Ballmer: 'Nobody Gets' the Microsoft-Yahoo Deal

 |  Includes: MSFT, YHOO
by: Larry Dignan

Microsoft CEO Steve Ballmer said Thursday that no one quite gets the software giant’s search deal with Yahoo (NASDAQ:YHOO). Speaking at Microsoft’s (NASDAQ:MSFT) financial analyst meeting, Ballmer said he was surprised by the market reaction—Yahoo shares tanked—to the search deal.

Ballmer said he wanted to provide his full explanation of the deal and “body English on the issue.”

He didn’t have to worry about the body English part. Ballmer was animated as usual. When it comes to the Microsoft-Yahoo search deal “nobody gets it.”

Overall, Ballmer argued that the partnership is about product, customer and revenue improvement. Yahoo gets to focus on being “the leading online media company in the world.”

OK, maybe the economics are a bit muddled. Ballmer said:

Economics is where people get even more confused. What happened? Nothing got bought. Nothing got sold. People expected something to get bought. Nothing got sold yesterday, and nothing got bought yesterday. But the partnership in and of itself creates economic value.

How? The search product will improve and the ad market will become more liquid.

“Our cost of good sold will be lower on search,” said Ballmer, noting “more liquidity that will improve monetization.”

On the Yahoo side, Ballmer sounded thrilled about the economics—for Yahoo. Ballmer said:

On the Yahoo side — this is the one that stuns me that people haven’t figured it out. Yahoo gets 88 percent of the surge revenue they have today. They have 0 percent COGS (costs of goods sold) against 88 percent revenue and they have no R&D expense and no ongoing cap ex. It’s sort of like unbelievable. You know, I don’t know what you say because they’re focused. But did they sell their search business? No, they get to keep 88 percent of the revenue. That sounds like they didn’t sell and I’m not selling against interests. I just think this was a win-win partnership.

And they (Yahoo) said yesterday that they expect their operating income to go up by $500 million on full implementation. Remember, this is a company that makes $700 million. So you’re talking about a 70 percent profit expansion just from doing the deal.

And Ballmer noted that folks aren’t accounting for potential increased market share, more ad liquidity and product improvements.

Do you get the deal yet? I do, but there’s a lot of regulatory and implementation wild cards before I can get as wound up about the Microsoft-Yahoo search deal as Ballmer does.