"No Bull----": Ballmer & Bartz on Microsoft-Yahoo Search Deal

Posted by: Rob Hof on July 29, 2009

Soon after announcing their deal to combine forces on Internet search and search advertising, Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer talked with BusinessWeek about how the deal came about and how they plan to make it work as they jointly take on search giant Google.

In a short conversation with me and my colleague Peter Burrows, the two CEOs displayed an easy rapport (and shared love of expletives) that was remarkable given the more than 18-month battle between the two companies. It’s a rapport, staged as it might have been, that they said would be key to carrying out the deal over the next two years of integration.

Here’s the full interview, after the jump:

Q: Microsoft has had trouble executing on its online strategy, which has been losing a lot of money for years. Why should shareholders and advertisers be confident Microsoft can make this deal work?

Ballmer: Execution is the key. Take search as an example over the last four years. We may not have started on search as early as I had wished. But our execution has actually been from nothing to a very competitive product in a very short period of time. There certainly have been things we have not executed on, and it’s not like we’ve gained a lot of share. And yet I think we’ve executed quite well.

On this team, we’ve got the same team, the team that’s been driving hard. We’ve augmented that team at the top with the addition of Qi Lu (a former Yahoo executive). Anybody who meets him is impressed with his focus on discipline. The fact that Qi also knows both the Yahoo and the Microsoft environment also helps.

On our side, we’ve got a lot of work. We’ve got a planning phase. Then we have some pretty aggressive plans to cut over the algorithmic search and the paid search. It will be two years before all the countries are done. But some of the big markets we’ll be (more) aggressive on.

Q: How will you minimize the inevitable conflicts that come from splitting technology development from ad sales?

Bartz: I don’t think that’s an issue because this place is actually an automated market. One is the self-serve where (advertisers) go in an enter the keywords. The other is where you’re working with the big customers, the Procter and Gambles, providing advice on what words make sense for diapers or whatever.

They (Microsoft technology people) can’t decide to just screw Yahoo because it’s the entire combined marketplace they’re managing. It’s their revenues and our revenues.

Ballmer: The advertiser doesn’t buy Bing search vs. Yahoo search. They buy keywords on our combined offer. And because we have a deep partnership—which means there’s a level of APIs (application programming interfaces) available–if there’s advanced analytics Yahoo sales force thinks is necessary for a premium advertiser, they can ask us, or build on their own analytics.

Bartz: Our engineers who have been in search longer and have more search patents than any company, we have been grudgingly respectful of Bing. I probably haven’t told you that (to Ballmer), but I can tell you now that we’re partners. We all know Microsoft doesn’t necessarily get it right the first time. But by god, you can’t beat ‘em on persistence.

Q: What do you expect your combined search market share to do—go down before it goes up?

Ballmer: No. Between now and the time regulatory closes, it’s going to be full-out, back-to-the-wall exercise work at Microsoft and Yahoo on engineering. We’re going to be banging the drum on Bing.com. Carol’s folks are going to be driving the whole Yahoo experience, including search. So I don’t think we miss a step.

The first step of the integration is the algorithmic (core search vs. search ads) integration. There’s a lot of experience at Yahoo and frankly a lot of experience now at Microsoft, including some ex-Yahoo people, like Qi, who understand how to do these cutovers and can probably do that very efficiently and relatively quickly.

The tougher part is cutting over the ad system, where we can’t afford to make a hiccup. Carol was doubly clear about that; that’s why we make a revenue guarantee during the period, just in case. We don’t plan on making any hiccups.

Q: What role will Qi and others from Yahoo have in managing this integration?

Ballmer: Our job in the partnership is to build the search platform and the paid search offer. We’re not changing our organization to go do that. Qi runs our online business Satya Nadella, at Microsoft 17-18 years, runs engineering. People are all in place, this just becomes an important priority.

Bartz: A good share of the people here worked for Qi, so it’s not like they’re unknown. That actually was comforting to me, even though I’ve never met Qi. I hear nothing but good remarks about him. The other thing that’s kind of fascinating is that Joanne Bradford runs our advertising markets and she was…

Ballmer: … sales and programming for Microsoft.

Bartz: So there’s a lot of transfer of personal knowledge back and forth. While all deals are chance because somebody wants something and somebody wants something else, people have really come together in the right spirit. That doesn’t mean there won’t be issues. But Steve and I have a good relationship and we have to start with that. That will reflect down to the organization, because I don’t think either one of us will take any bulls--t from anybody. If either side starts playing (games), we just place a call to each other and the bulls—t meter comes on, right?

Ballmer: At the end of the day, we’re not two companies that have high market share. We can’t afford to have bulls—t.

Bartz: We also never been companies that have had big fights. Forget about last year, that isn’t the point. Sometimes when companies get together that have hated each other for years, that’s hard. This is not the case here. That makes a big difference.

Q: The consensus today among analysts and investors seems to be that Yahoo got the short end of the deal. How would you respond to that?

Bartz: I don’t think we did at all. We get to keep virtually all of our revenue with no cost. Somehow they thought, gee, we should get a billion dollars, which after taxes is half a billion dollars, and I get 50 basis points of interest on that. That doesn’t really help my business. I wanted the high TAC rate (traffic acquisition cost, or ongoing payments from Microsoft) so I get ongoing maneuvering for more investment and more profit.

The other thing is they (analysts and investors) just lost track of how much it would take to get it implemented. Some people bought into the stock thinking that, wow, there will be a deal and I’ll jump in and jump out because they’re going to save all this money in two minutes.

This management team at Yahoo made a long-term decision that CEOs are often not credited with making. We made a long-term decision to run this business and run it for a future of growth and profitability, and that’s what today showed.

Q: Is Bing’s success a reason for the timing of this deal?

Bartz: No. As Steve said, if they had been successful, we probably wouldn’t be sitting here. But it really didn’t have anything to do with it.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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