Microsoft CEO Steve Ballmer told a gathering of Web developers in Las Vegas that he sees the company’s proposed acquisition of Yahoo as the key to successfully competing with Google. Online advertising is currently “all about Google, Google, Google,” Ballmer told former Apple evangelist Guy Kawasaki during a MIX08 on-stage interview. “We have real commitment, real aspirations and real tenacity about being a serious player, and yet we have a long way to go,” he said.

“We have to have a strong position in online search if we are going to have a strong position in online advertising,” and that’s where Yahoo could really help Microsoft reach “critical mass,” Ballmer said.

The Value of Scale

Scale — which Ballmer called a form of synergy — is an important advantage in the search game, he said. “The more searches you have, the more advertisers you have; the more advertisers you have, the more bidding you get on key words; and the more revenue you make, the more you have to invest,” Ballmer said.

At the same time, however, the more advertisers a company has, the larger the collection of relevant ads it has to insert on pages, Ballmer said. “In the case of search, ads are part of the content and right now Google has a larger body of ads to insert on any key word that we or Yahoo have,” he explained.

Though Microsoft’s unsolicited bid for Yahoo could help level the online playing field, Ballmer said some streamlining will be needed if the deal goes through. “It won’t make sense to have two search services, two advertising services, and two mail services, so we’ll have to sort some of that through,” he said.

The Untold Story

Ballmer sees Microsoft’s efforts to increase its presence in the online advertising and consumer-devices…