Kevin Johnson, president of Microsoft’s Platforms and Services Division, answered questions about integrating the two huge companies after Microsoft made a $31 per share offer for Yahoo this morning. Here is an edited transcript of my conversation with him:
Q: Why are you doing this and why is now the right time to do it?
A: Well first of all, this combined entity creates a more competitive company. It creates value for shareholders and it’s going to enable us to enhance experiences for customers, whether they are end users, advertisers or publishers, and it creates great opportunities for the employees of both Microsoft and Yahoo.
At the end of the day, this is about creating a more compelling alternative to an increasingly dominant player in the industry.
Q: Does this essentially say that at this point Microsoft doesn’t see itself as able to catch Google alone?
A: I’d go back to the Financial Analyst Meeting [in July 2007]. We outlined a value chain analysis and the taxonomy of user services and ad platform, and, look, we’ve been making good progress over this last year. We released the Windows Live Suite in November, a new release in Live Search last October. We successfully completed the first phase of integration with aQuantive. We’ve signed up new publishers to our ad platform. You know, look, we’re pleased with the progress and we’re very proud of the work that our employees have been driving in this area.
You know, the fact is that this is an industry where scale matters and by combining our resources with Yahoo, not only are we able to achieve scale economics, we’re able to expand the R&D [research and development] capability, capture operational efficiencies and focus on new user experiences.
Q: Certainly one of the most important metrics for online advertising and success overall online is still search market share and I think it’s fair to say both Microsoft and Yahoo have been steadily losing share against Google over the last year. On that front, what makes you think that combining two entities that are losing share is going to help against the one that’s dominant and still gaining?
A: Well, there’s two things. First, I’d point out, if you look at our share, I think we’ve been kind of holding share, and holding flat on share. The fact is this is a game of scale. By bringing the companies together we can create a more efficient operation and organization that scale enables us to eliminate duplicate capital costs, such as servers and data centers and infrastructure and by combining our R&D capability it allows us to have more engineers that focus on a broader range of products. Instead of having engineers both working on search indexes and core search relevance, we can have one team of engineers working on that and that frees up engineers to drive new innovations in search — search verticals, new search user experiences. There’s plenty of opportunity to drive breakthroughs in search.
Q: When I think about Yahoo, it’s hard to think of something that they do that Microsoft doesn’t also do in the area of online services. So what’s your strategy going to be for combining those many overlapping services? Is it going to be a co-branding thing, or what do you see happening there?
A: First of all, through recent experiences with aQuantive and Tellme, we know how to do successful integration. And part of that successful integration is having clear, defined synergies we’re working to get. A clear set of integration principles and then it’s putting together a joint team of Microsoft leaders and Yahoo leaders who are going to work through a thoughtful integration process to make the decisions on how this lands. We’re confident based on our recent success of integration with companies like aQuantive and Tellme that this process is the right process to yield great results.
Q: But aQuantive and Tellme had much less of an overlapping set of technologies or businesses they were in. It seemed like it was adding technology to what you guys were already doing whereas there are so many things that both MSN and Yahoo do that are essentially competitive and the same service. Will those go forward under the same name, or how do you see that part happening?
A: If you just take decisions around brands, you know, first of all, we’ve got a great set of brands, The Yahoo brand is a great brand and as part of this integration process, we’re going to get leaders from Microsoft and Yahoo that are going to make thoughtful decisions, not only around the technology integration, but the user experiences and the brands. This is an opportunity to bring together the best of both worlds.
Q: Are you anticipating any layoffs at Microsoft or Yahoo as you combine the two companies?
A: A key part of this is the expanded R&D capacity. We’re hiring engineers today and by combining resources with Yahoo this expands the R&D capability. This is an opportunity to get that expanded R&D capability and really prioritize what they’re working on so that we can expand the range of innovation that’s taking place.
Now, certainly, in combination with that, there are operational efficiencies that we will gain from this combination. And on the people front, much of the operational efficiencies certainly relate to the integration work where we’ve got to do a great job of getting the right people in the right jobs and making sure that we have the right amount of head count and resources, focused in the right areas.
I think we’re confident, not only will we take advantage of this expanded engineering capability, but we’ll be very thoughtful about the operational efficiencies that we can gain by getting the right people in the right jobs and the right amount of resources allocated to individual areas.
Q: What about combining the cultures of the two companies? Is that a big challenge too?
A: Our two companies share a common passion for innovation and creating opportunity and great user experiences through technology. And that passion for innovation is really at the core, and so together I think we’re going to redefine how people and businesses think about information in the new age of the Internet and I think that common passion is really a glue that helps us bring the workforces together.
Q: What you’ve described is a complicated and extensive integration process. What’s your best-case scenario for how long it takes after approval is granted?
A: Certainly, we’re going to go through the integration planning process with the joint team of Microsoft and Yahoo, make thoughtful decisions about that. Some of the thoughtful decisions that will be made is sort of the timing of when and how things are sequenced.
But, you know, clearly we’ve got a certain set of integration activities that would happen on day one of closing and then certainly over some period following that. We’re going to work through the set of things that get implemented to bring resources together.
Q: Do you face a risk here of spending so much focus on integrating the two companies that you don’t get quickly to some of the benefits you’ve talked about?
A: Certainly, there is some — you know, you look at scale economics. Combining our search inventory on the same ad platform, that’s going to deliver better yield or better revenue very quickly. So there’s certain synergies that will happen very quickly. he fact that on our integration plan, we’ve got to work to get to a single search index, a single ad platform. And by doing that, that means that we have one team of engineers working on that instead of two.
That enables us to now prioritize engineering work on new emerging scenarios such as video, mobile services, social media, social platforms. And so, I think there’s a set of things that we can get immediately and as we deploy engineering resources on the broad set of priorities, there’s things that will also be driven long-term.
Q: How big of a risk do you think you face from antitrust regulation on this?
A: We’ve worked closely with our legal counsel and we are confident we can obtain all necessary approvals in a timely manner. And we’d expect to close within the second half of this calendar year.