Ballmer on Yahoo Deal: ‘Nobody Gets It’

The day after announcing a landmark search deal with Yahoo, Microsoft CEO Steve Ballmer told a gathering of financial analysts at the company’s campus on Thursday that “nobody gets it.”

So, he’s going to explain it.

During his lead-off speech at Microsoft’s (NASDAQ: MSFT) annual Financial Analysts Meeting (FAM) at its corporate headquarters, Ballmer said he wanted to give investors “my full explanation, my body English” on Wednesday’s deal.

“It’s not about money, it’s about scale,” Ballmer said. “It’s a tool for product improvement.”

The comments come following a sharp 12 percent drop in Yahoo’s (NASDAQ: YHOO) stock price on Wednesday, with investors disappointed by the lack of an upfront payment to Yahoo as part of the two companies’ 10-year search technology and revenue-sharing agreement.

Commenting about what he referred to as “frothiness in the markets” after Wednesday’s announcement, Ballmer explained his take on the deal.

“What happened is that nothing got bought or sold yesterday, but the partnership creates economic promise,” he added. “This is a win-win deal with more choice, better value, and more innovation.”

“Our COGS [cost of goods sold] should be lower than it is today … and we might make a percentage point or two in the 12 percent” that Microsoft gets through its part of the revenue sharing with Yahoo. While Microsoft’s share is relatively small, it provides “more liquidity in the marketplace,” Ballmer said.

“Yahoo gets 88 percent of the revenue they get today but they have zero percent COGS and no R&D expenses, and no [capital expenditures],” Ballmer told the analysts. “Did they sell their search interests? No.”

“This is a huge value creator, but nothing got bought or sold,” he added. “Assuming we get regulatory approval, more of our financial upside comes in the future.”

Focus on Windows

Microsoft’s FAM is an annual event meant to wrap up the previous fiscal year’s results for analysts as well as preview plans for the company’s future. During the course of the day, many of the company’s senior executives will present their views on their divisions to the analysts gathered in Redmond.

During his time in the spotlight, Ballmer also took some time to talk up the coming release of Windows 7.

For one thing, he revealed that, behind the scenes, he has been personally in charge of the operating system’s development.

“For the last 12 months, I’ve been running our Windows business as acting leadership,” he said.

Hopes are high for the release, coming especially on the heels of Windows Vista, which received a lukewarm reception when it debuted and has generated only middling adoption in the years since.

Not only is Microsoft counting on a big bump from the OS’s debut in October, but PC makers and others in the IT ecosystem are hoping that buyers move to upgrade or purchase new systems in connection with the release, sparking an industry-wide lift.

Windows 7 was “Released to Manufacturing” or RTMed last week, the final stage before the product ships, during which it’s sent to partners.

Already, signs are pointing to vast interest in the launch. Some 8 million users downloaded the “Release Candidate” — the final test release before RTM, Ballmer said.

He also gave a small jab at some of the analysts in the room at FAM over their choice of PCs.

“I’ve picked out the Macs in the room … that’s okay as long as you use Office,” he quipped.

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