Microsoft CEO Steve Ballmer paid “lip service” to a Yahoo! deal and cleverly set the stage for acquiring Facebook, during his keynote at the Digital Hollywood Media Summit.
Yahoo!’s stock price shot up on the news of his comments, but I think the press and the markets are missing the big picture: Microsoft’s is using the “potential Yahoo! deal” as a red herring with investors. Ballmer is using Yahoo! to convince the market that Microsoft needs to buy Facebook to compete with Google, and to set a price floor of 50 billion for the acquisition. Microsoft may be facing a situation where Facebook usage grows so fast that its costs skyrocket, creating a cash crunch, and in this difficult fundraising environment it’s best bet is just to buy Facebook.
I reached this conclusion after analyzing Ballmer’comments and talking to Microsoft execs at the media summit. Here’s my story from the conference:
Microsoft would spend 47 billion dollars for Yahoo!’s users, not Yahoo! technology. “Small companies you buy for technology, big companies you buy for the customer base.” Ballmer explained. Defending his Yahoo! bid, he said there is still “a compelling set of economics that underpin the idea of a search partnership.”
Microsoft targets “returns to scale” when acquiring a company with a large number of users and advertisers. “The more users you have, the more you know about people’s interests” Ballmer said, and this data is something they could gain from Yahoo!. Ballmer then pitched Microsoft’s ability to use online behavioral data to create targeted advertising and personalized experiences.
“Our goal is to play the relevance game as well as Google.” Ballmer said. Microsoft can rise to the challenge because of its many consumer Internet technologies, online businesses and nine billion dollar R&D budget. What he didn’t didn’t say is that Microsoft still needs to buy a big user base in order to feed this engine.
Ballmer needs to make a bold move.