05222007 JP Morgan Steve Berkowitz
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05222007 JP Morgan Steve Berkowitz 05222007 JP Morgan Steve Berkowitz Document Transcript

  • 05222007 JP Morgan Steve Berkowitz Who: Steve Berkowitz - Senior Vice President, Online Services Group When: Tuesday, May 22, 2007 Where: J.P. Morgan 35th Annual Technology Conference ADAM HOLT: Good morning everybody. My name is Adam Holt. I’m a senior software analyst at JP Morgan. Thanks very much for coming to see us today. I’m very happy to have Microsoft to be able to speak to us this morning, in particular, Steve Berkowitz, senior vice president for the Online Services group. Which is obviously a critically relevant area and not just right now, but as part of the company’s growth strategy over the next 5 to 10 to 15 years. Steve, thanks for joining us. And I thought maybe just in terms of level setting for the conversation, we'll pick up what we were just talking about here casually, which is you sit in a seat where you're looking at almost boundless opportunity from a revenue and a priority perspective. And I just wanted to maybe start out the conversation with understanding how you think about the different markets that you address in terms of both prioritizing but also allocating resources. STEVE BERKOWITZ: Well, the Internet is just an amazing kind of sea of opportunity at this point. When I look at our opportunities in the Internet, the first thing I'm doing -- I've been here now about a year, so then in Microsoft time that's about two days in trying to get to figure out how the whole company works -- I look at the opportunities and say, wow, you know, we have 465 million unique users worldwide of MSN, we have 278 million mail users, 280 Messenger users, so we have this great user base that we need to figure out how to more deeply engage. So, when I look at the opportunities that sit in front of Microsoft today, I look at it and say, wow, we just have a tremendous set of assets that we need to get deeper engaged in our properties. That, combined with a strong advertising platform, I think will set the future for Microsoft. ADAM HOLT: So, is the advertising market really, if you were to think about sort of the order of priorities, it's obviously one of the largest markets that you address. Search gets a lot of attention. Maybe you could talk a little bit about how you think about both addressing the advertising opportunity but also whether or not search is really the primary focus or just part of a broader picture. STEVE BERKOWITZ: Sure. Well, let me separate out the user platform for a minute from the advertising platform. I think eventually all advertising is going to converge to be IP-based advertising, so search and display and IPTV and mobile. I mean, all the advertising itself will come together and hopefully be served off a single advertising platform in the future, and I think that's where you're seeing some people in this industry head towards. Search is an important component of that today. It's where a lion's share of the revenue is generated today. But that's only again a small subset of advertisers that can advertise on the Internet.
  • In terms of search from a user perspective, search is a killer application on the Internet. It's one of the most important applications in terms of how people access the Internet. It's one of the major entry points onto the Internet. And there are two types of searches. There's what we call destination search, which is search where people decide they're going to go to a URL and search. And then there's what we call convenience search, which is search where you are, and where you're seeing search boxes embedded in browsers, and search boxes embedded in publisher sites. And we're starting to see more and more growth of convenience search, which is search where you are. And so when you look at the base that we have at Microsoft, our goal happens to be to try to keep the people we have searching through convenience search on our site. So, search is a very important part of the navigational aspects of the Internet, as well as so is a portal as another entry point, and social communities as another entry point. So, we look at those two things slightly differently. ADAM HOLT: So, maybe let's talk for a minute about the actual transactional velocity on your different properties. You know, obviously as you noted you have a very large install base if you look at Hotmail accounts and IM accounts. I guess two questions. The first is, how do you translate the strategy for increasing the velocity of transactions, if you will, around the existing assets that you have, and how do you think about sort of more broadly accelerating traffic? STEVE BERKOWITZ: Sure. Well, when we look at -- we look at we have not done a great job of what I call kind of moving traffic around our network, and it's one of our top priorities this year as we start to look at the business model as, you know, how do we make sure that we've put search boxes at the end of every page on MSN. How do we make sure we've better integrated the search experience into Messenger. Today it's just a search box, it's not a search experience. It's how do we make sure that your social content is searched when you're in Messenger from your friends getting -- knowing what your friends are doing. How do we integrate Spaces and Messenger? Spaces was actually a business that grew to over 100 million unique users through its affinity with Messenger. Our next step with that is now to integrate