shiller who gets edit for predicting the housing crisis. we we too far with that ideahat's partf our proem. we beganed chairman woulde reluctant to say any opinion abt the markets. because he didn't think he could match the russ come of the market. that was a big mistake. >> crlie: we conclude with the look at the microsoftahoo!

deal. >> yoo! is disbanding. ey're search team, their engiering. and disbanng the team which but their adrtising engine to sell a. the happen to be some of the most aspec of engineering in the company there. really yahoo!ants to be top intern company has to have the engineering ops to keep doing that. so it's going missout on that, it will save money by these people >> the big problem hereis tt yahoo! really, they wald away from theost interesting fight on the iernet right nowhich search. and they handed it over to microsoft for less thanny of the previous deals that were on the table. >> also moving in the ars that are qui threatening to crosoft. using e profits in searc to t in to operating syems, in to onle appcations, they

threat the cash cow businees like office an word and excel. and they jt recently announced doing operating system for laops. they already havene for mole phones, i think microft wants to gn share in search in part to hp alleviatehat threat. >> arlie: a conversation with shiller d debriefing on microsoft yahoo!, next

captioning sponsoredy rose commucations from our studios in new yo city, this icharlie rose. >> charlie: the.s. housing mark has shown signs ever improvement after steep sses, some econosts conten bottom is near. prices have lted the free faliar. the secto ver well, robert shiller, heelped develop -- that later proved to true. earlier this year heublished s latest book titled "animal spirit human ychology drives the onomy and why it matters for

globalapitalism. i am pased to have him back on th program. lcome. >> it is looking less dire. our dahe zip shillerdata -- that means, but the housing march quote shows a lot of momentum. we're seeing the dnwar momentum diminished. nd so that is a good sign from a standpoint of home pricesi don't know that it means it's going be a sudden turn around the last cle, that peaked around 1990, home prices by91 e rapid decli was over. t they didn't increase until '9 so, i thk that pple who are

hopi for aapid turn around they could be right, nobody knows thesespeculative markets. i wouldn'told my breath. given the situationhat the hole economy is , i am still ncerned about the housing market. >> charlie: just put at aside just for a sond wher ishe economic recovery? >> well, w are now 18 months fromhe peak in december 20. since then, we' lost 6.5 million jobsaking this the severest recession since the great depression. it's alrea 18 mons o. we ha not had an 18-month recessn since the depressn. it's the longest. you might say it suld come to an end soon, when it's this old, the turn arounseems natural. but we don'teallynow.

it really depends on the outcome of our polici. we have make our futur recasting is one thing. we have to have the right policies to bng us to a more prosperous econo. >> charlie: dwe have the right polics? >> i think we're making a beginning. i think that correcting e errors that led to this, i would say moving ahe to a better catal system will take five or tenears. if you look at what happen after e great depression, they were innovating, the government, and private busiss were innovating for really aecade long period. i thin it's really in aense opportunity when you have a isis like this, it's an opportunity r innotion. that's the way weshould view it. >> charlie when you say, lessons -- i asse, i know that you think strongl about this, we need significant more regulaon. >> well, i wouldn't say more. i would y better. >> charlie: all right tell me what better is.

>> ion't think -- tt doesn't mean government even, necessarily. it means we have a private self regulatory organization. we have others like th. regulation is about rules. weake rules. businesses make internalrules. families have rul. children on the playground have rules. that is what has to be improved. this has not a timeo move toward bigge goverent. it's better regulatns. and i tnk on top of that, also, we need innovation in the financial secr. this i something that i've been involved for yearsrying to bring up to the risks a managed better. this crisis was caused by a failure of risk management. and it's aailure rig up the i that financial there wrists ought to they about. i think that they are figuring things out now.

and so financial engineering comiot just from t government, think more from the private sector is what's going toring us to a better economy. >>harlie: risk management as i uerstand you mean, is that financial,ew maj financial institions had no idea wha they h at risk. therefore, risk managent was t effecte at all in terms of the mortgageased securities at have been created. well, think that risk nagement tools have advced a lot. but there were errors made, the erro were trustin somebody's -- if quantitative analysis that wasn't quite right. not cong bkto our fit principlesnd thinking about what ds this analysis -- for exampl we had the impression that home prices alws go up. and do younow how man financial errors wereade because of that?

