Summary:

After discussing the state of the economy, Steve Adler, BusinessWeek’s editor-in-chief, opened day two of the McGraw-Hill Media Summit by as…

imageAfter 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) in search. 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 in search and that Google has put in more resources there, and has put more marketing effort into search while Microsoft has a number of areas it concentrates on. As for Microsoft’s reported testing of a new search engine called Kumo.com, Ballmer said that in general, the company’s been turning out new search releases every six- to nine months. “The questions for us in the search area is, ‘How do you differentiate? How do really ascertain user intent?’ The answers are going 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.” More after the jump: Search deal with *Yahoo* deemed “compelling.”

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.”

Impact from the layoffs: In January, Microsoft announced it was cutting 5,000 jobs, the first time the company had engaged in a mass reduction of staff. Adler asked how the company was handling it. Ballmer: “The human cost is clear. Everybody feels bad about it. On the other hand, people know it had to be done. And no one wants death by a thousand cuts. People understand we were thoughtful about it.”

Three screens and cloud: Microsoft, Ballmer attests, participates more broadly on computers, phones and gaming and cloud computing than anyone. “XBox Live today is an experience on their console. Allowing people to participate on all screens is crucial. People will not expect islands based on screen type. The PC has unique merits over the TV or phone. The PC is the starting point and the cloud will distribute it to the other screens.”

Acquisitions: Microsoft doesn’t have an “acquisition strategy.” Ballmer says it has a “business strategy.” Still, Ballmer adds that Microsoft made 20 acquisitions last year, and it will probably do another “10-, 15- 20 more purchases this year. They’ll be small, maybe around $10-, $20 million range. Nothing the average BusinessWeek reader will pay attention to. Even our $1 billion don’t get much attention. We’re not close-minded to the idea of a $2- $3 billion acquisition. But it’s not likely. No one knows what asset values will be until the economy rights itself. I’m only involved in acquisitions over $100 million. If someone in the company wants to buy something for $50 million, they have other executives who greenlight that.

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