Spaces into the next generation of product. So, for us it really comes down to better understanding the user flow of traffic, and a lot of that comes down to the best part about what I love about this business is people are telling us every day what they want to do by their actions on the Web. So, we're seeing a lot of great stuff happen there in terms of what we're trying to do along traffic movement. In terms of new customer acquisitions, I mean, that's something that we all do every day. A lot of it is viral, so a lot of it is developing products that people want. A lot of it is actually using content today as a driver of acquisition of customers. So, we're sponsoring Live Earth on 7/07/07, which is a series of seven concerts throughout the world on MSN. MSN will be the only online site that will be broadcasting these concerts live, you know, things like that where you're partnering with content suppliers to actually create an interesting experience that attracts people to it. And that experience for that will be combined with Spaces, it will be combined with Messenger, it will be combined with mail. We're going to be using these content
  • experiences or these total experiences to drive retention and frequency on our properties. ADAM HOLT: So, maybe if I could just pick up on that point about partnership, you've done a number of different kinds of partnerships, Facebook, a couple that you just mentioned. How do you see -- what do you look for in a partnership opportunity, and how do you think about sort of sharing the economics around I won't say subsidizing customer acquisition but aggressively trying to spend around customer acquisition? STEVE BERKOWITZ: Well, again I think, as I said, an interesting part about customer acquisition in the Internet space, it isn't just about market, it is about building a stronger experience. So, what we look for is in a sense win-win relationship. So, there are a lot of things that we do out there because we have such a large aggregated audience that people want access to, so we kind of look at it. You know, we did the deal with Career Builder where they're the official partner up, we have Match.com for dating. So, we look at this as saying, you know, we're not necessarily developing all of this content ourselves, or very much content ourselves at all. We look at this in saying, you know, what we do is we aggregate audience. I kind of look at it as we own the real estate of the mall, and our job is to bring the best stores to that mall. And if we do that, then we will increase engagement, increase flow-through, and increase traffic by creating common navigational elements for people, and again very similar to what Windows does in terms of its common navigational elements. ADAM HOLT: So, I guess one question would be one thing historically that has been maybe a little bit of an inhibitor in being able to do more content partnerships is having a full back-end from a technology perspective. You've been better on the search management side. Obviously you're now getting into the display management side. Can you talk a little bit about where you see sort of the back-end in terms of where you are today and where you need to take it? STEVE BERKOWITZ: Well, again, I mean, this is an industry that I look at as kind of -- I look at it two ways. You need to build a set of technology platforms. So, we look at adCenter as a technology platform, we look at business intelligence as a technology platform. We also look at user platforms like search and mail, Messenger, our portal infrastructure; those are all -- and our points platform, as well as our commerce platform; all of those are platforms. And if we're building our business right, then what we're going to do is we're going to do what we've done in a lot of other businesses, we're going to build first party titles on that platform. MSN is a great example of a first party title in which we're building a unique experience on top of all of those platforms. And we'll have third parties build with us. So, there are things that we're doing with different companies out there like Qwest where we'll end up building the portal for them, and they'll be building off our platform, or things like we'll do with Bell Canada. So, we are actually looking at our business and saying, wow, we're going to build platforms, and we're going to allow third party developers to develop on that platform, so that's a lot of the investment you're seeing us do in the infrastructure of the business today is to build the back-end infrastructure to allow other people to build off that. We'll help them monetize it through our adCenter, through our
  • aQuantive acquisition and through other things, as well as we'll allow them to engage their users through the technologies we build. ADAM HOLT: So, maybe since you mentioned it, can you talk a little bit about how you see aQuantive fitting into this vision, number one; and number two, do you feel like with the aQuantive acquisition you've built out all of the key components of a display/search/broader technology back-end? STEVE BERKOWITZ: Sure. Well, first of all, I would call actually the aQuantive acquisition, as I told the people at our town meeting, I look at it more as a merger. I've done about 40 plus acquisitions in my business career, and I've actually been on the buy side when Barry Diller bought Ask. And so there are different ways to look at acquisitions. There are certain acquisitions you acquire to look at and say, okay, great, there's lots of cost synergies, and