To challenge Google in the paid search and online advertising businesses, Microsoft will have to focus on a few key areas regardless of whether it succeeds in acquiring Yahoo this year for $44.6 billion, CEO Steve Ballmer told financial analysts Feb. 4.
Microsoft will have to expand its research and development efforts, create operational efficiency - particularly if Microsoft succeeds in buying Yahoo - to get the right people doing the right jobs, and grow its search and ad businesses to get more people coming to its search engine and clicking on ads.
"We are going to have to innovate like crazy to get the position that we want to have in this market," Ballmer said, pointing to the company's ad platform, search, as well as emerging user experiences such as mobile, social media, video and entertainment.
Acquiring Yahoo, he said, would give Microsoft the engineering resources to succeed more quickly. To wit, he said he expects Yahoo to quickly bless the deal.
Ballmer made his comments during Microsoft's strategic update just a few days after offering to buy Yahoo at a 62 percent premium. Microsoft believes such a deal would help it gain considerable ground in the search and online advertising markets versus Internet power Google.
He said that given Google's 75 percent share of paid search worldwide, a Microsoft-Yahoo combination would enhance competition and help Microsoft challenge Google sooner than it could with its own resources.
Before Microsoft gets there, the company has a lot of overlapping products to rationalize, industry experts say. These include Webmail, search, instant messaging and other competing consumer-oriented software products.
Like a circus pitchman, Ballmer started the analyst meeting by defining what Microsoft currently is as a company and what it will be for the forseeable future: a leading provider of broad software innovation.
Expressing surprise at Microsoft being pigeon-holed as a desktop software maker when the company has made some forays into the enterprise market, Ballmer assured analysts that Microsoft is a provider of hosted software plus services for the Internet age.
He said that while people associate online advertising with the cloud computing trend that Google, Salesforce.com and other smaller vendors are leveraging, Microsoft plans to make all of its products available in the cloud as a SAAS (software-as-a-service). That includes the Windows operating system and major money-making products such as Office, in addition to the ad-driven Windows Live suite.
"Each and every one of these businesses on top of a consistent cloud platform transitions to have additional revenue and profit opportunities based on this transformation to the cloud," Ballmer said.
He acknowledged that while some cannibalization is possible -Microsoft SAAS offerings gobbling up Microsoft's traditional packaged software - the opportunities for future growth are greater, with several hundred customers in the pipeline for Microsoft's software-plus-services approach.
For example, Ballmer promised a version of Windows Live for enterprises, but did not provide a timeframe for this product.