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Summary:

In an interview published this morning in the Financial Times, Microsoft CEO Steve Ballmer said he wouldn’t be looking to pick up any other Internet companies just because the Yahoo deal failed. One can only imagine how far shares of Facebook would have plummeted on that […]

In an interview published this morning in the Financial Times, Microsoft CEO Steve Ballmer said he wouldn’t be looking to pick up any other Internet companies just because the Yahoo deal failed. One can only imagine how far shares of Facebook would have plummeted on that comment had the social networking site been publicly traded. Ditto for Slide and RockYou, both of whom recently raised money at lofty valuations.

“People don’t understand what they’re talking about,” Ballmer told the FT. “At the end of the day, this is about the ad platform. This is not about just any one of the applications.” And for Microsoft, according to the interview, the primary ad platform is search. That makes sense as search is a billion-dollar, proven business.

Application companies have some ad revenue, but right now they’re kind of like cable channels for the web, while an ad platform is the means to a business model that supports that cable channel. Microsoft wants to own the keys to the business model. So to prove their worth, it’s time for application developers to prove their business model.

  1. Wasn’t there a quote from another MS exec that said that opposite? Paraphrasing, “….acquiring 20-30 Web20 Valley companies for a total of 5-8 Billion over 5 years?”

    I could have sworn I read that somewhere.

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  2. I have no idea what MS is smoking these days..

    If they want to dominate the web and stop getting their asses handed to them by Google, they have to invest in startup companies – the BEST startup companies and pay a premium to take them off the market and get their founders working for Microsoft before Google or other competitors can even bid.

    Microsoft is in an amazing position to actually be able to buy these kinds of companies but.. apparently.. because they couldn’t get a struggling, established (and, now, dying) company like Yahoo, they no longer interested in startups. ???

    Personally, I think Microsoft has to be bluffing. They’ve spent Billions on developing web technologies, C#, ASP.NET, created what is actually an extremely powerful platform building web applications and are clearly very interested in what is happening online. The future is online. The future is not just the next version of Windows anymore… and at least the department working on ASP.NET understands this.

    Is Ballmer just being Ballmer and contradicting what other people at Microsoft have already said (I too heard that MS was interested in acquiring 20 startups each year for the next five years — in fact, I think it was BALLMER himself who said this!!!)?

    Google makes MS look bad. Even Google doesn’t seem so sure about what they are doing online anymore (they put lots of free stuff online but are still struggling to come up with something better than Adsense + can’t properly monetize YouTube etc.) but they are still running circles around Microsoft…

    Microsoft needs to step up and start buying great startup companies. Period.

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  3. And by “Great” I mean = startup companies that are actually profitable, close to being profitable or with huge profit potential. I can understand why Ballmer would not want to buy overhyped, overvalued startups and profit models that have yet to prove they can make money.

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  4. Stacey Higginbotham Friday, June 20, 2008

    Alan, at Web 2.0 last year Microsoft said it would make about 20 acquisitions a year for the next five years and wouldn’t rule out open source deals. However, a look at MSFT’s previous deals indicates that the announcement was only sort of exciting given that MSFT did 13 deals in fiscal 2007 and 21 in fiscal 2006.

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  5. Why is it that people think Google is beating MSFT? Google is good at one thing – search and search based advertising. Granted they are the gorilla in that space but they have yet to prove they can succeed in any other space. With most of the Internet’s growth coming from Asia and Russia (both of which have other dominate search companies) why is it that people think Google is going to control everything?

    I am not a huge MSFt fan but look at their business and specifically how many aspects of software they control. Google will never be MSFT. In fact MSFT has soooooo many legs up on Google that its not even a fair fight.

    I say let Google have search – let them own it. Hubris will eventually be their downfall. It happens to every single shining star.

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  6. nd for Microsoft, according to the interview, the primary ad platform is search. That makes sense as search is a billion-dollar, proven business.

    Application companies have some ad revenue, but right now they’re kind of like cable channels for the web, while an ad platform is the means to a business model that supports that cable channel. Microsoft wants to own the keys to the business model. So to prove their worth, it’s time for application developers to prove their business model.

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  7. Can someone please explain the use of business model in this article? How does an application developer prove their business model?

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  8. Stacey Higginbotham Friday, June 20, 2008

    Parrish, they actually make a sustainable profit selling ads against the apps they’ve developed (or they show us a different way they can make money.) It’d be nice if they could also grow sales at a rate that would justify their valuation.

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  9. Stacey, in other words there revenue is created by selling advertising? What valuation model is used to determine values? In addition what metric is used to compare to other transactions. What is an acceptable growth rate for most start-ups for app developer based companies?

    By the way, thank you for your response to my previous question.

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  10. @Parrish:

    You’re making this too complicated. Ballmer said what any right-minded investor would say in a “post dot-com” era; show me the money. Stacey summed it up nicely…if you want to be an acquisition target, you have to demonstrate how you actually earn revenue, not just get “hits”. Popularity does not equal value. Innovation does not, by itself, equal value.

    Take eBay for example; there’s an application whose business model does not rely on advertising for revenue. They have solid technical infrastructure, a large customer base of happy customers, and their name is nicely saturated into our daily lexicon. If eBay were a younger, more acquirable company, I would say this is the kind of company Ballmer would try to buy.

    The days of creating a “portal”, selling ads, then cashing out with an IPO are over. (Thankfully.)

    -John

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