how are you going to do that. We look at the aQuantive acquisition as one of revenue opportunity and relationship opportunity. So, we look at it and say, wow, we didn't have a strong publisher facing relationship, we didn't have a strong -- we have a very strong advertiser connection, but we didn't have the tools for the advertisers. So, we look at aQuantive as an additive or, as I said, more of a merger of businesses, and that for us is really exciting, because it's getting us into places we weren't in before, so that part of it is very exciting. So, in terms of how we see the future of this, I mean, it is a great time for us, and when we look at, you know, do we have all the tools, I don't think anybody has all the tools today. I don't know if we really know where advertising ultimately is going to go. As I said earlier, it's going to continue to grow. The goal is to start targeting advertising across all forms of delivery from mobile to IPTV to the Web to mobile devices. So, as we start to look at that, how do we deliver that, I'd say we have a lot of the pieces, I can't say we have them all yet until we sit down and continue to look at where the industry is going. ADAM HOLT: Just a couple more questions about sort of the concept of building more transaction velocity around the user base and in the user base. You know, historically you all have not been active acquirers of install bases or user bases. How do you think about that concept from a strategic perspective, and also the concept of sort of outright subsidizing user acquisition? STEVE BERKOWITZ: Sure. Well, I think one of the interesting parts about user acquisition is what I call renting traffic, and then there's owning traffic. And certain of the deals you see out there today are what I call renting traffic, which is where you're monetizing somebody else's site but you don't get any relationship with the user. Those are good deals in some respects, they're not so good deals in others, depending on the economics, but the economics always pretty much lie in the hands of the publisher or the user/owner. So, those deals are ones in which they help you scale and they'll help you get economies on your advertising platform, but they don't necessarily help your user base. There are other deals in which you can actually connect with the user and actually have that relationship with the user, either joint ownership of the user or actually be
  • able to leverage that user in other ways, and we look at those as actually more advantageous type of relationships with customers. And so we're looking at different ways as we look to our partners to leverage those technology platforms that we've built, you know, is there somebody who can create a version of Messenger that ties into our Messenger network but is branded their version of Messenger but they get access for their unique set of their users with their own version of Messenger, plus they get access to the entire Messenger network. So, we're looking at different ways to leverage those technologies to increase user engagement across the network. ADAM HOLT: If I could spend a couple of minutes on adCenter, I mean, if you look at the third quarter, it was the first quarter after the move to adCenter from Overture where you saw a good year on your growth in RPS. Can you talk a little bit about where you think you are in the deployment and I guess monetization of that platform? STEVE BERKOWITZ: Sure. Well, I mean, adCenter is now -- I think I've been there a year now, so it's just about a year old now. And I think we've accomplished a lot of what we've been trying to accomplish since we turned off Overture about a year ago, but again we still have a lot of opportunity to grow. The system itself, one of the interesting parts about both search and adCenter is they're learning systems. They're systems that move and get better with more and more transaction volume and more and more history. So, again we only have a year's worth of history, and actually that history is scaling itself. So, as we start to see the business grow, we continue to see tremendous potential in terms of what we can do with adCenter, and how well we can monetize our traffic. But it's still early, and there are still a lot of things we need to do. We've only been in the game now for about a year in terms of adCenter. So, we'll continue to see the incremental growth, we'll continue to see we hope all of those things that we've seen in the past, but again we're just at the early stages of where adCenter can be. ADAM HOLT: As you said, search is to some extent a learning technology. A year ago, people talked a lot about things like pages indexed, and the algorithmic advantages and disadvantages versus MSN sort of at the time from a branding perspective and Google. Is that sort of a stale conversation at this point? Do you see really parity from the actual search technology side, and is it really just about real estate and transactions at this point? STEVE BERKOWITZ: Well, you know, this is a question I love because I've been answering this question now for five years. I actually think search is a lot more than the algorithm, it's a lot more than purely the results themselves. It's really about an experience. It's even to me more about the white box than it is about the results themselves. I mean, we're all getting better and better and better and better at results. We're still not answering 35 to 50 percent of the queries that are being asked, so there's still a tremendous amount of improvement.