why did have that iression? it was primarily because people were not lookingloing far enough back in toistory. theymistook a bble for historical reali. and that pervaded so many decisions and led to big errors. there was nobody managing real tate risk. that's one thing tt i have beenrying correc if i might talk, my company, macro markss just launching a new yo stock exchange real estate product. we're a for-prot company but this comes outof my sense also of what e economy needs. it needs to develop to a better capitalism. weon't want to go to a bail-out economy wher the government is -- in the sho run, okay. but weave to plan for a better econom the ilure to manage real estate risk was central to what happened ithis cris. , that's where we ould g i have anoth book which i

wrote in september, this is an opportunity to develop an improved capitalism i dot think we have any other way go but improving capitalism. >> charlie: et's just stay wi that. what's the title. new book? >> the other book is, in september was called "subpre solution." it was propol, what to do. >> >> charl: let me understand what you are arguing with your mpany and wt you believe is neceary. you believehathereought to be a nd to have hedge against real este spelation, real estate what? we nd to aow people somehow to adjust their exposure to risks. so thatthey are bearinthem in proper amot. and al to express thr opinn so that we hav price discovery. i'm using some jargon here. price discovery means, we find

the market price for rl estate five years, that's wt our securities are doing. we kno what you can plan on. so, we have a price nowor real tate in five years which show it, about sen oreight percent lower than now in five years. and you can lk that in for business decisions, because there's a mket that allows y to. sohat's -- of course it's just beginning. when it's big enough,hat's ere we are. that will make for -- thas the wa capitalism iupposed to work. you look a pricesyou make -- yothink, can i mak money on at -- can i make money a builr if prices are 8 lor. maybe i can. if s hedge it and do it. >> chaie: right. u are saying use derivatet a time whenerivatives are the suect of severe criticism >> ihink it's a mistaketo

iticize derivatives, per se. because derivatives you kw, people tk about credit default sws as derivative. it's a kind of insurance. if i giveit a dferent name, is anyone agnst insurance? what about health insurance? anyone against that? >> charlie: but insuran -- >> health inrance nor a company, tt's what credit default. >> charlie: insurances a management of risk, isn't it? >> absolely. in ct, you know over the centuries, people o wereery resistant to t idea of insurance, is only in modern times like the 20th century that it became likerandma and apple pi we all know thatnsurance is a good thing. derivatives ar still - it's taped word. but it's the same thing. it about getting a broar group ofpeople to spad out risks er more people. d to have them pay for the managent of the ris at a premium or price that compensas the other sideor

taking on the risk. that's insurance, that's derivave. >> charlie: our company, macro markets wlcreate the financiavehicles that will allow you to hedge these risks? >> we have one for the u.s. as a whole. we want to do medil costs. >> charlie: before do you, that you experimentedded wit th in cle, didn't you? >> i did in the not. i've been advocating -- that's some kind of consumer price index manament vehicle like thenadad fermto in chilly. >> i have a lot of different propals. they're all on the same theme of developing fancial markets. so that they work f the people. >>harlie: also on this the: you worship at the holy grail of trying to fige out how to manage ri. >> well, i thi that quantitative finance is rely important technology. a littlebit like nlear physs. i know that sous funny, but --

maybe not quite up t that. t somethingike -- in the sensthat it's a real technolo which can improve humanelfare, it has dgers if it's n done right. but history has own overall th something like that can be managed if we have theright -- we regute nuclear power, o. for e same reasons, for preserve publisafety. there parallels the. i thinthat ultimately our society isot going to wantto forgo the advantages o applng finaial technogy just lik th apply other technologies. >> crlie: do the things that have happened to us over -- in this economicrisis, global economic crisis,his may be simplistic, simp suggest that mr. debts are not efficit? >> this is another theme of mine which you'll find in "amal spirits." >> charlie: go ahead. >> i think the so-called

efficient markets hypothesis which ca in around in the '60s, became very popular in the 1970s. i think it was a half truth. wh does it mean to sayarkets are effient? it means that the prices reflect information. they pool all the information anthey become a better price than any single person could. there's so truth to th. >> crlie: markets have perfect information so to speak. but weexaggerated the truth. we wt through an erarom the '70s to the presentf -- it's almost like aew relion. we worip the markets. we wenttoo far whhat idea. that part of our problem. we began, the fed chairmawould be reluctanto say any opinion out the markets becse he didn't think he could match the sdom of the market. thatas a big mtake. >> charlie: you use the word

