On this week's EIC Squared podcast, ZDNet Editor in Chief Larry Dignan and I discuss the news of the week. It was a big week for Microsoft, with several announcements and teases from its meeting in Seattle with financial analysts. Steve Ballmer is still bullish on the online space, but not on Yahoo. We also talk about Kevin Johnson's departure from Microsoft. (See coverage on the Microsoft financial analyst meeting from Ina Fried and Mary Jo Foley.)
We spend a few minutes debating the impact of Carl Icahn joining the Yahoo board and what it means for Jerry Yang's future. Larry thinks that Yang bought himself more time to turn things around. If so, he will need to speed up delivery on the Yahoo Open Strategy and build a social layer into Yahoo's collection of services.
Finally, we discuss the impact of Facebook Connect, which will let users access and feed their Facebook profiles and friends on any Web site. It's Facebook's way of extending its platform to embrace other services and get more data and pages flowing through its social portal.
On June 27, Microsoft Chairman Bill Gates said he didn't think that his company and Yahoo would make a deal, adding that Microsoft CEO Steve Ballmer will find "plenty of other opportunities.
Not so fast. As Yahoo's quarterly earnings come up on July 22 (see Kara Swisher's take on the upcoming financial results) and the shareholder meeting on August 1, Carl Icahn and Steve Ballmer are teaming up to remake Yahoo's board of directors and shelve Yahoo CEO Jerry Yang. In a letter to Yahoo shareholders, Icahn said:
Steve (Ballmer) made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo, such as either a transaction to purchase the 'Search' function, with large financial guarantees or, in the alternative, purchasing the whole company."
Microsoft issued a letter today confirming Icahn's remarks about Microsoft's renewed interest in a transaction with Yahoo:
While, of course, there can be no assurance of a future transaction, we will be prepared to enter into discussions immediately after Yahoo's shareholder meeting, if a new board is elected.
Now the fate of Yahoo is clearly in the hands of shareholders. They can give Icahn a few seats on the board but not enough control to force massive changes or they can hand over the company to him and Microsoft, knowing that a transaction for $33 to $35 per share for the search business or the entire company will be consummated over the next six months.
As I have said before, Microhoo has always been about the money, and less about a shared strategy and cultural fit. Yahoo's board thought that Yahoo was worth $37 per share, and Microsoft wasn't going to negotiate against itself, with no other buyers in sight.
During an interview at the D6 conference, Yang said:
I understand the situation people are feeling, but at the same time we did not walk away from that proposal, Microsoft did. We are willing to do a deal under the right terms. It wasn't clear to me they wanted to finish the deal. I can't go revisit and take or not take it. I understand our obligation to stockholders from conversations with a number of them. The focus for us is how do we recognize more value for the company soon and position Yahoo to be much more successful in the long term. If there is a way to do it, we'll talk about other alternatives, but we aren't going to do something short term.
Yang has some regrets that Microsoft walked away from negotiations in May. He may prefer an independent Yahoo, but reality is setting in, and now he is probably wishing he and his board had played less difficult to get.
Update: Yahoo issued a testy statement regarding the Icahn-Ballmer "apparent effort to force Yahoo! into selling to Microsoft its Search business at a price to be determined in a future 'negotiation' between Mr. Icahn's directors and Microsoft's management."
In the statement, Yahoo invited Microsoft to make a proposal immediately and for Icahn to reveal his plan for Yahoo beyond teeing up Microsoft to make a deal. I doubt Jerry Yang and company are going to receive any kind of proposal until the shuffle at the upcoming shareholder meeting takes place.
The witty John Paczkowski has come up with his list of the best quotes from the D6 conference. (See our full coverage here)
Following is a small sample:
"Guys like us avoid monopolies. We like to compete."--Microsoft Chairman Bill Gates
You would have loved Windows 1.0, Walt. You would have LOVED it.--Steve Ballmer
(Credit: Dan Farber)"AOL is the Rodney Dangerfield of the Web. We don't get no respect."--Jeff Bewkes, president and CEO, Time Warner
"I didn't leave business school to go bankrupt."--Microsoft CEO Steve Ballmer on his first days at Microsoft
"Hollywood is a community that's so inbred, it's a wonder the children have any teeth."--Barry Diller, chairman and CEO, IAC
On this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss the celebrity interviews at the D6 conference, hosted by Walt Mossberg and Kara Swisher. Unfortunately, I called in from the San Diego airport United Airlines gate area, so you'll hear crying children and the ticker taker coaxing me to get on the plane. Larry gives the lowdown on Dell's earnings and the most recent security issues, patches from Apple, and the Comcast hack.