  • But search has to go beyond 10 blue links. It has to move to a point in time where it's much more intuitive to what you're trying to find. We have to find ways to get a better one-to-one relationship with the consumer in search. So, I think a lot of the innovation in search that consumers will feel are powerful to them will come around the UI. It will come around how we deliver that information back to them, how we get underneath their intent, how do we deliver a picture when they're asking for something that's, you know, what does a dog look like, or what does a Maltese look like, when they ask what the weather is how do we give them the weather, and how do we not only just give them the weather but we also know where they are based on the IP address of where they are. So, search has to become much more one-to-one, much more personal, and it's got a long way to go. So, I think that we'll get more and more parity around the 10 blue links. And again index size is important for relevance on the tail, not so much on the popular query, so that's going to be important, but it's getting the basics right, which are speed, you know, size of it, you know, I won't call it size of index but really having the document in your index to give it back. But search is going to move beyond the basics, and it has, and it's going to move to very much about that one-to-one UI relationship, and it's going to move off the PC, and it's going to move to the mobile device, and it's going to move to IPTV, and it's going to become a navigational element across almost every device we have. ADAM HOLT: I'm going to pick up on a comment that you made earlier about better embedding search in your different real estate properties, if you will. There's an argument that as we see a Vista upgrade cycle there will be a little bit more sort of native areas for you to embed search on the desktop, which then could be a leverage point across the broader Internet. How do you think about that argument? Is that something you think is a really important driver or maybe overestimated? STEVE BERKOWITZ: Well, I mean, I'll actually answer the question a slightly different way, which is the interesting thing about the Internet is you have to earn it every day. One of the things that we live the first maybe five or seven years on the Internet with was this idea that if I won the default, I can win the battle. So, if I got somebody to -- if I got the default from the OEM or I got the default from the browser, I got the default, that I could win. Well, people know how to change it today. As a matter of fact, people are looking to change it, and everybody is fighting to change it. So, I think the best way I would describe it is that the advantage of the value chain, which used to start back with the operating system, then move to the OEM, then move to the ISP and you kind of go all the way down to the end consumer, where it used to be much more valuable to be further back in the value chain at the earlier part, because consumers were less likely to change, and there's still a significant number who are that way, but you have to focus on delivering the best result at the end of the day, because consumers will change it. If you don't give them the right experience they want now, they'll so someplace else; it's too easy for them to switch. So, I actually believe that it's less important as it was in the past and much more important today to realize that the experience you give them, the results you give
  • them, the stickiness of that experience, the thoughtfulness of it, how to build emotional attachment to the consumer is where we're moving in the future. ADAM HOLT: I'm just going to ask one more question sort of in the advertising and search vein, and then I want to move to some of the services strategies, and what you're doing for Rich Internet Applications. So, looking at the most recent quarter, looking at the aggregate sort of advertising growth, it's better than it has been, but still below peers, and as I mentioned, the RPS number had improved, but some would estimate you're still at sort of a 30 to 40 percent discount to Google. As you think about obviously there are a number of different things we've talked about that sort of collectively would cause that gap to close, you know, where do you see sort of from a timeframe perspective A) that gap starting to close, and growth really starting to accelerate in the advertising business? STEVE BERKOWITZ: Well, remember again we are doing better than the industry in terms of display advertising today. We're continuing to grow at or faster than the industry on the display side. We do have potential on the search side. I can't tell you when that will be realized. I can't tell you exactly the timeline to it. I just know that we're continuing to get great feedback from our advertisers about the ROI to them on adCenter. We're doing lots of things to increase the velocity of that, we're looking at lots of different ways. So, I would say that we're going to continue to look at hopefully outgrowing the industry on the display side, as we have in the past quarters, and then on the search side only time will tell. ADAM HOLT: So, maybe I'll switch gears to talk a little bit about the sort of software as a services strategy. You have obviously a number of different irons in the fire on that front. I get asked often, how would you sort of explain or try and describe what Microsoft's software as a services strategy is? It's everything from pieces of Dynamics to Windows Live. If you I were to pose that question to you, I'd be interested at how you would try and -- or be able to summarize it; probably a lot more eloquently than I certainly could. STEVE BERKOWITZ: Well, I mean, I'll look at it from what I do every day, which is the online services business, but I really look at it as how do we extend the client experiences into the cloud. So, when you start to look at really, as I said, where I think the future of the Internet is going, I mean, the Internet really is just a natural extension of our lives today as they exist. So, if you look at it, I mean, the things that you want to do on the Internet, you want to find information, that's about search. You want to communicate, that's about mail and Messenger. You want to socialize, that's about things like Spaces, you want to do commerce, so all the things that we do naturally, and it comes down to an identity. So, when we look at how do we extend the paradigm of software as a service, we're looking at how do we bring -- how do we extend your persona, how do we give you the ability to extend that identity across every device. So, we look at what we call Live ID, this idea that you can have an ID and that ID is now associated with you, and that gives you the ability to access so many things through the cloud, whether it be eventually your software licenses, whether it eventually be your address book, storage in the cloud, computational power in the cloud. We look at this ability to say, okay, how do we extend your persona, and then how do we also extend the