"irratnal exuberance"efore e fed chairman did. >> i don't think so. i think it w his term. i was talking to him on couple days before -- sounds like ala greensn, but i do think it's a good term, that's why ise it ashe title of the boo cause i reflects you know it's kinds ever similar. did i now i do "animal spirits this is with george, i should say. it's on a theme that economics professi has goen too hung up on rationaly. pele have a rationaleside, yes, thas important to recoize. but the also have ab animal irit side and it's really important to undstand that side if you want to understand economic fluctuatns like the one wee in now. >> charlie: expla. >> t big problem that ecomists, toretical economis have had in our opinion, and george and my opinion, is they never figured out what drives the economy.

what ihe ultimate soue of these fluctuatns up and down. now, they got it pary right. but i think they itted -- we, both are strongly feel that they omitted ry important point. 's the inconant see of human behaor, that hans will become optomisti er optimistic and drive e economy to -- >> charlie: hansill believthat housing prices will nevego down. that's exactly. w in the world did they t th idea? on they -- george and i phasize that it'sriven by stories. that narraves drive -- for example -- >> crlie: the animal spirit is driven by stories. right. people have sto of their lives. story of my country. story of what epic am i - what great historical thingare happen. >> charlie what movie am i in? >> that's exactly right. people tend to view themselves -- >> charlie: we've see this

movie befo they sometis will say. can ahead. >> whawas hpening in the 1990s ere was sense of possibility. we were entering the new millenni. the internet h just been discovered. younpeople were setting up dot.com companie these stories we very powerful, because they suggested at we should be doing. i felt --e feel like a lose fer we're not pa of this. charlie: it suggests old rules didn't appl >> so then you forgot history, you made the same miskes again. >> charlie can you measure this emional fact that the animal spirits are there and that human emotions are not constant? can you measurehat? can you factor tt in to further understand mkets? >>well, back in 1947, geoe katona setut, he was at the university of michin, i-- seout to starteasuring hum

confidence. 195 he createdthe university ofichigan consumer sentiment inde which was later follow by theonference board, consumer confence inde there are people who try to quantify this withome success i find their research very interesting, but i wish there were more of i it's those two groups th are doing that, academi academic economists have genelly dismisdhatind of measure. i thinthat measuring the animal spirits is sll a infant industry. chigan has been doing this for 60 years. >> charlie: here's also this factor that's at wor in things like ts. if t guy acrosshe street, o peon across the seet is taking a lot of risk, and making a lot of money, then the pressure on you to do the same thing and especiallyif you're job or future is a stak is hu. right. you're getting at some aspects of herd behavr.

thword herd behavior isaybe not --t'sartly -- it is so complicated, one thg that comes in is that if don't do it. everyo else is doing something. they're making moneynit now. i don't know that this is ever ing to come to an end. it's not clear. it's a difference of opinion. do i justotarticipate? li people are writing subprime loans i'm a mortgage originator. that's where a the action is, they'rmaking a lot money. and if i say i won't do that, i kind of get lef behind. i'm loong old. you're getting owlier and nothing isappening. the kinds of thghts enter, it's not the ecomists lately. the estaished padigm they don't generally rresentthose kis of human emotions. i think part of what we're doing is influenced by psychology, by

neoeconomists -- >>harlie: whatis neural mmission? >> i tnk that's exciting new branch which i am not- i am not a practitner of. trying to meld brain research with commission. we have to understand h the brain funions. they put people in a functional maetic resonance imaging device watch whas going o inside their bra -- >> chaie: when they're doing what? >> making ecomic decisions. and we -- >> charlie: like what? you make economic decision, buy this hem or not, whetr i trade this security not? >>let me gi you example. in swzerland, the had people play games with each othe econic games whi they were -- i don't rememberhe details exactly. there was a point in the game when some players swed vengeance t each other in other words, ey're not making a goo business decision,

