CEO Ballmer reveals plans for billions in new Microsoft spending

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CEO Ballmer reveals plans for billions in new Microsoft spending

Redmond (WA) – At yesterday’s session of the MSN Strategic Account Summit, Microsoft CEO Steve Ballmer addressed the growing question among financial analysts, and now among consumers as well, regarding that $2 billion + in extra expenditures that a Merrill Lynch analyst discovered during last week’s quarterly results conference. There, Ballmer told an audience of prospective MSN advertisers that the company expects to spend $1.1 billion in research and development for MSN in fiscal 2007, which begins in July.

A key excerpt from one of the PowerPoint slides in Microsoft CEO Steve Ballmer’s presentation on Thursday. Here, “capex” refers to “capital expenditures” – how much Microsoft is willing to spend from its own net worth, to help ramp up MSN.

“I think we surprised some in the financial community with some of this last week,” Ballmer told the audience, according to Microsoft’s official transcript, “and our stock showed that surprise, but our dedication and determination to invest in important ways in this business is strong. And we will invest as much in this online opportunity in R&D as any of the other big players in the market.” He noted that the company intends to spend a total of $6.2 billion in FY 2007 for R&D, with roughly 18% of that amount now earmarked for MSN.

A full $500 million of additional investments in MSN next fiscal year, Ballmer added, will come from capital expenditures, or “cap-ex” – directly from the warchest of what the company is worth, with the rest, by implication, through re-invested earnings. So there’s $1.6 billion, then you take into account the possible $400 million Microsoft spent to finalize the acquisition of game advertising provider Massive Inc., announced yesterday…and that’s $2 billion. Roughly what the Merrill analyst calculated.

The question some will be asking today is, how much of a difference is there at Microsoft between R&D and M&A? On Wednesday, the buzz on the street – thanks to a Wall Street Journal article – was that Microsoft could simply be planning to invest that $2 billion in consumption of market share, perhaps through an equity swap arrangement with Yahoo.

But acquisition was not the message Ballmer was giving advertisers in yesterday’s speech. Instead, he was giving every indication that the company truly is planning to place a giant bet on its new development team – led by CTO Ray Ozzie – and its new MSN marketing team, which will be assembled by incoming executive and former CEO Steve Berkowitz.

Using two of Microsoft’s favorite keywords of late, Ballmer said, “I do think…that this is really a platform play. We need an ecosystem, as we call it, around our Live platform, just as we needed an ecosystem around Windows, thousands of communications service providers, thousands of content authors, thousands of people who want to provide unique, customized versions and views of the Internet and information. All of that will build in the excitement and interest and audience. And then we also need an ecosystem of advertisers and agencies and search engine marketing companies. And we’re dedicated to that kind of partnership and ecosystem…The only way we will be able to get to critical mass is by literally reaching out.”

For those keeping score at home, yes, Ballmer alluded to his now-infamous catch-phrase, which was originally bellowed out before a mass of bewildered software authors, when he told the audience the real key to MSN and adCenter growth will be “advertisers, advertisers, advertisers.” AdCenter is the advertising delivery vehicle behind Windows Live, being developed “on the fly” by the MSN team, to do battle with the AdSense program that made Google an overnight powerhouse.

In the wake of last week’s news that Microsoft not only planned to ramp up capital expenditures into overdrive next quarter, but would be facing lower than anticipated earnings growth at the same time, its stock value began an 11% plunge on the NASDAQ before settling just yesterday.