  • Windows paradigm of folders and sharing onto the Web? And so we look at how we're extending all those things as how we look at software plus services. Software plus services will come back, and that's bringing software to the cloud and then bringing what I call kind of Web-based applications back to the client. And so we look at that as the only company who can do both, bring Web applications back to the client, and client applications to the Web. ADAM HOLT: So, I guess the obvious follow-up would be do you see a point in time where some of the primary desktop applications are actually delivered as a service, like the Office suite? STEVE BERKOWITZ: Well, you know, we have Office Live today. Again, I'm not really focused on that side of the business, so I can't really answer that question, but I do see the ability for you over time just more as a user than as anything else for our ability for you to access that application or at least the heart of that application wherever you are, and I think that's just something that will take time, and we'll continue to look at as we start to develop that. But I do believe that the goal in my mind is to extend PC computing to the cloud with the idea that you can access your information anywhere you want it off any device is the goal. ADAM HOLT: I'm going to ask two more questions, and then I'm going to open it up to the audience for your questions. We've been hearing -- particularly fresh off the MIX conference -- more about Microsoft's strategy broadly around the delivery of Rich Internet Applications. We've been hearing a lot more about Silverlight. Can you talk a little bit about how you see -- and maybe this is just a general question, maybe too general, but what you see as Microsoft's role in both the delivery and management of Rich Internet Applications? STEVE BERKOWITZ: Well, I mean, Silverlight is a cross-platform application, and we believe that again it's part of our software as a service strategy. It allows us and people to develop Rich Internet Applications that can move very fast between the PC and the cloud. So, for us it's just an extension of what we're trying to do in this whole software plus services arena, and we see it as a great application, and we're going to see it as a great application because it crosses over not only Web-based applications, but it's going to help tremendously in the advertising world. ADAM HOLT: And my last question, embarrassingly bring it back to the numbers, as an analyst usually does, obviously one thing that the investment community has been very focused on are the investments around the online strategy and the potential that investments sort of continue at a pace that would be pretty substantial. In the most recent guidance that you've given it would imply sort of 650 to $750 million worth of operating expenses to online initiatives next year. And I guess my first question is, you know, how would you think about sort of allocating that pie, if you would, to different priorities, and then maybe just more broadly, where do you draw parameters around your opportunity set from an investment perspective? STEVE BERKOWITZ: Sure. Well, I can't really talk about how it's allocated. A lot of it is investing in datacenters, a lot of it is investing in the infrastructure that we're
  • going to need to really build out the software plus services strategy, a lot of storage and a lot of things of that nature. But as we start to look at the future, and we start to look at where the opportunities lies, I mean, the opportunity for the company is to, as I say, I always kind of look at it as really to develop a very significant new source of revenue for the company, which is advertising. And the advertising business today is, what 20, $30 billion online, 250 billion in the U.S., 500 billion worldwide. The advertising industry and the amount of advertising that's going to move into this quote/unquote IP-based advertising over the course of the next five to 10 years is huge. People say it's going to grow at 20 percent annually. Who knows how big it's going to be at the end of the day as money starts to shift, but we know it's going to continue to shift and continue to accelerate. So, we really look at this as a huge opportunity to build advertising as a platform, to build services as a platform, and you combine that with client software or software as a platform, you start to realize that Microsoft is extremely well positioned in the future to leverage these things. The great part about the Internet and the great part about this business model is that they do scale tremendously once you get to that point. When we get to that point, I don't know, but I know that the idea that we're in this for the long haul is there. ADAM HOLT: Terrific. I'm going to open it up to any questions in the audience. I'll start here on the right side. QUESTION: Hi, Steve. STEVE BERKOWITZ: Hello. QUESTION: Is this on? Are we on? ADAM HOLT: You're on, you're on. QUESTION: Okay, great. You talked a bit about -- my name is Tim Mung, by the way, Solace Systems. My question was about the tools in the MSN toolbox. And obviously there are a lot of things that MSN would have to vet in terms of what would be successful, make the MSN experience better. How does MSN vet new technology, and what are the success criteria? STEVE BERKOWITZ: Sure. Well, it's interesting. I mean, the nice part about most of the MSN technology, a lot of it happens to be a lot of it is Web-based, the client stuff we're doing really, really well with from mail, Messenger and Spaces. So, we're constantly looking at different ways to deliver information. So, as we start to look at the future of MSN, we really see MSN as becoming kind of the next generation of information delivery. It needs to evolve, it needs to start integrating a tremendous amount of user-generated content. It needs to start integrating lots of other different types of data as we start to talk about it. It needs to actually integrate search better into the experience about how search becomes an important part of it. And if you look at MSN today, you'll see things like the popular search module, which is on the homepage of MSN, which is just a great way to integrate both MSNBC content into search, because again not all the current information gets into search.
