shiller who gets credit for predicting the housing crisis. >> we nt too far with tha id that's part of our pblem. we began fed chairma would be reluctant to sa any opinion about e markets. because didn't think he could match the rs come of the market. that was a bigistake. >> charl: we conclude wh thlook at the microsoft-yah! deal. >> yahoois disbanding. theye search team, their engineerg. and disbandinghe team which built eir adverting engine to sell ads. these ppen to be se of the

most aspects of engineering in the company there. really yahoo! wan to beop internet cpany has to have the engineering chopto keep doing that. so it's going to miss ou on at, it will save money by these peop. >> the big problem here ishat yahoo! reall they wked away from t most interesting fight on thenternet right now which is search. an they hande it over to microsoft for less than any of the previous deals tha were on the table. >> also moving into the eas that are qte threatening to microsoft. usinthe profits in seah to get in to operating stems, in to oine alications, they threen the cash cow busisses like office d word and excel. and theyust recentl announced doing operating system f ptops. they alrea have one for bile phones, i think miosoft wants

toain share in search in part toelp allevia that threat. >>charlie: a conversation with shillerand debriefing on microsoft yahoo!, ne. captioning sponsor by rose comnications

from our studios in new rk city, thiss charlie rose. >> charlie: t u.s. housing maet has shown signs ever improvement after steelosses, some ecomists contd botto is nea prices havhalted the free miliar. the secr vy well, robert shille, he helped develop -- that later proved to berue. earlier this year he pubshed his latest book titled"animal spirits. human psyclogy drive the economy and why it matters for global capitalism. i amleased to have him back on e program. welcome. >> it i looki less dire.

ourata the zip shiller data -- that means, but the housing march quote shows a lot of momentum. we're seeing the dnwd momentum diminishe nd so that is good sign from a standpoint o home prices, i don't know that means it's gointo be a sudden turn arou. the lastycle, that peaked around 1990, home prices by '91 the rapid decne was over. but they didn't increase until 7. so, i ink thateople who are hong for a rapid turn around, they could be right, nobody knows these speculative markets. i wouldn hold my breath. given the situation that the hole economy isin, i am still

concned about the housing market. >> charlie: just put that aside just for a secon where. is the economic recover >> well,e are now 18 months fr the peak in decembeof 07. since then, wve lost 6.5 million jobs making this the severest recession since the great depression. it's alrdy 18 mthsld. we ve not had an 18-month receion since the depreion. it's the longest. yo might say ithould come to an end soon, when it's this old, the turn arod seems natural. but we don't really know. really depends o the outcome of our policies. we have to make our future, foresting is one thing. we have to have the right policies to bring us to a more prosperous economy. >> charlie: do weave the right policies? >> i think we're making

beginning. i think that correcting the errors that led to this, i would say moving ahead to better capitasystem will takeive or ten yea. if you lk at what happened after the eat depression, they were innovating,he government, and private business were innovating for rlly a dece long riod. i think it's reallyn a sen an oortunity when you have a cris like this, 's an opportunity for innovati. that's theay we shld view . >> charlie: when yay, leons -- i assume, know that you think stronglyabout this, we need snificant more regulation >> well, i wldn't say more. i would say better. >>harlie: all right, tell me what better i >> i don tnk -- that doesn't mean government even, necessarily. it means we have a private self regulatory organization. we have others like that.

regulation is about rules. we mak rules. businesses make internal rus. families have rules. children o thelayground have les. that is wt has tobe improved. this has not time to move toward bigger governmen it's better regulations and i think on top of that, so, we need iovation inthe financial sector. this is something that i've been involved for years tryg to bring up to the risks are managed better. this crisis was caused by a faure of risk management. and it's a faire right u the ali that financial there wrists ought to they about. i think that they are figuring things out now. and someinancial eineering cong not just fromhe government, i thk more from the private sect is what's going to bring us to a better economy. charlie: risk management as inderstand you mean, is that financial, few mor

financial instutions had no id wt theyad at risk. therefore, risk manament was not effeive at all in terms of the mortga-based securities that have been created. >> well, i think that risk management tools have aanced a lot. but there were errors made, the errs were trustg somebody's -- if quantitative analysis that wasn't quite right. not mingack to our rst principl and thinking abou whatoes this analysis -- for exame, we had the impression that home prices aays go up. and do you know how my financia errors we made because of that? why diwe have thatmpression? it w primarily because peopl were not lookingoking far enough back in to history. th mistook aubble for historical reaty. and that pervaded so many

