

The move represents a switching of teams for Dr. Lu, whose former employer was the target of a $47.5 billion acquisition offer that Microsoft abandoned earlier this year. When he begins work as president of the online services group at the Redmond, Wash., company on Jan. 5, Dr. Lu, 47 years old, will face the formidable task of improving Microsoft from a distant third place position in Internet search, behind Google and Yahoo. His familiarity with Yahoo could make that easier if Microsoft is able to strike a deal to acquire Yahoo's search business, as Microsoft CEO Steve Ballmer has said he's keen to do.

In the first joint interview together, Mr. Ballmer and Dr. Lu on Friday morning discussed their plan for making Microsoft more competitive on the Internet. Mr. Ballmer also reiterated his interest in acquiring in Yahoo's search business and how it would be better for both companies if they can do a deal "sooner than later."

Excerpts of the telephone interview with both men follow:

WALL STREET JOURNAL: Steve, was this a difficult or particularly long search to find the right person to run your online business?

STEVE BALLMER: I'll say, no, actually to both. Somebody might have a different point of view. I think people would have wished, hey, just fill the job quickly. But "difficult" would imply it was tough to find the right guy. I think it was important for me to take the time to get to know many people in the online industry, which was great.

Steve Ballmer Associated Press

And yet, it was not a difficult choice, I think, for what we need to accomplish, you know, sort of four key things. There's general management, and I've got great confidence in Qi [pronounced "Chee"] as a leader and manager. There's technology, certainly Qi has an unparalleled background. There's product as opposed to technology, and really what it takes to build a winning product. And if you want to build a winning product in search, again, there's no better guy on the planet than Qi, so I felt very good about that.

WSJ: His predecessor running Microsoft's Online Business had more of a sales and marketing background. Did you decide that deep technical skills first and foremost were the most important thing for improving your position in search?

Mr. Ballmer: There's a difference between technical skills and product skills. Both were important. There are a lot of people in our industry who understand the technology, but don't actually understand really what it takes to build a winning product. So perhaps the most important thing was the product skills, and really the understanding of what people want, and what they're trying to accomplish and get done. Then it's also great to have the skills to map that back into the technology itself.

We did restructure the job some, which made it easier to focus in on product, and general management as opposed to other things. We did take our sales force and move it so that we could manage it under our chief Operating Officer Kevin Turner, and that made it more pure to focus in on this issue. Also, because we moved the Windows Live pieces into the Windows group, which I think is appropriate, it created clear focus on search, portal and advertising as the product.



Qi Lu

WSJ: At Yahoo you were obviously in a competitive position against the dominant player in this business, Google. Do you feel like at Microsoft you will have better resources to more effectively compete against Google?

Mr. Lu: In my interaction with Steve the one thing that impressed and won me over is the level of commitment they are investing. They're investing resources, they're investing in our ability to distribute a product, investing in things that we can do to ensure we have at the highest quality of user experience, and that's very, very important.

WSJ: Do you feel at Yahoo that level of investment wasn't as high as it needed to be?

Mr. Lu: Yahoo was operating in a slightly different situation. The company has a different profile, type of business, and the operating margin structures it needs to operate with. So it's different.

WSJ: Steve, should a Yahoo search deal come to pass with Microsoft, would Qi's hiring make it easier for Microsoft to integrate whatever assets it acquired from Yahoo?

Mr. Ballmer: I think a search deal makes great sense for Microsoft, and Yahoo, and I think I've been very open about that. That's as true with Qi joining us as it was before Qi joined us. Obviously the logistics of any such integration&hellip;can only be simpler by having somebody who will know both sides. But, that was not a factor in hiring Qi.

Our focus on portal and search is super-strong, and even if we never do a Yahoo deal or anything else, I wanted to have Qi come on board. It is kind of a bonus that if something happened with Yahoo I'm sure it's somewhat simpler.

WSJ: In your last comments on this, you said that there are no talks going on with Yahoo. Has that changed? Are there any kind of talks about a search deal between Microsoft and Yahoo at the moment?

Mr. Ballmer: The answer is no, but I wouldn't tell you if there were. But in this case it's easy.

WSJ: Do you feel like you're in a situation where you can go slow with regards to Yahoo and any conversations, or do you need to move quickly?

Mr. Ballmer: We're fully prepared to compete without any partnership with Yahoo. We don't need to act. Would it be advantageous for both of us to make a deal? Look, the fundamental basis for doing the search deal with Yahoo has to do with critical mass in the advertising marketplace. It doesn't have to do with technology, or any of these other things, it really is a market phenomenon. Together we would have more advertisers&hellip;.which means we'd have more relevant ads on our page. We'd have higher monetization levels possible in front of us because there would be more people bidding on more key words. Most importantly, Google would have perhaps a real credible competitor sooner.


WSJ: Do you think that that's unlikely before Yahoo finds a new CEO?

Mr. Ballmer: It's not my place to speculate there, I'm afraid.

WSJ: Qi, let me turn this around. You were at Yahoo when Microsoft made its acquisition bid. I'm curious what it was like being on the other side, and how you, as a Yahoo person, viewed Microsoft and how others inside the company viewed Microsoft?