  • So, we're going to continue to see us evolve the delivery mechanism of MSN, which is a lot of it will be how to we deliver the content to the consumer, and then how do we integrate this kind of end-to-end experience so it's very sticky to customers so they don't leave. ADAM HOLT: A question there in the pink. QUESTION: Hi, Steve. It's Soren Bech from Neuberger Berman. You spoke about doing a better job of engaging your users, and one of the areas where there have been fewer announcements from Microsoft have been around content. You see Yahoo! coming up with partnerships with Viacom and with newspapers, and Google buying YouTube. What are some of the initiatives that you guys have underway? Why haven't you been as involved in that in the past few months? STEVE BERKOWITZ: Well, I'd say we actually are. I mean, we just did announce the deal with Career Builder in a sense for that. We have great relationships with Match and Expedia. We're doing -- we have an agreement with Control Room to broadcast concerts live across the Internet. We continue to announce content deals monthly in terms of relationships that we have. On the other side of the business, on the health side, we acquired Medstory, which is a medical search engine. So, we are acquiring content, and we actually are partnering for content tremendously. So, I think maybe part of it is it just doesn't get picked up by the press, I don’t know, but I think you're going to start and continue to see MSN -- we did an agreement with the Golden Globes to broadcast, be the official, the only broadcaster of the Golden Globes live, and it was the second biggest day ever on MSN. Our relationship with MSNBC as part of the network is a huge content relationship. So, we've got a lot of very, very strong content relationships, and we actually look at ourselves as a -- I kind of call it a very independent source, that we're not in the content business itself, we actually are looking for partners, we're not competing with partners for content, so we're seeing lots of opportunities in content across the board. And some of the deals that you referred to, some of them are actually advertising deals and not content deals, like the Viacom deal that's mostly an advertising deal than it is a content deal. ADAM HOLT: Yeah, a question in the back on the right. QUESTION: You were saying that one of the strategies for having the online business overall is basically to have a new ad revenue or to build the revenues through ads. But how profitable really is this business? And really anything that Microsoft adds onto what their existing business is, is less profitable than what they currently have. So, what really is the point? STEVE BERKOWITZ: When you say less profitable, you're saying -- can you repeat? QUESTION: Yes. I'm just saying what kind of margins can you expect to get from the advertising revenue?
