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Gates explains why Microsoft needs Yahoo

A main driver of the takeover bid is the desire for "great engineers," says Microsoft's chairman. Plus: Windows 7 and other future tech.

PALO ALTO, Calif.--For a man a few months away from leaving his job, Bill Gates has a lot on his mind.

The Microsoft chairman is looking ahead to the time later this year when he will be focused full-time on fighting disease and poverty, while also trying to do everything he can to help his software company in its battle against Google. These days, that includes trying to sell Microsoft's $40 billion plus offer for Yahoo, not only to Wall Street, but also to all those Yahoo folks that Gates has his eye on.

Gates spoke to CNET News.com on Tuesday about how Microsoft needs Yahoo's engineering talent, how Windows 7 will make the keyboard and mouse less essential, though far from obsolete, and what journalism will look like in the future.

Q: You mentioned in some of the phone interviews earlier today that Microsoft isn't really looking to up its bid for Yahoo. I was hoping you might be to talk about why acquiring Yahoo is important, what is it that they have that they could bring to Microsoft? And then as a follow-up, do you think the company is ready to go the proxy fight route? Is that what's needed to get the deal in front of shareholders?
Gates: We have a strategy for competing in the search space that Google dominates today, that we'll pursue that we had before we made the Yahoo offer, and that we can pursue without that. It involves breakthrough engineering. We think that the combination with Yahoo would accelerate things in a very exciting way, because they do have great engineers, they have done a lot of great work. So, if you combine their work and our work, the speed at which you can innovate and get things done is just dramatically more rapid. So, it's really about the people there that want to join in and create a better search, better portal for a very broad set of customers. That's the vision that's behind saying, hey, wouldn't this be a great combination.

So, it's not a scale question but more a people question?
Gates: With people, you get scale in terms of the number of brilliant engineers and the speed of innovation that they're really driving. If you take mobile and video and neat new things for advertisers with targeting, and just the basic search algorithms, and the kind of computational platform we're building that we're using for search and we're going to use for cloud computing generally, the amount of computer science it's taken to do that is phenomenal. As you get more scale of engineering, you can just pursue that agenda more rapidly.

It's really about the people there that want to join in and create a better search, better portal for a very broad set of customers. That's the vision that's behind saying, hey, wouldn't this be a great combination.

So, yes, the advertisers and the number of end users is good, but we'd put the people in the engineering as the key thing that we say, yes, what can we get when we put their brilliant people and our brilliant people together.

Since you mentioned the people, how big of an issue do you think the cultural difference is? Because, I mean, obviously the key to retaining people is making sure that they actually want to work for Microsoft. Do you think there are significant cultural differences?
Gates: We've had an extremely successful group here in Silicon Valley that's done brilliant product work like Mediaroom and PowerPoint, and we have a research lab down here. Yahoo wants to do breakthrough software. The engineers there want to compete very effectively against Google or any other thing that comes along. So, I don't think there's really a different culture. If Yahoo had gone the direction of just being a media company, and not said that software innovation was important to them, then, no, there wouldn't be that intersection, because we're about breakthrough software. And that's where you can take search, portal, and these other things, and really bring them to a whole new level.

(Yahoo CEO) Jerry Yang, to his credit, has kept a lot of very top engineers that have just been doing their work and improving those things, and that's why we see the combination as so powerful.

One of the things that you've been talking a lot about is this idea of the new digital decade. What are some of the things that we can't do today that we're going to be able to do in the coming years through digital technology?
Gates: Well, everything is evolutionary in that things that start with a few people, get very widespread, and then eventually at least among younger people in the more developed markets just become common sense that that's the way things get done.

A cell phone that does photography; that's easy for your photos to just be shared and available. A cell phone that you can talk to and it will find the information that you're interested in. The next 10 years will have a lot of those (things) where they're not very commonplace today. If you look hard, you could find a little bit of location-based software or a little bit of interactive TV. But over a period of a decade, these increases become dramatic enough that it's a qualitative change, that you almost laugh at why did we have physical film, why did we have TV that was very channel-oriented.

There are a lot of these things about books, and note-taking, and TV watching that are basically unchanged by the digital revolution today, even though there are some avant-garde users. Whereas 10 years from now, the mainstream users will act like, well, of course, it was always supposed to be this way.

So, the notebook, the TV, and a couple of other things are things that we're just going to laugh about in a few years. Any others that strike you as things that are just hopelessly outmoded, that are maybe one technological breakthrough away from obsolescence?
Gates: If you look at the ones that have already gone away, like the CD, it took about five years from when at first people said that it wouldn't happen. Now it hasn't happened, but the writing is on the wall in terms of those trends. With the encyclopedia, it took a long time from when we started doing Encarta, the Wikipedia guys started doing their thing, before now you really can say, hey, the depth, the richness, it's completely changed; likewise with photography. A decade is a good period of time to take because for many of these things, that's where you go from avant-garde to common sense.

