Ballmer: Time to ante up online

Updated 10 a.m. PDT, with more details on spending plans

REDMOND, Wash.--In trying to explain Microsoft's continued decision to spend in its money-losing online services business, CEO Steve Ballmer likened it to a game of high-stakes poker.

"We are going to have to ante up in a significant way to even be in this game," he said.

Ballmer: Online investments a fraction of operating income.

(Credit: Ina Fried/CNET News)

But, he said, as both advertising and content move online, the opportunity is huge.

"There's at least a trillion dollars just in media, communications, and advertising, not all of which we can capture," Ballmer said.

(It seems every time Microsoft talks about the opportunity, it grows, even if Microsoft's market share doesn't.)

In any case, Ballmer made the familiar case that the scale of the opportunity for a company of Microsoft's size is too big to ignore.

The money that Microsoft is spending, he said, is a few hundred million dollars in losses each year, but amounts to around 5 percent of the company's overall operating income.

"Some say it's too expensive," Ballmer said. "It's a relatively small percentage investment from an overall Microsoft standpoint, in order to have a real opportunity at significant acceleration of our market value. I think it is a very good risk return."

Ballmer did say that the investment will have to continue until Microsoft gets more scale, which he said he could not put a time frame on.

Of note, one slide Ballmer showed pointed to an investment of 5 percent to 10 percent of operating income until the company has a more significant share of the market.

Ballmer's comments came at the start of Microsoft's financial analysts meeting, which runs all day here.

Originally, Ballmer said, he wasn't planning to give the online pitch, but said recent organizational changes (i.e. the departure of online business head Kevin Johnson) forced him into duty.

But, he said, the company thought it was important that "whoever gives this presentation was actually still going to be here in three weeks."

Update: Ballmer went into detail of where that online spending is going. He talked about how Microsoft's costs to maintain its search index have to be nearly as high as Google, despite the fact that Microsoft has a lower volume of searches.

Microsoft also has to spend more in other areas than Google, by virtue of its No. 2 position. Marketing was one area, he said, where Microsoft will have to outspend the market leader. "Google doesn't have to. We do," Ballmer said.

Ballmer also said that the on-again, off-again talks with Yahoo are in the "off-again" stage.

[Penguinisto]

I find it interesting how he downplays the costs as a percentage of operating income... and not as a percentage of overall profits. Likely because the percentage would be uglier and higher, and stock holders would punish the crap out of MSFT for doing it.

Thing is, with Yahoo still intact and Google still growing, MSFT is only falling further and further behind now. Perhaps Ballmer actually should have gone into detail as to where he's going, instead of simply saying the equivalent of "oh, we're just throwing more money at it".

[Kwasiowusu]

It's not so much, how much money Microsoft is spending on search I am concerned about, its what Microsoft is getting for that money. It seems to me that after spending billion of bollars of shareholder's money, Google search is stil far better, end deleivers far more relevant results, and in much larger quantities than Microsoft's Live search does. All Ballmer has to do, is do a search on the word "Microsoft", then click "news" after that, for both Google and Live search, and then compare the vast difference in quality of reults. Google by far smokes Live search results. Exactly what are these clownss who run the search business doing? And why are they wasting shaeholders money and after over 6 years of trying, are still delivering such a crappy, low quality product? Isn't it time for Ballmer to sack those idiots who are running the search business, and bring in people who can actually do the job?

[bicparker]

Microsoft's management doesn't have any experience in dealing with a problem like this other than throwing money at it.

They have always had excess cash in the bank.
They have never posted a loss.
They have never had a major layoff of workers
They have never had an outright decline in sales
They have never had to engage austerity measures

Their management approach is a one trick pony in that respect. If they are ever faced with limiting circumstances, I am not sure they will know what to do.