Mr. Lu: For me, Microsoft has been one of the most, if not the most, successful technology companies. And the one thing you can say about Microsoft is about their competitiveness. They may not get it right in the first version of the product, but they're coming at and they'll keep coming at it and improving the product. And so we always respected that, and viewed Microsoft as you can never count them out as very worthy competitors.

With regards to the acquisition, certainly the management team and the board of directors made their decisions, and we all know about that now. Sometimes the employees, different people have different views. That's perhaps all I have to say.

WSJ: Do you think if the scenario that we talked about should come to pass, some kind of collaboration between Microsoft and Yahoo on search, that top talent would remain, and that there would be a relatively smooth integration of their assets with Microsoft?

Mr. Lu: Based on what I know of, I think certainly a case can be made that a lot of employees will remain, and they will be able to put together a smooth transition. Just to add to what Steve said earlier, the key value of consolidating the two search assets is by combining the supply and demand in the ad marketplace so that you have more advertiser base, and given that you will have ads that are more relevant, serve the user better, and create more [return on investment] for the advertisers, and certainly provide more yield, economic value for all parties involved.

WSJ: Should we look at an improvement in Microsoft's market share position in search, or are there other measurements by which you'll judge that the Internet business is headed in the right direction at Microsoft?

Mr. Lu: To me, ultimately in the search case, it's market share. Beside search share, there's a different set of metrics that can tell us how competitive our products are. There's a lot about measuring the quality of the search experience, and there's also a lot of measurements you can use that will tell us how effective our ad marketplace is at being able to provide yield.

Mr. Ballmer: The only thing I would add is, on the portal side of the business -- that's where we actually have our biggest revenue stream today -- we have a lot we think we can do to continue to drive page views.

WSJ: Can you set some expectations for how much you think you can improve your market share in the absence of a deal with Yahoo?

Mr. Ballmer: I don't choose to make forecasts on that kind of stuff ever. It's a function of a lot of things &ndash; how rapidly the product improves, how quickly we can sort of capture user imagination on the kinds of improvements we're making, how effective we are in getting our search product distributed. I said to our shareholders that we are prepared to invest significant amounts of money in our online business, 5 to 10 percent of operating income if we had to, for the next five years.

WSJ: Steve, are you concerned that with the departure of Brian McAndrews, the former senior vice president of Microsoft's advertiser and publisher solutions group, and before him Steve Berkowitz, that Microsoft may seem like a inhospitable place to outside executives who come in to run your online business?

Mr. Ballmer: No. You probably should ask Qi. He's an outside exec who is coming in to run our online business.

WSJ: But he doesn't start until January.

Mr. Ballmer: Yes, that's right. So if you want to scare him away, this is the call, I guess. I'm teasing.

No, I don't think so. I mean, Brian, we acquired his company [aQuantive]. And Brian is a CEO, he's been a CEO for a long-time, and you've got to make a judgment. It's different than acquiring a small startup, and when Brian came in he said, hey, look, I'll help you with the transition and I'll see what I think. And he had a chance to do that, this is sort of the right time for him to make a transition. We don't say he's retiring because I suspect he'll be a public company CEO again someplace in the not too distant future, but he's been a great facilitator of the integration of aQuantive, for which I'm very thankful. He's a good friend. Our sons play on the same basketball team.

In general, I would say we have a very good track record in terms of executives coming in from the outside, but a very good record is never 100%. I was talking to the CEO of a Fortune 10 -- the head of HR for a Fortune 10 company &ndash; and I said what's your track record? He said we keep about 50%. I said, well, we do a lot better than that we keep about 70-75%. So I think we do pretty well.

WSJ: It was pretty widely known that Brian McAndrews was interested in this job, running the online business. Did you make any effort to try and keep him in some other role?

Mr. Ballmer: I love Brian. It would have been great to have him stay at Microsoft, but I respect the decision he made for his career goals and ambitions.

WSJ: Microsoft I think has hired another Yahoo, former Yahoo technologist, Sean Suchter. Are you specifically attempting to hire talent away from Yahoo?

Mr. Ballmer: I should take that, because Qi has had absolutely nothing to do with any recruiting we've been doing as a company to date, because he hasn't started. We have an A team in search. We have a great competitor, but we have an A team. Sean, who I had a chance to talk with during the process, is another great talent. I'm sure there's other people we've hired from Yahoo. I've been reading there's people they've hired from us. It's a small industry, so some of the talent will flow that direction.

WSJ: Steve, does the souring economy affect your ability to improve your position in search, either on the upside or the downside?

Mr. Ballmer: I don't think it makes a material difference.

WSJ: I'm curious if any pull back in spending on advertising will negatively affect your goals here.

Mr. Ballmer: You asked about market position, which to me implies share. Will online advertising suffer with the economy? The answer to that is sure, of course it will. It makes the P&L tougher. There's no question about that.

On the other hand, relative to building share and position in search and portal, and share of advertising, I don't think the economy is really a factor for us. I don't know if you know the old story about the two guys out in the woods who see a bear, and one guy says, boy, we'd better really run fast, or that bear is going to get us. We've got to run faster than the bear does. And the other guy says, no, I've just got to run faster than you do. In this economy, maybe that's the right way to think about it.

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