There are some schools today where all the kids use tablet personal computers. They are a small percentage of the schools, but the lessons we're learning in those schools in terms of how do you get it into the curriculum, how do you get the teacher comfortable with it, where is it better, how do you make sure the class is still concentrating in an appropriate way?those lessons have been learned. And so as you get the price down and younger teachers are embracing it, then it can spread quite rapidly.

Video on the Internet...is video mainstream in the Internet today? Well, you can sort of say it is. People go up and watch a lot of clips, and yet there's still this bifurcation between your high-popularity video off cable/satellite, and your sort of broad lower-resolution type that's Internet-oriented.

The PC and the TV are very different today. Even the way you move between the phone and the PC is very different today.

So, one of the things that overlies all this is the cloud, the intelligence in the Internet, and how that gets used. Another thing that overlies all of it (are) the software breakthroughs and the sensors (that) let us do natural interface--the touch screen, and the camera, (and) the microphone.

Are newspapers on that list of things that are on the verge of going away in their present form; and if so, do you have any thoughts on how journalism gets paid for? Is that something that can be paid for in the digital economy?
Gates: Certainly (with) the paper-based form of newspapers in the United States and some other countries, readership has been going down for a long time; even before the Internet came along. Give TV the credit for the fact that there's been a real change there. It's probably being accelerated now by the Internet, that you can go and get so much news online.

The version after Vista is a big step forward in terms of speech. It's a big step forward in terms of ink. It's a big step forward in terms of touch.

And particularly if you take the younger demographic, the quality of online news sites--Microsoft and dozens of other people in the broad sense, and then more vertical providers like CNET in a focused sense--it's unbelievable. You know, you want to see a new gadget, hey, there's a couple sites that you really ought to go to and they do an incredible job, versus any type of print thing that is going to come out later and not let you kind of disassemble it and animate it and compare it. It's a lot like the encyclopedia where in a sense you can say, yes, of course, this is going to change.

Now, the ability to charge for the online version, either through advertising or a subscription fee, (raises) a lot of questions. As you have tail content, the advertising model just isn't going to generate much in the way of revenue. And for the encyclopedia, it turned out that a volunteer model was able to do quite a reasonable job.

For journalism, there are a lot of things that I doubt that alone will give us the kind of in-depth professionalism, persistence that we'd really like to see, and so you'd like some form of the financial reward to be there. I hope that readers will be willing to pay subscriptions or watch ads or things that will keep the high quality and breadth of journalism alive and (make it) even better than it is today. In some ways, we have better journalism today. In some things these bloggers, and the fact that you don't have to just work for a particular newspaper, in some ways it's better. (With) in-depth, certain kinds of journalism...there's still a question of how that gets funded.

What are some of the big technical challenges to getting to the type of technology that you talk about? When you think of the top two or three technical hurdles that we're working against today, what are some of the things that jump to mind?
Gates: Obviously, natural user interface requires software. I was just reviewing the next version of Windows and the great advance they make in that. Will that be enough that everybody will obviously want to use it? Well, it didn't happen last time except in modest numbers, a few million, but that's still not mainstream. We've got vision software in the Surface, and we're trying to get that not just into retail stores but into homes and offices.

You've got touch, which is going to come in, and that's fairly inexpensive. We worked with some partners to do some really great things on the touch technology. So, I think that can move mainstream fairly quickly.

(In) speech recognition, it's many decades of work and building up the databases and just learning where the mistakes happen to get made. That was part of the great thing TellMe had. They had been doing directory assistance for a lot of the big phone companies, so their database of information of how people utter things was quite broad. And applying machine learning to improve the quality of that was a great synergistic opportunity. So, there are huge software improvements, and, of course, we need our chip guys to give us the memory and speed to be able to execute these natural interface things.

So, I'd say that's one whole area that's very important. There are some things about how we write software and prove its correctness...We've got to make it a lot easier to write complex software, not just because we want to write bigger things, but because we're relying on software in a more fundamental way for key infrastructure and private information.

Will the next version of Windows move natural language interface beyond the niche thing, or do you think it will still be a niche thing when we're talking about whatever comes after Vista?
Gates: The version after Vista is a big step forward in terms of speech. It's a big step forward in terms of ink. It's a big step forward in terms of touch. I'd say that the likelihood is that touch will become mainstream on certain form factors very quickly, because we're working hand-in-hand with the hardware companies.

With speech and ink, it's a little harder to say. I'm a big ink lover, and so I'm hoping that that's where every student decides, yep, this is the time I want to get not just a portable Windows machine but a machine that I can put in notebook mode and use the pen as well. We have OneNote, which has been a great advance in terms of showing people the application software that works with that. That's what these schools are building their curriculum around. Now we're getting feedback on that. Anoop Gupta has our educational vertical--our group that is taking and doing enhancements of OneNote and doing enhancements to SharePoint to try and drive that. So, with ink I'd say it's unproven. I would vote yes, but I have a known bias.