they're doing something which actually cost the money,t appes to be -- >> charlie: because the want to retaliate. >> some economts said, that well, maybe there was some rationale reasonwhy ty -- th was part of a grand strategy. butarns fhare fnd that lookg at their brain that region of the brain was acvated at the time that they were being apparently vengeful. is the samleasure center that -- it was -- ttakes you happy when you're sexually fulfilled or things like -- i making loosely from a study that -- >> charlie: this is interesting stuff i'm telling yo .. what itmeans is that economistsho say it' a rationale are wrong. because we can see with the neural imaging deves what the emotions that accompany these economic decisns are. we now know thatvengeance is

partf what drives people. you've heardeople sayit, i'm going to dohis for the principle ever it. i don'care if itosts me money. we now kno that that's not just talk, that is ho people feel. that's part of animal spirits, that george and i tal about. that peoplgetting ang and they get resistant. th don't want to make a dl wi someone that they d't trt or they feel is wronged them. unfortunaty that is par of an economic contraction. that is part of what's happening now. >> crlie: what is it about you, y, thatakes you so fascinated by this? >> it cod bemy wife, w is a ychologist. >> chaie: yes. that's interesting. >> it is interesting. i talk to her a lot. >> charlie: how is she influenced you? >> she brings back to reality. >> charlie: she does? >> i think george's wife,oo. he'sarried to janet young, who was chairman of the council. of economic visors is now

president of the san fncisco fed. she is a smart woman. i ink both of r wives bring us bk to realityore, it's easyn academia too off oa tangent. and i think my work improved, think geor ace work improd when we maied. >> charlie: becau you did what? rather tn going off on tangents it was like a reality check? >> t thing that -- the ademic inctive system , u want to be the froier. you don'want to be criticizab. what do you do? you special se,eally narrowly. that i think is ulmately a mistake. you need someone with a broader judgme to bring you back and make you think, you know, writing that pap and geing inthe top journal isn't really what youant to do if the whole thing is meaningless. even if youet the accolades you want to feel good about what you've done.

>> chaie: here is what i don't understa about is ll, beyond how you got to this and you explained some at have beuse of your wif and paid ibute to hern lots of different ys that i've read in reading about you. i don't derstand this. when you have the ack record you did, and reputation yo do, suggested thatousing prices were going to fall, we were in for roh sledding, it could ad to exactlyhat's happened. clearly people with a lotof moneat stake should have been listenin. d they mply dismiss you? did they say, thank you very much, prossor, now go back up to new haven and write another book. >> that's at they said. >> charlie: essentially that was it. >> it is a estion of how do we judge thgs. if could have mathematical oof that a, b and c and d,

case close i think i would have prailed. others ke me. >> charlie: do you believe that what weent through with all these mortgage-baed securitiesnd catastrophe that it led to that it simply was a glitch in security sings. >> i think so. >> charlie: explain. >> companies were pting togethern pools, mogages. and then selling the off to investor they were dividing these up to in trenches by riskategories and selling the separate ones off. then placed in other cs and -- cdoquared. it gotery complicated. then wn the whole system blew up, it was a mess cleang througthe wreckage. people are naturally dismaye by wh happened. but i take that as something like the sinking of the titanic.

engineers when they built the titanic they werin a rush t get it done, they used the wrong riforts. they have -- the captain was going through iceberg-laden waters. there were histakes made and mistakes by ople in a hurry whwere that's how we improved. i n't think we have any other choi, really, any other sensible choicbut stick with capitalism, make it better -- >> charlie: just make sure. the kind ofregulation it's not nessarily you believe that government shod bring out all these new regulations, weeed to have better regulations. some of them ought to be generated by the financial seor themselves. >> rig. i think actually most regulaons are generated by peoplemost financial regutions come in as suggestions bypeople in the fincial sector, becau government employees are not involved you have -- just like i'm saying

the children a the playground when they're unsupervised they say we have to make a rule about this or that becae they're playing the game, they want to know. we also have to take in to all ements of thissociety, there is a proem that people in the normal sector may not show enough concern for people lower on the economiladder. i think actuall one of the big problemshat we are t confronting well right now is the ring economic inequality, that part of the reason w i think anger is developingt this stage th we throw on t huge hit to unemployment. pele are losing the sse that america is for us tether as the people. that is so precious, that's why i suort the efforts that obama hamade and wish they were stronger. the real mistake tt has been

