Last Updated: May 29, 2008: 12:55 PM EDT
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The man who would run Yahoo

In a Fortune exclusive, Microsoft's Kevin Johnson talks about innovation, disruption, and what he's going to do about Google.

By David Kirkpatrick, senior editor

Microsoft's Kevin Johnson

(Fortune Magazine) -- He made his mark at Microsoft as head of the company's worldwide sales force at a time when it seemed everyone hated the company - most of all its customers. In 2 1/2 years Kevin Johnson achieved a miracle: He turned Microsoft's customer satisfaction numbers around.

After that, CEO Steve Ballmer gave Johnson a really hard job: Figure out what to do about Google, which now garners more revenue from online advertising than Microsoft does from Windows.

Plan A, which Johnson spearheaded, was to buy Yahoo (YHOO, Fortune 500), a company that for all its problems commands roughly twice as much online-ad revenue as Microsoft (MSFT, Fortune 500). Plan B, it would appear, is to acquire Yahoo's search business and leave the rest. In the middle of all this, while immersed in Yahoo talks "seven days a week," the affable Johnson, 47, known to insiders as KJ, agreed to talk to Fortune twice, once in April and once in late May.

"Online is a very, very significant growth opportunity for us," he says. It's also something of an obsession for his boss. It was the only part of Microsoft's business that Ballmer talked about in his presentation at the company's annual CEO summit in early May. He showed a PowerPoint slide that displayed approximate ad revenue for the largest media companies in the U.S.: GE/NBC (GE, Fortune 500) on top at $15 billion, Google (GOOG, Fortune 500) in the middle at $8 billion, Microsoft down near the bottom, with a measly $2 billion. Ballmer estimates that the $40 billion spent this year on online advertising will double by 2010. If Microsoft is ever going to approach the growth it achieved during the PC boom, it has to grab some of that action before Google takes it all.

That's where Johnson comes in. He holds an unwieldy portfolio at Microsoft. On one hand, he's in charge of the company's core Windows monopoly - for better or worse, it was on his watch that the company released the much criticized yet highly profitable Windows Vista. With his other hand he runs Windows Live Services - a division whose failures he described bluntly in a May 18 memo to his staff: "The fact is we are not where we want to be in [online services] yet, and we've been in this position longer than we'd all like."

There's an important link between these two seemingly unrelated businesses. Ballmer wants Johnson to take Microsoft's so-called platform business - its PC-based Windows software franchise - and migrate it toward what Microsoft calls "software plus services." Just as Windows was the framework on which software ran in the PC era, Windows Live Services could be the framework for Internet computing. It's unlikely that Microsoft will ever create the kind of monopoly on the web that it enjoyed in PCs, but the company is deploying its considerable resources to control as much of it as possible.

During a long conversation, Johnson draws a simple chart on a whiteboard. Four vertical rectangles represent industries that profit from online advertising: search, information and content, communications and social networking, and online productivity services (e.g., word processing on the web rather than on the desktop with Microsoft Word).

Underneath all four is a horizontal box - the revenue-generating ad platform on which the other industries rely. That box is key to Microsoft's online aspirations. "There will be a small number of big-scale players in that underlying platform," Johnson says. Microsoft has been building its platform though acquisitions, but before its $50 billion bid for Yahoo, the most it had ventured was $6 billion last year for aQuantive's system for buying and placing ads.

But for a platform to work properly, Johnson says, it needs scale. "The more ad inventory you can get, the better job you can do to target ads, drive efficiency, and deliver better yield for publishers." Google has scale; Microsoft doesn't. But it does have a lot of money. Thus the Yahoo pursuit.

Searching for results

Johnson wouldn't explicitly confirm what has been widely reported: that having failed to buy Yahoo outright (as of presstime), Microsoft is now going after its search business. But he makes no bones about wanting to increase his search traffic. "What we're lacking is more share of search queries," he says. "So we've got to attract more users to our search engine. The more consumers use our search, the better our platform is to advertisers."

Though many see Microsoft as a ruthless monopolist crushing smaller companies underfoot, Johnson reflects the internal view - that the software giant is a great partner. Witness how many companies rode Windows to the bank. Microsoft's ad platform, says Johnson, will be similarly designed so that other companies - be they online publishers or advertising firms - can grow their own specialized applications. It is this culture of cooperation, Johnson believes, that Google lacks.

As Johnson lays out his vision for Microsoft's search business, one word comes up again and again: "disrupt." Google, of course, is the company he most wants to disrupt, and in late May, Microsoft announced a bald attempt to do so - a "cash back" program that will pay customers to use its search engine (rather than Google's) by sending them a rebate check whenever they find a product and make a purchase through Windows Live Search. Google doesn't have anything like that - yet.

Johnson says he has plenty of other disruptions up his sleeve. One he talks about a lot is something called "engagement mapping." That's a geeky term for a system that scrutinizes all the ads a user sees before clicking on a search ad. "We think paid search is getting more credit than it deserves," says Johnson. He claims Microsoft will soon be able to track a consumer's entire decision-making pathway and use that information to sell ads in places other than search. It's a proposition he believes online publishers will eagerly embrace. They are as nervous as Microsoft is about Google's growing share of online advertising.

The cash-back program is Johnson's short-term tactic. Engagement mapping is his long-term strategy. Now, if he can get hold of Yahoo's ad inventory, he might have the scale he needs to finally start to do something about Google.  To top of page

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