decisions and led to big error there was nobody managing real estate risk. that's o thinghat i hav be tryingto corrt. if i mig talk, my company, macr maetss just launching a new rk stock exchange real estate product we're a for-pfit company but this comes out of my sense als of whatthe economy needs. it needs to develop to a better capitalism. don't want to go to a bail-out economy whe the government is -- in the srt run, okay. but we have to plan f a better econy. thfailure to manage rea estate risk was central to wh happenedn this csis. so, that's where weshouldo. i have anoer book which i wrote in september, this is an opportunity develo an improved capitali. i n't think we have any other wato go but improving capitalism >> charlie let's just stay th that. what's the title. new book? >> t other book is, in

september wa called "subime solution." it was prosal, what to do. >> >> chaie: let me understand what you a arguing with your company andhat you believe is nessary. you belie that there ought to be aeed to have a hedge agains real eate sculation, real estate what? >> weeed tollow peopl somehow to adjust the exposure to risks. so tha they are bearg them in a proper aunt. and so to express eir opion so tha we he price discovery. i'm using some jargon here. price discovery means, we find the market price foreal estate in five years, that'shat our securities are doing. we kw what you can plan on. so, we have a price now for real estate in five years which shs it, abouteven or eight percent

lower than now in five years. and you canock that in for business decisions, because there's aarket tha allowsou to. so that's -- of course it's just beginning. when it's big enoug that's where we are. that will make for -- tt's the y capitalisms supposed to work. you look at prices, yo me -- you thk, can i make money o that- can i make money as builder prices are 8% lower. maybe i can. if so, hge it and dot. >> charlie right. you are saying e derivative at a time when deratives are the subjecof severe criticism. >> i thi it's a mistake to critize derivatives,er se. beuse derivatives, y know, people talk aboutcredit default swaps derivative. it's a kind of insurance. if i give it a diffent name, is anyone againsinsurance? wh about health insurance? yone againsthat?

>> crlie: but insurance - >> health insurae nor a company, that' what credit default. >> charlie: insurance is nagement of risk, isn't it? absolutel in fact you kw over the centuries, people who were ver resistant to the ideaof insurance, it's ly in mern tis like the th century that it bame like grama and apple pie. we all know that insance is a good thing. derivatives are still --t's a taped word. but it's the same thing. it's aboutetting a broader grp of pele to spread out risks overore people. and have them payor the managementf the risk. at a premium or price that compensates e other side for taking o the risk. at's insurance, that's derivative >> charlie: you company, macro markets will crte the financial vecles that will allow you to hedge these risks? >> w have one for the u.s as a whole. we want to mecal costs. >> charlie: before you,

that you experimentedded wh is inhile, didn't you? >> i did in the not i've been advocating -- that's some kind of consumer price index magement vehicle like the unad fermto chilly. >> i have a l of different proposal they're all on theame theme of developing finanal markets. so that they work for t people. >> chaie: also on this theme:you worshipt the holy grail of trying to figure out how to manage risk. >> well, i think that qutitative finance is a really portant technology. a little bi like nucle physics. i know that sounds funny, but -- maybe not quite up tohat. but mething lik-- in the sense th it's a real technology wch can improve human welre, it h dange if it's not de right. but htory has show overall

that something like that can be maged if we have the rit -- we regulateuclear power, too. for the me reasons, for preserve public saty. there is rallels there. i think th ultimately our society is not goingto want to forgo the advantages of applying financia technology just like they apply other technologies. >> charl: do the things that have happened to us over -- inhis economic crisis, global economic crisis, this may be simplistic, sily suggest that mr. debts are not effient? >> this is another theme of mine which you'll find in nimal spirits." >> charlie: go ahead >> i think the so-called efficient markets hypothesis which me in around in t '60s, became very popular in t 1970s. i think it was half truth. at does it mean t say markets

are eicient? it means that the prices reflect information. they pool all the information d they become a better pri than any single person coul there's me truth to at. >>harlie: markets hav perfect information so to speak. >> but we exaggerated the truth. weent through an era from the '70s to the prese of -- it's almost like a new rigion. we wship the markets. we went too farith that idea. th's part of our problem. we began, the f chairn would be reluctant to say any opinion about the markets bause he didn't think he could match the wisdom of the market. th was a bigistake. >> charlie: you use the wor "irrional exuberance before the fed chairman did. >> i don't think so. i think itas his term. i was talking to him on couple days before -- sounds like an greepan, but i d think it's a good term, that's why i use it

the title of the bk. becauset reflect-- you know it's kinds ever similar. did i now i do "animal spiri" this is with george, i should say. it's on a theme that enomics profession h gotten too hg up on rationality. peopleave arationale si, yes, that's portant to recogniz but they alsohave ab animal spir side and it's really important to understd that si if you wanto understand economic fluctuationsike the one we're now. >> charlie: explain. >> the big problem that economts, theorical economists he had in our opion, and george and m opinion, is they never fured t what drives the economy. what is the ultimate source of these fluctuationsp and down. now, they got it partly right. but i ink they omitd -- we, both are songly feel tt they