made is that foclosures are still at too hh a rate. employment is at a high rate. we should he ved faster and more directly to protect all these people. becausenow we've got kind of a damaged amal spirit at this point. it's still possible -- we've done part ofhe job. >> charlie: e come out of is, but it's going toake, what, how long? >> interms of t national bure of economic research recession dating, it is quite possiblehat we will be out of the ression technical this year. but i'mot soptimistic from that. becauswe can have a doubldip receion. we can have ry slow recovery. that has been the pattern for recent resections. given the amount o damage

the economy, dage to the imal spiri, which george and i emphasize, not measured that people are lookin at thi recession just another i a stringof resections. i think underestimating the longer term damage. -- drlrmteagam e? term damage? >> il give you as anxample. what washe real surprise in the great depression? there were two aspects oft. i'm making a great depression parael aisedly. we'rnot liky to have as bad an experience as tt. >> charlie: 2 unemploent. >> rig. but i mean, there are a lot of ways in which the current experience resembles the depression. but let me just, in the great depression fro 18929 to 193 we had 43-month interaction. that was almost th longest history. but it did come up. we had a recery from 33 -- from '33 to he 37. people fget. that itstill the depression

becae the unemployment rate never got below 10%. and then aft hear 37the economy stted singing -- siing again there we still no jobs. no no jobs but unemployment rate averaged think 17%rom 1931 to 194 where a whole decade. the puzzlent then people said is, why isn't the econo recoveri? i think that -- there's lot of -- dashhere's this so many oks and ideas written about. this the theme that george and i emasized is tha maybe the name our to recovery neglected failure for animalpirits to comeack. what iean bynimal spirits is a willingness to spend, a williness to hire people. a willingness to -- we emphasized that busine rlly is built on a sense of entrepreneuriasense. the sense of possibility. a sense that we cano something

new and different. it's risky but we're going to do it. when y get in to a bad economic atmosphere, everything ses too risk y. pele are pulling back. that i think is probably the most impornt rean why the depreson lasted for so long. i'm not predictg anything as bad as that. but thinking tt it is plausible that wewill have trouble climbing out of this. we'll have the nb saying the resection is over. then three, four, five years fromowome prices maye even lower. i don't know. th's a guess. i dot know. the wholthing is jt disappointing. the reason it's disappointing is because we haven't moved to a business environment that is condive to starting important -- some people wildo . but it won't b at the nmal level.

that'shy i thinkhat we want to have more -- i tked about a lot of thesein "subprime solutis" they sound a little radil and differe. but ideas that expand on pitalism to make it work. make it work as it should. >> charlie: that you nt book? >> i don't have a xt book in mind right now. >> charlie: how capitalism can work. >> is ip both of the books. >> charlie you also worry abt sort of the psychology of america. mae psyology of other peoples and her countries as well. but that somehow the belief in the work ethic has been eroded >> that's right. this is why people sometimesre angry with people i finance. they have a sense that fance is all about picking money up fa -- >> charlie: inancial engiering, they didn'tuild anything, didn'take anything, they? how used insideinformation

therfor it's allunfair that they made billionof dollars. >> in fact i think unfairns probably -- another theme in "animal spirits unfair bevior tends to grow during a boom period. so, business ethics do slip somewhat during a growth period. the problem is, that pple getting any aut that. but fact there's notng wrong i've met many fine people ininance. i' trained the i have thousan oformer udents -- >> chaie: not running hge fus or something. i guess there's --ut i come back to it. theiggest problem facing this country is not this crisis. it's the growing inequality. i think that we have t-- anher theme in book. i've written another book about it. >> charlie: what was th title that hav >> i had a bookalled "new financial order" in 2003 but i thought that book that we

should manage inequalit in a ientific way. weave to have a plan so that inuality don't getworse. i don't ink we have any reon to want it to g rse. so why don't we spend now, te, inking -- no presidential nned daylight has ever mentioned th. maybit's too -- we don't want class warfare we want to srt thinking about the forces that we can be offset. this is fundameal. why is the healthcare issue so imrtant right now? i think it's fundamentally because medal thnology is improving to the poi where it's developing a lot of expensive predures that can save and prolo people's ves. give tm usefu more years. now we're realizing that income and equalitis worse than we though becae people who are poor will die younger. they didn't used to be that way.

