Thursday, October 4, 2007

Microsoft’s chief executive has seen the future - and the future is advertising

Steve Ballmer’s plans for the computer software giant include taking on Yahoo! and Google in their own internet territory

Steve Ballmer doesn’t do half-measures. The veteran Microsoft chief executive says that he relaxes by running, playing golf and seeing his children “and the other 18 hours of the day I work”.

Moments later, the dynamo charged with steering the 30-year-old software giant through an increasingly complicated middle age actually raises his voice to a yell as he maps out his blueprint for Microsoft’s future.

“It gives us the chance to surprise shareholders,” he shouts of his plan to transform Microsoft into an advertising company. He leans forward and raises his voice several decibels as he hits “surprise”. The soundbite is delivered in the manner you might expect of a man whose behaviour PC Magazine said - approvingly - “borders on the maniacal”.

But there looks to be clear thinking behind Mr Ballmer’s strategy: Microsoft, often criticised for not spotting the web’s potential early enough, must catch Google, the runaway leader in online advertising and the king of internet search. Mr Ballmer has just bet $6 billion (£2.9 billion) on that aim, through the acquisition of aQuantive, an online advertising company that specialises in targeting online campaigns to individual consumers. The deal is Microsoft’s largest to date. Mr Ballmer, 51, says that it “proves his commitment” to making Microsoft a true advertising powerhouse (it is languishing in third place behind Yahoo! and Google). “We’re going to keep coming and coming,” he says. “I think everybody would like to see – in advertising and search – Google get some competition.”

There is only one moment when Mr Ballmer’s web evangelism slips – when he voices caution over the longevity of social networking sites such as Facebook: “I think these things are going to have some legs, and yet there’s a . . . faddish nature about anything that appeals to younger people.”

That could be negotiating spiel: they follow reports that Microsoft is weighing up paying as much as $500 million for a 5 per cent stake in Facebook. Such a deal would value the three-year-old site at $10 billion - despite it being expected to achieve revenues of only $150 million this year - and could start a bidding war, with Google, for what is widely viewed as the web’s hottest property.

Mr Ballmer will not comment on Microsoft’s talks with Facebook, but he does suggest that he can see value in the Facebook brand and the “network effects” - or community - that the site has built up by accruing more than 40 million users.

However, he adds that, in contrast to the aQuantive deal, there is little in the way of underlying technology to justify the lofty valuation attached to Facebook. “There can’t be any more deep technology in FaceBook than what dozens of people could write in a couple of years,” he says.

He goes on to reference the past declines of sites such as Geocities, the online community that was bought for $3 billion by Yahoo! in 1999. It “had most of what FaceBook has”, according to Mr Ballmer.

Betting that his site will not meet the same fate, Mark Zuckerberg, 23, FaceBook’s founder, has mooted a valuation of $15 billion but has insisted that Facebook will remain independent. Mr Zuckerberg opening the gates to Microsoft would surprise many in Silicon Valley, but Mr Ballmer admits that he needs to muster up something shocking to catch Wall Street’s attention. To his chagrin (he owns more than 9 per cent of the company that he joined in 1980, a holding that contributes to an estimated $15 billion personal fortune), Microsoft shares have traded more or less flat since 2002 and are languishing at half the levels seen in 2000.

Mr Ballmer says that the sluggishness is in part the result of overly optimistic Wall Street targets - misguided calculations by “all these expensive, well-meaning financial types” - and in part a function of Microsoft being a technology company subject to more risk than a “bricks and mortar business, like Tesco”. In truth, however, Wall Street is also nervous about how long it will take Microsoft’s big bet on advertising to pay off.

Meanwhile, Microsoft’s efforts to revitalise its shares look like an effort to emulate two of its rivals, Google in online advertising and Apple in hardware, two companies whose share prices have left those of Microsoft far behind. Apple’s stock, largely on the back of the iPhone, has doubled in the past year; Google’s has surged 700 per cent in its three years as a listed company.

His advertising plans follow an established Microsoft pattern: chase a market leader into a new sector and pummel it into submission. That, after all, is what the company did to Lotus in spreadsheets (with Microsoft Excel) and Netscape in web browsers (through Internet Explorer).

Mr Ballmer suggests that there lies a new formidable force behind the drive into advertising. “My general rule of thumb today is that anything the consumer doesn’t have to pay for, they won’t,” he says.

The admission beckons towards a trend of free online software and services that has the potential to decimate Microsoft. Google and IBM, for example, recently launched free alternatives to Microsoft Office, Mr Ballmer’s biggest earner by far. The stalwart suite of office tools, which includes Word and Excel, accounted for revenues of $4.6 billion – a third of Microsoft’s total sales – in the company’s most recently reported quarter.

Microsoft is in danger of losing licence fees that it has milked for decades as customers depart for free alternatives. The answer: Microsoft will also offer free services - e-mail, photoshare, instant messaging and the like - and reap revenues through advertising.

“There is no way to play in broad consumer services unless you’re going to use advertising,” Mr Ballmer says, “and you only have two choices for advertising: one, you do it yourself, or you outsource it to Google. In our case, that’s probably not going to happen.”

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