Bill Gates and Steve Ballmer reminisced about 28 years of working together and addressed a number of topics, including Vista, Yahoo, Google, Windows 7, and search, in an interview with Walt Mossberg and Kara Swisher at D6.
Following are the videos from the Gates-Ballmer interview. Full coverage of D6.
Part I
Part II
Click here for full coverage of the D: All Things Digital conference.
The sixth version of the D: All Things Digital conference will begin Tuesday night with Bill Gates and Steve Ballmer onstage. The two legends of Microsoft will offer the first public peek at Windows 7, although Ballmer told me they would only show a little bit of the user interface.
It will be a very early "positioning" peek given that Windows 7 isn't due until the beginning of 2010. As CNET News.com's Ina Fried reported from her interview with Window chief Steven Sinofsky, Windows 7 is not a new kernel. Ballmer said that doing too much with the Windows kernel in Vista has been a source of incompatibilities and displeasure among users, and Microsoft wants to avoid that kind of problem.
Sinofsky described the Windows 7 kernel evolution as follows in the interview:
We're very clear that drivers and software that work on Windows Vista are going to work really well on Windows 7; in fact, they'll work the same. We're going to not introduce additional compatibilities, particularly in the driver model. Windows Vista was about improving those things. We are going to build on the success and the strength of the Windows Server 2008 kernel, and that has all of this work that you've been talking about. The key there is that the kernel in Windows Server '08 is an evolution of the kernel in Windows Vista, and then Windows 7 will be a further evolution of that kernel as well.
CrunchGear has published some screen shots of what appears to be an embryonic Windows 7. A Microsoft spokesperson has said that the screens are either very old versions of the new operating system or fake.
The speakers at D6 also include Jeff Bezos, Michael Dell, Mark Zuckerberg, Barry Diller, Howard Stringer, Jeff Bewkes, and Jerry Yang, among others. However, don't expect a group hug between Ballmer and Yang, who may be in the audience tonight for the Gates-Ballmer show.
Click here for full coverage of the D: All Things Digital conference.
Continuing the exegesis of Steve Ballmer's remarks on how Yahoo should be viewed as part of "a" strategy to accelerate Microsoft's online advertising, but not "the" strategy, CNET News.com Executive Editor Jim Kerstetter and I attempt to make sense of the latest twists and turns in the Microhoo saga. Watch the video:
See also:
While speaking in Moscow, Microsoft CEO and Yahoo suitor Steve Ballmer said, "Yahoo was never the strategy we were pursuing, it was a way to accelerate our online advertising business...We will spend money on some acquisitions. You can do a whole lot of things with 50 billion dollars."
In support of Ballmer's recent remarks, Microsoft officials maintain that Yahoo has always been part of "a" strategy, and not "the" strategy.
Yahoo is a means to an end. Of course, Microsoft was primarily interested in the search piece, but they apparently thought that acquiring the rest of Yahoo would also have some strategic value. Otherwise, why pay so much, unless Microsoft thought it couldn't achieve what it wanted without making an offer for the entire company.
In my post analyzing Ballmer's Moscow remarks, I said that he was doing a bit of historical revisionism. The initial $31 per share, $44.6 billion, a 62 percent premium on the January 31, 2008 price was for more than just getting access to Yahoo search technology, engineers, and contracts.
Now, after 113 days of going back and forth, Ballmer and his team have refined the overall strategy to focus on Yahoo's search business. It was apparently Yahoo CEO Jerry Yang who brought up the idea of Microsoft doing a deal around search at a meeting prior to Microsoft walking away from the negotiations on May 3. At the same time he dangled search in front of Microsoft, Yang was also talking to Google about a search-related partnership.
It appeared from Ballmer's letter to Yang on May 3 outlining the reasons he was taking a $33 per share offer off the table, that Yahoo's negotiation with Google for a search deal was a major pain point that drove Microsoft away.
Microsoft and Yahoo have reengaged negotiations on a search deal, and Microsoft is also reserving the right to reconsider a full acquisition "depending on future developments and discussions that may take place with Yahoo or discussions with shareholders of Yahoo or Microsoft or with other third parties," according to a Microsoft statement from May 18. I guess that is part of "a" strategy, but it's "the" strategy of accelerating the online advertising business.