but once we have expense procedes that can prolong lives, how cane denthat? to lower income people. so to me it's even more ndamental than the healthcare debate now. it's gettinghe income and equality manag so it doesn't become a huge problem inhe future to me, it's a technical problem how to do that. just as cash. >> charlie: a technical problem? >> i'd like to see -- okay. i'm talking about so many books here. >> charlie: we're talng about ideas. m interested in thed idea. >> iave another paper with len berman called -- maybe i shouldn't bring things ulike th which i so polically namite. let me just layit out we think the -- >> chare: don't sensor yourself. dot edit yourself. >> i getting angry e-mail every time iring this up. this is really risk management.

we don't know how bad the income and uality is going to g. it cou get better, it could get worse. it's a risk. let's put in a system tha mages the risk. the proposal we have is to index the taxystem for inequality. so that, the plan isn the futu, if inequality gets wor we aomatically raise taxeon the althy. it not -- obama -- ngress are talking about taxingtaxing the rich to p for the -- charlie: healthcare. >> health care. that sounds so logical. but afterhe fact, you try to do that, it creates l call oblems. we have plan fo the next decade. let's write itn to the lawow at that's going to happen. my son isow a phd student in philosophy. it's my son, my next generation will carry more etherea level. for me ihink of myself as

humble eineer. who has -- finanal enginr. i'm awar of a technology of risk magement. i'm so aware of a technology of social sciences. psychogy, sociology,e mentioned neurosciee. i am trying to think like an gineer to put these things together to make something that works. i think it's not just me, i think thi is the new paradigm. >>harlie: the new paradigm is... >> t quote thaler and others they have book called "nud" and in that bo they talk abt choice arctecture. but the ea is to design financial and econom contracts arnd people. knowing the way they behave. and dging them in airection that works. that managesheir risks and

manages their -- tha becomes part of a funconing economy. i mentio sunsteinow part of thebama administrion, i take it as very inspiring that i see peopleike this involved at the highest level of our government. i think that this is new. this is like the n dl. we are thinking at aetter level, a more enlightened vel out how to ange our economic policies. i think it's a process, we haven't hed the end of thi by any means. but i think tt the application of fancial technology in connection with application of our undersnding of the han species and huma mind is a breakthrough frontier, we're breakinghrough rightnow. d i'm hoful that we'll have better coury in the u.s. and

other countries around the world. >> chaie: this book is caed "animal spirits" how mum human psychogy drives economy and why itatter for global capitalism. george ackerloff and robert j. iller. if you don want to read this now, nothing i can say tt wod make you want to read it ter listening tohis conversaon. it is a fascinating inquiry tha goesar beyond economics in terms of the way human nature works. my thas to bob shiller, tnk you very much. >> my pleasure. microsofand yahoo! announced yeerday a partnership in the search and advertising business. under the deal yahoo!'s websites will be powered by microsoft new search engine, binge. yahoo! will ge 88% of the ad revenue from searches on i sis for the first five yes.

withhe partnship the two hope to take onoogle which currently commands about65% share of the u.s. market. agement follows microsoft's fail take over bid for yahoo! shows t continuing iortance it isplacing onearch. joining me from redmond, washington, is nick wi field of e "wall street journal." here in new york, wi me, even levy of "wired" magazine and erick schonfeld coed for o techcrunch blog. i am pleased to have all here. nick, tell m how this deal happened first. >> it started lt year wit the c.o. of micsoft, steve ballr, making an unsolicited bid for closed to $48 billiono acquire i can't homent never happened, yaho resisted t offer. temp apart, st forward to about janua, yahoo! has new

c.e., carol bartes and microsoft and yahoo! start taing about a more limited deal, t a full blown acquition in which microsoft basically take over t search operations, handle the search operations onahoo! in exchange for some value. and the deal went through all sorts of fits and starts and nely arrived athe deal you described a moment a. all of this being designed to improve microsoft's fairly poor position in search right now which street a highly crative maet, the online advertising mark that accompanies search. and one that microsoft really has not had much successn on its own. >> charlie: is this a goo deal for just miosoft or go de for microsoft and yahoo!? >> the shareholderof both companies seem to thinit's a better deal fo microsoft than it is for yahoo! the stock of microsoft went up a bit yesterday, up a bit today, yahoo! is down. one ofhe problems yahoo! has is that they had sorof almost

