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@ McGraw-Hill: MSFT's Ballmer: Bullish On Yahoo Search Deal; Economy Will Help Us Beat Apple

This story was written by David Kaplan.
[In progress]After discussing the state of the economy, Steve Adler, BusinessWeek's editor-in-chief, opened day two of the McGraw-Hill Media Summit by asking Microsoft (NSDQ: MSFT) CEO Steve Ballmer why doesn't the company dominate search. Adler recalled talking with Bill Gates about six years ago about how the company planned to beat Google (NSDQ: GOOG). Today, Microsoft has about 10 percent of the search market. What went wrong? Ballmer said that there wasn't a lot of room to innovate and that Google has put in more resources there, and has put more marketing effort into search. As for Microsoft's planned ... We've been turning out new search releases every six- to 9 months. How do you differentiate? How do really ascertain user intent and that is what will go into what we'll call 'Live Search' for now. We could use a set change. When we're ready to announce it, we will. Whether we call it Kumo or something else, that remains to be seen.

Adler: What does Kumo mean? Ballmer: I don't know. I don't think it means anything. I just read the same blogs you do about Kumo.

On Yahoo: A search deal would be about getting the pooled volume, not Yahoo's technology. The more users you have, the more ad revenue you have. As that grows, the more dynamic the ads are. There are returns to scale. From a technology perspective, it's about playing the relevance game as well as Google. We're largely on the same strategy, with or without Yahoo (NSDQ: YHOO). We did have a discussion over the phone with Carol Bartz. When it's appropriate, we'll have a face to face chat. Whether a deal gets done or not, who knows?

A deal remains possible: Adler came at Ballmer from all angles trying to pin him down on the likelihood for a search deal. Ballmer: "There are things that are fairly compelling set of economics that underpin a possible search partnership. Unless, I'm fooling myself, there's a strong basis for a deal. Though we did try last year. The economy has bailed me out of that one."

Poor economy will hurt Apple (NSDQ: AAPL), help MSFT: Paying $500 more for logoApple's logoisn't worth it in this economy. [Audience gasps.] I don't have any Apple products, my kids don't and my wife certainly doesn't. Adler: I don't buy any of my competitor's products. I just borrow them at the newsstand. Ballmer: I thought you'd say you just read them online for free.
More after the jump

Keep going with Zune: About half the audience raised their hands when Adler asked how many own iPods. Less than 10 did the same . The big pay off is on phones and PCs, Ballmer says, as opposed to just the one device and "that's where we have to align the Zune. But we'll keep going with it."

Windows mobile 6.5it's all about price: Ballmer estimates that smartphones will go from about 10 percent to 70-, 80 percent. You want a range of price points, he says, zeroing in on the pricey products from Apple. "iPhone is a very expensive phone without a keyboard. Some people can't afford it, can't afford the data plan. It costs about $500 to make. We want to power a low- to mid-range phone that can work with hardware developers. Unless you assume that Blackberry and iPhone will dominate the smartphone market, which I don't, that gives us a huge opportunity. A $500 phone is not going to reach all Americans and people in emerging markets. The most popular phones in China and India cost $25 to build. We're at $125, which isn't close to those countries, but a lot cheaper than Apple. Plus, we can do touch-screeen cheaper, both high end and at the lower end, than Apple can."

Shop around: Microsoft plans to open retail stores. Adler wonders, Is this also derivative of Apple's established reail stores? Ballmer: "There's a range of innovation by our partners. You have to sell the hardware and the software. There's a challenge to our hardware vendors to bring their products to market because it's so high risk. There are 35 or 40 different computers you can get at a Best Buy. Apple sells about half of its branded products at its stores. We don't know that we can sell half of all PCs at our store. But we can do very well. It's way too early to talk about sales goals though. We'll start slowly, opening a few stores at first and then a few more."

By David Kaplan