In other words, it still might be strategic to acquire all of Yahoo (given acquisitions are supposed to be strategic), but the predominant strategy is to blunt Google's search offensive with Yahoo search as an accelerant.
In effect, Microsoft has three possible avenues to take in its strategy: acquire all of Yahoo; acquire or joint venture on Yahoo search; or find another alternative (there aren't many left) to accelerate its online fortunes. At this point, Microsoft may no longer find it strategic to acquire all of Yahoo.
Yahoo could do a search deal with Google, which might never get done due to regulatory scrutiny and would make large shareholders unhappy, or do a deal with Microsoft. The odds favor some kind of Yahoo-Microsoft transaction.
Tune in next week for the next chapter in this saga. On Tuesday at the D: All things Digital conference, hosted by The Wall Street Journal's Walt Mossberg and Kara Swisher, the main actors will be in the same room. Bill Gates, Ballmer, Yang, and Yahoo President Sue Decker will be in attendance. The crowd will be looking for any contact or body language that could signal whether the two parties have found strategic alignment.
Steve Ballmer is changing the script in the Microhoo saga.
During a speech Ballmer made Friday at a tech conference in Moscow, Reuters reported him as saying, "Yahoo was never the strategy we were pursuing, it was a way to accelerate our online advertising business...We will spend money on some acquisitions. You can do a whole lot of things with 50 billion dollars."
Steve Ballmer
(Credit: Dan Farber/CNET News.com)The money must be burning a hole is his pocket, given how ready he was to hand it to Yahoo, when he now says that the combination was "never the strategy."
If Yahoo was never the strategy, what was the last three-and-a-half-month pursuit of Yahoo for nearly $50 billion? It makes Ballmer look like a flip-flopper, distancing himself from his previous hot pursuit of the Internet portal. In his initial letter to Yahoo's board on January 31, which was clearly not a love note but a business solicitation, Ballmer wrote:
While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo can offer a credible alternative for consumers, advertisers, and publishers. Synergies of this combination fall into four areas:
• Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.
• Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.
• Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.
• Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.
From that letter, it would appear that Yahoo was a strategy, and it went beyond just search.
Perhaps Ballmer's remarks in Moscow could be construed as a way to avoid uttering the "Google" word. Yahoo may not be the grand ultimate strategy, but preventing Google from getting in bed with Jerry Yang and company is--hence, Ballmer's continued pursuit of Yahoo's search business.
In speaking with CNET News.com on February 20, Chairman Bill Gates laid bare the Yahoo bride, revealing Microsoft's real strategy (as opposed to "the" strategy) around Yahoo, which it is now pursuing:
We have a strategy for competing in the search space that Google dominates today, that we'll pursue that we had before we made the Yahoo offer, and that we can pursue without that. It involves breakthrough engineering. We think that the combination with Yahoo would accelerate things in a very exciting way, because they do have great engineers, they have done a lot of great work. So, if you combine their work and our work, the speed at which you can innovate and get things done is just dramatically more rapid. So, it's really about the people there that want to join in and create a better search, better portal for a very broad set of customers. That's the vision that's behind saying, hey, wouldn't this be a great combination.
When Yahoo played too hard to get, Ballmer came to realize that swallowing Yahoo whole perhaps wasn't as good a strategy for Microsoft as it was for Yahoo shareholders. Doing anything to stop the fast-growing Google, which will generate about half the revenue Microsoft does this year, is the strategy. Hence, pursuing Yahoo's search business on one end and Facebook on another front to create more inventory and ride the social-networking wave.
It all sounds a bit desperate. Perhaps it should be looked upon as an "evolving" strategy. What's clear is that Ballmer and Yang never had the kind of relationship that could lead to a marriage. In the end, emotion trumped "the" strategy.
Yahoo CEO Jerry Yang talked to a few press outlets Monday, opening the door to further negotiations if Microsoft is willing to show him the money, or what he considers the appropriate price.
Microsoft's final bid was $33 and Yahoo held out for $37, or something close to that number, but Ballmer decided on Saturday not to continue the courtship. With Yahoo flaunting its possible ad serving deal with Google and holding out for an 80 percent premium over the January 31 closing stock price, Yang appeared to overplay his hand.
According to Reuters, Yang said it was Microsoft who decided to cease negotiations. With shareholder lawsuits piling up in the wake of the failed deal, the stock suffering, and no other suitor in sight, Yang may now be looking for rapprochement with Ballmer.
"If they have anything new to say, we would be open...I am more than willing to listen," Yang told Reuters.