set expection that they we going to get a bighuck, multi-billion dollar check from microsoft fo exchange for a deal. at didn't happen. instead whatahoo! is getting is vy hig percentage of the ad revenuerom advertisi sold on searches that microsoft delivers. so so, both parties argue it's betteror yahoo! toet this because they' getting more -- bigger chunk of the shared ad revenue on ongoingasis but no biup front check th seems to sappoint people. charlie: so, what's the judgment of people who look a it i terms of whether yahoo! would have been tter to ta the original deal that ballmer offered orake the deal they haveow? >> well, i don think there's any question that yoo! shareholders would be beer off if they had accepted the origin $48 billion de. i don't knowhat yahoo!'s latest mart capitalation is, they're down lot.

so, i don't think crosoft though regrets not acquiringll of yahoo! i think they're frly happy with the potion that they' in. they also have managed to imove their own home grown search eine, which is now lled binge, and hav started inch up a little bit in marketshare. so i think mrosoft probably comes out a little bit ahead herebut stil both parties are that yahoo! is going to thrive as well becse they no longera to have invest in search >> charlie: thehis goingo sneak. >> the up front moy really isn't thevacuee to yahoo! the evuee is, yoo! disbanding. their search team. their engineering. and disbanding the team which built their adversing engine to sell adson search. theshappen to be some of the most important aspects of engineering at a company there.

ally ifahoo! wants to be top internet comny has to have the engineering chops to keep dog that. so, it going to missut on that. it wl save money by not hiring those people to pay. those arehe people you want on your company. also, this deal is a little complicated. yahoo! actlly is going to sell some of these ads t the prium customers. a lot of cusmers, those in the long tail, ty justo on t website and buy the ads just straight there like you buy someing from amazo a big customer needs someone to work with them and tell the what wordso buy, it's very complited you how much toid these things arell done by bi. yahoo! is doinghat par microft has technolog which means those peoplework for yahoo! have to goack and forth to rmond talk to a lot of people to be famiar with how that works. there's a litt complication in how they're gointo be able to

do that taken google and build up the ad share bond what it has mbined withahoo! >> charlie: did bg make a difference he at fact, the fact that bing has gotten th miosoft search engeneral as gotten good reviews? >> think bing mad a big difference. nofrom bing, bing is only out for tw months. but it's me a lite bit of in in sre, .4%. is that going to last over time? o knows. yahoo! dn't want to find out. the bi oblem heres that yahoo! really -- they walked away from the most interting fight on the intne right now which is search. and theyanded it over to microsoft for less than any of th previous deals tha were on the table. the foyereal deals on th table go back to 45 or $48

billion fer in february of 2008. the revised search dl which included $8 blion to buy 16% of yahoo! and a billion dollar payment for the searcpart of the buness. the gag l deal that got squashed. this dl washe worst of all the deals. and as steve mentions, the deal introduces a l ofomplexity, right? w you're going to have yaho salepeople selling microsoft's search product. yahoo! sales people hav enough oblem talking to yahoo! engineer now they have toalk to microsoft engineers. what if something goes wrong? who e they going toell at? are the miosoftengineer go tg like that bei yled at by yahoo! sales peoe. >> charlie: nick, you're in redmond, wt does this do for steve ballmer?

