Microsoft goof puts Yahoo analysis on view

A day after announcing a partnership with Yahoo on search technology and advertising, Microsoft held its annual Financial Analysts Meeting on its Redmond campus Thursday. Brier Dudley and Sharon Chan covered this gathering in their blogs, excerpted below.

A particularly interesting slide was released at Microsoft's Financial Analyst Meeting. It included "context" about the Yahoo deal and was marked "not for disclosure."

In other words, the slide had the secret internal analysis of what the Yahoo deal means to Microsoft, including details not revealed in Wednesday's announcement or Thursday's presentation to analysts.

It was included in the slide deck briefly available for download from Microsoft's investor site but wasn't shown during CEO Steve Ballmer's speech.

Among the details: "Net: We will lose money the first two years ($300m total) then start making a decent return ($400m steady state)."

Microsoft also expects total transition costs of the deal to be $600 million to $700 million ("up to $200m could hit us in 2010"), according to the slide (check seattletimes.com/brierdudleysblog for a look at the slide).

— Brier Dudley

When Ballmer talks ...

Microsoft CEO Steve Ballmer is talking now.

On the Yahoo partnership: "On Yahoo side, Yahoo gets 88 percent of the search revenue they have today. They have 0 percent COGS [cost of goods sold], ZERO percent COGS, against 88 percent revenue and they have NO R&D [research and development] expense and no ongoing capex [capital expenditures]. It's sort of like unbelievable. Did they sell their search business? No, they get to keep 88 percent of the revenue."

Ad campaign against Apple: He pulled up a chart of a survey in which 18- to 24-year-olds were asked whether Apple or Microsoft offers the best value and tracked it through the year when Microsoft began airing the new laptop-hunter ads. More of the people surveyed now believe Microsoft offers better value than Apple.

The next netbook: Microsoft has been working with PC markers on a laptop called an ultrathin, a more expensive netbook that has more power and a better screen but still uses low power. "Why don't we have a high-performance lower-power device? That comes this year. The new ultrathins will be like high-end netbooks."

— Sharon Pian Chan

Apples come in bunches

Apple has apparently won over desk share in a room of about 400 Wall Street analysts. Steve Ballmer was onstage talking about how Microsoft is doing against Apple, then said he had been counting the number of Apple laptops vs. PCs in the room.

"I can see we have some work to do here," he said. "I've already counted them. We got a bank of them over here in the middle, over here. Feel free, as long as you're using Office, to go right ahead."

— Sharon Pian Chan

Yahoo deal: priority 2

You read that right. The Yahoo-Microsoft partnership is priority No. 2.

The first priority is search, according to Qi Lu, president of Microsoft's Online Services Business. No. 3 is to invest responsibly and to hit financial targets.

Lu, a key person in Microsoft on the partnership announced Wednesday, talked more about the deal and what it would achieve. Scale was the main advantage.

"With larger scale there's several important advantages," Lu said. "The first is almost immediate lift in quality user experience."

For instance, he said, the suggestions that come up when a user types into the search box is determined by what other users typically type in. The more data Microsoft's search engine Bing has, the more likely suggestions will match what the user wants.

Lu also talked about benefits for advertisers.

"With more clicks, the algorithms will be able to match the ads" to the right customers, he said. "Advertisers will get better ROIs [return on investment] per click. ... This partnership will enable Microsoft and Yahoo to be more competitive, to innovate better, to benefit all our customers and users."

He was upfront about the challenges and talked about Google's strong market share and brand.

"The early feedback from market has been encouraging. But the larger perspective is this only the beginning. It's a good step but it's a first step in a long, long, long journey."

— Sharon Pian Chan

Off-the-wall technology

Microsoft has seen the future and it looks like a Philip K. Dick short story.

Robbie Bach, head of entertainment and devices, and Craig Mundie, head of Microsoft Research, gave demos of Natal and other natural user interfaces.

Natal is the Xbox technology where the player becomes the controller — cameras track the player's body movement, which controls the game. For instance, Bach played full-body handball, jumping around the stage to bounce a video ball against a backboard on-screen.

Mundie showcased an office of the future in which what goes on a computer screen now is instead projected on the wall, and the desk is an interactive touchtop like Microsoft Surface.

A virtual on-screen digital assistant, who looked like a J.C. Penney underwear model, filed documents and placed a videoconference call. The woman on the other end of the call was able to pull up images and documents onto the wall projections. Mundie could also pull up documents with gestures picked up by a camera.

"There will be a successor to the desktop," Mundie said. "It's the room."

It's similar to a scene in "Minority Report," the movie based on a short story by Dick, in which Tom Cruise moves computer investigative files around a glass wall with his hands.

— Sharon Pian Chan