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.