>> it gives him a fighting chance to a market that he said is strategic. they have yahoo!'arketshare theyould go to 30% of ares -- 30% of arches in the u. and that's significant. now the question is, does it decline from there? can they increase it? if they do that, how muchoney do they makeff of it? because of course microsoft is losing money in its iernet search busess right now. but they just want to gain the share. they sayhey get eballs, arch is scale business at they wilstart to improvehe ality of the search. because they can do all sorts of things, ke ads more releva. if they do they they tnk they can of flywhee affect and eating in to google's share. the other thing that this let's them do is, gag sell not only

strong in searchwith -6r 5% us share but google moving in to the otherreas that are quite threatening toicrosoft. they'r using their profits get in to opering systems, in to online applications, that are fr. that threaten the cashcow busisses like fice and wor and cel. they jt recently aounced that there going to b doing an operating syste for laptops. they already havene for mobile phones. d i think microsoft wants to gain share in searcin part to help alleviate that threat. >> charlie: and wha about leadership of yahoo!? carol parts? >> wl, she physical she had to do something. but i think in this case by targeting the search ams and taking it away, some peoe wonder whether that'going to really take the glue,hich keeps e portal together there. the search that yahoo! did had about the times the size of what microsoft search mainly

because so many pele come to yahoo! and they search tre. so it really s an opportunity for yaho to grow out there and do more. she says this is gng to enable em to ccentrate on the other things that they do. but having very strong srch team and engineering tha comes with tha with the srch and th the rlly complated engineering you ve to do to b able to sell ads on searches that's very complex. fo reasons we can get in to it really helps if your share ows. those engines aren't goingo be abl to filterhrough the rest of the company to lp you do these other things ere. if yolookat. team, it's going take well over year for this to cometo fruition with th deal. i'm workings engineer for yahoo! now, what's my future? >> charlie: that's -- losing talent is big issue. and building on the old.

>> who one o the most talented people at microsoft, the one they talk is qi lu the guy who came from yahoo! we to microsoft yahoo! he's t technology leer that bright guy who is leading microsoft sear. >> charlie: wha about aol? what's going to hapn to a? >> so, i think a is agreat example here. because you've t tim armstrong who came from google now the c.e.o. of aol he tookhat is a hobbled compy, and is taking it in a new directionway from the sweet spot that gooe or yahoo! or crosoft already dominated. he's hiring hundre of journalistjournallists wch as you know fm yourolitico piece th very, very valuable sets. is kind of crete eighting not just one part of his busine eating this sort of new newsstand line. is doing lot of intereing things. why didn't rol parts do that? why didn't she double do, yo

can ke argument that ultimately she had do something becausshe doesn't have microsoft windows ney. doesn't have google search money. ultimately search is expense. maybe she thats to get out of the the buness ultimately. but microsoft eds her search volume. why not double down, invest arch and get better deal down the line? or merge with aol witn they become public? >>harlie: speing of one final issue, anti-trust, nick is google worried about an-trust of the marketshare? with this deal be subjecto anti-trust implications, questis? >> google is i think worried, yes, about their future in an-trust. in this particularase with microsoft and yaho they aue that togher they have 30% of the market. compared to google's 65%.

so they think th will have strong. they will fac tough strut knee. they're prepared, i think, t ally fight with google. it's unclear wha google i going to do. there was talk today at this microsofmeeting i was a of google ploying sort ofhird party advocacy groups to fht th deal. but googles the big gorilla here. it's a littlechallenging for themo make an argume that is is going to be ti-competitive. goog has -- >> it's irony. last year, when there s threat of microso bing yao!, google wanted make a a deal with yah! of the search. microsoft complainedbout it. and saido the justice department,successfully argued that we can't do this.

cause yahoo! would end its search team. ere would be les competition in there. guess what. >>harlie: take over the search team. is there a feeling with the search backs getting good mas and now is deal is microsoft is back and c deliver a lot more than people, maybe much strongering th people assumed it was say six months ago whe the fort to buy yahoo! cam to nothg? >>here is a feeling on the uping. windows 7 is coming outhich they he will erase the sort of disdain er windows vista which was a troubled operang system th technical problems. bing is doing well. they haveone innovative stuff in games some peoplthink that they have placed t much emphasis on searchnd neglecd mobile phes. ey have pretty poor offering there. apples got t i hphone and hers are doing well in that

catery. they got some gchallenges in other areas as wl. >> microsoft no doubt tter off today in search tn it was before but we shouldn't over estimate what their advantage is. en if they have 30% of the sear marketshare. they don't have0% of the revenues they're givg 88% tha have back to yahoo! >> charlie: nick win field, "wall street journal" near. erk schonfeld from techcrch. eve see levy officer "wired" thk you very captioning sponsored by rose communication captioned by media access groupt wgbh accessgbh.org