  • STEVE BERKOWITZ: Well, I mean, I think, you know, this is a business of scale, and once you hit that scale, because there is no cost of goods per se, you don't have a fixed inventory, you actually can start to create a tremendous amount of leverage in this business. We haven't yet hit that tipping point as a company. I believe we will, and once we will I think that you'll start to see the business grow dramatically fast. I mean, this is again an annuity like business if run properly, and it's just a question of what's your aspiration. And our aspirations are very high, which means that we're going to be willing to invest today to get those margins in the future. QUESTION: So, what kind of dollar amount are we talking about here, I mean, as far as the size of the ad revenue? I mean, there are only -- it's a finite amount of money that's being dedicated to advertising overall globally. So, what is that tipping point for Microsoft? Because we've seen this story so many times before where you've pursued something, and it's not worked out the way -- everybody wants this monopoly again, which they got the first time around, and it's not been successful with it. So, I don't know why this would be any different. STEVE BERKOWITZ: Well, first of all, this is a business that isn't going to be a winner take all or a one size fits all solution. I also think that this is actually a business that there aren't limited dollars yet, and I think we're a long way away from limited dollars. If there are $500 plus billion of advertising in the world today, both online and offline, and only 20-some-odd billion of it is online, the velocity of movement I think the other day I was looking at something in the New York Times that said online advertising grew at 35 percent, the rest of the advertising was flat or down. I think that what we have an opportunity to see in this business, which is different than a lot of other businesses, is actually a shift of dollars, in addition to the growth of dollars. So, I think that this marketplace can be huge, so I think this marketplace can be 20, 50, 100 billion or 200 billion. I mean, I think the potential for the marketplace is huge, and if you can get a business that if this does become a $150 billion business, and we're able to achieve 20 percent market share of advertising dollars or 30 percent market share of advertising dollars, you're looking at a business that's huge, the potential is just huge from a servicing side. Now, there will be different margins in this business. There will be a huge margin on what we call proprietary traffic or traffic you own and which you don't have to pay quote/unquote what I would call kind of TAC costs to, and I think that's one of our most important strategies is to build out that proprietary audience, and then there will be significantly lower margins on businesses in which you have to pay TAC on, but because it's an advertising platform, your proprietary business becomes more profitable because of let's say even assuming TAC becomes a break even business. So, I think you'll see very good margins in this business. I mean, I've run it on a smaller scale and seen some very good margins at Ask, and I think you'll see -- and you see other businesses out there that have great margins. We just have to catch up, and we're making great strides in doing that right now. QUESTION: But you didn't tell me what the tipping point is. STEVE BERKOWITZ: In terms of actual dollars?
  • QUESTION: Yes. I mean, you're saying it's scalable up to a certain amount, but you're the head of the division and you presumably have some kind of a target out there. What is that point, because you do have a lot of investments to make up until that time? STEVE BERKOWITZ: Right, and I would say to you that I wouldn't disclose the actual tipping point of it, but I would say to you that it's within our sights in terms of what needs to get done and how we're going to get there. Again, because the opportunity is so different than any other business that I've been in, and any other place than I've ever been in, it is a question of the payoff and what the payoff is. And as I said, our aspirations are very different than the aspirations I've had at other businesses I've run, because we're not in it just to make a little bit of money, we're in it to be in it, and I think we're going to figure out and continuing to figure out what that point is, and where the marketplace is. But again it's still -- like I said, if we're going to be at a business that is 50, 70, $80 billion in the next three to five years, I mean, I'm hoping at that point in time we're going to have our fair share of that, and we're going to see really good margins from that? QUESTION: Can you at least give me a market share target? STEVE BERKOWITZ: I can't give you that. QUESTION: If we can make an estimate of how big the market is, can you tell us what you would like to have of that market? STEVE BERKOWITZ: Well, it depends. I mean, I'd love to have all of it but I can't. I think that -- I mean, I think each year it's a step. I think today -- I'm not sure of the exact number of share we have today in terms of ad dollars. I think it's 7 to 9. I'd like to see us continue to grow that share over time, but I can't give you an exact answer. ADAM HOLT: Okay, we have time for one more real quick question. Over here on the left. QUESTION: (Off mike). STEVE BERKOWITZ: Sure, talking about some of our partnerships question. The Bell Canada partnership is a joint venture in Canada, so it's different than the SBC or the AT&T -- I don't what the name of the company is today, it keeps changing every day -- and Yahoo! And our deal with Qwest is much more focused on a rev share, much more focused on a partnership of building together than it is the fee-based relationship that Yahoo! has with AT&T today. QUESTION: (Off mike). STEVE BERKOWITZ: We're building portals. We're actually building a version of Live.com for them, as well as MSN.com. It's been a relationship we've had for many, many, many years. So, we've always had a relationship with Qwest, and Verizon, too, to build portals for them for their customers. So we supply them with Mail and Messenger and Spaces, and some voice over IP stuff. But again it's what I said earlier, we're allowing third parties to build on our platforms, because again what
  • we're trying to do is build out our ad platform while also building out first what I call first party titles, and then I consider Qwest kind of like a third party title, very similar to the gaming business. ADAM HOLT: Terrific. We are out of time. Steve, thanks very much. That was terrific. STEVE BERKOWITZ: Great, thanks. END