omitted verymportant pnt. it's the inconstan see of human behaviorthat humanwill become optomistic, over optimistic and drive the economy in to -- charlie: human wil believe th housing prices will ner go down. >> that's exactly. how in the world did theyget at idea? ce they -- george and i emphasize that it's driven by stories. that nartives drive -- for example -- >>harlie: the animal spirit is driven by stories. >> right. people have sry of their lives. a story of country a. story of what epic am i- what great historical this are happen. >> charl: what movie am i in? >> that's exactly right. people tend to view themselves -- >> charlie: we've sn this movie bere they somemes will say. can ahead. >> wt wasappening in the 1990there was sense of possibility. we were entering the new millenum. the internetad just been discovered. yog people were setting up dot.com compans.

these storiesere ver powerful, because they suggested what we should be doing. i felt -- we feel like a los fer we're not rt of this. >> charlie: it suggests old rules didn't apy. >> so then you forgot history, you made the same mtakes again. >> charl: can you measure this otional fact that the animal spirits are there and that hum emotions are not constant? cayou measure tha can you ftor that in to further understand marke? >> we, back in 1947, george katona set outhe was athe iversity of michigan, in -- set outo start mearing human confidence. in 1951, he created th unersity of micganonsumer sentiment index, wch was later followed bthe conrence board, consumer confiden index. there are people who try to quantify this with som success. i find their research very

interesting, but i wish there were more of it. it those two groups thatare doing that, academia, academic economists have generall dismissed tha kind of measure. i think th measuring the anal spirits is still an infant iustry. michan has been doing this f 60 years. >> charlie: there's also this factor that's at wk in things likehis. ifhe guy across the street,r rson across thetreet is taking a lot of risk, and making a lot of money, then t pressure on you to do the same thing and especiall if you're job or future ist ste, is ge. >> right. you're getting at some aspects of herd behior. e word herd behavi is maybe not it's partly -- it is so complicated, one ing that comes in is that if i don't d it. everne else is doing something. they're making mon on it now. don't know that this is ever

gointo come to e. it's not clear. it's a difference of opinion. do i just not parcipate? like people a writing subprime loans i'm a mortgage oginator. that's where all the action is, they're mang a lot of money. and if i s i won't do that, i kind of get left hind. i'm lking old. you're getting owlier and nothing happening. ose kinds of oughts enter, it's not the onomists lately. the esblishedaradigm they don't generallyepresent those nds of human emotions. i think part of what we're doing is influenced by psychology, by uroeconomists -- charlie: what is neural commission? >> ihink that's exciting new branch which i am n -- i am not a practioner of. trying to meld brain research with commission. we have to understandow the

brain fctions. they put people in functional gnetic resonance imaging device watch wt's goingn inside their bin -- >> crlie: when they're doing what? >> making enomic decisions. and we -- >> charlie: like what? you make economic decision, buy this hem or not, whher i trade this securitor not? >> let me ve you example. in itzerland ty had peop play games with each otr, ecomic games wle they were -- i don't rememb the detail exactly. there was a point in the game when some playershowed vengeanceo each oth. in other wordsthey're not making a gd business decisio they're doing something which actually cost tm money, it apars to be -- >> charlie: because ty want to retaliate. >> some econists said, tha well, maybe there was some rationale reason whyhey -- is was part of a grand

strategy. bu earns fhareound that loing at their brain that region of the brain was tivated at the time that they were being apparently vengeful. it is the se pleasure center that -- it was --hat makes you happy when you're sexually fulfilled things like --'m making loosely from study that -- >> charlie: this is interesting stuff i'm telling you. .. what it mes is that economists who say it's a rationale are wrong. because we can see with the neural imaging deviceshat the emotions thatccompany these economic decisionsre. we now know at veeance is part of whatrives people. you've heard peoe say it i'm ing to do thi for the principle evert. i don't ca if it cos m money. we now kw that that's no just talk, that is w people feel. that's part of animal spirits,

that george and i tk about. that peoe getting ary and they get resistant. ey don't want to make aeal th someone that theyon't ust or they feel is wronged them unfortunely that is pt of an economic contraction. that is part of what's happening now. >>harlie: what is it about you,ou, that makes you so fascinated by this? >> it uld be my wife,ho is a psychologist. >> crlie: yes. that's interesting. >> it is interesting. i talk to her a lot. >> charlie: h is she influenced you? >> she bringme back to reality. >> charlie: she does? >> i think george's wife, too. he married to janet young, who was chairman of the council. of economiadvisors is now president of the sanrancisco fed. she is a smart woman think both ofour wives bri usack to reality more, it's ea in academia to go offn a tangen

and i thi my work improved, i think gege ace work impved when we rried. >> charlie: becse you did what? ratherhan going off on tangents it was like a reali check? >>he thing that -- the academic ientive systemis, you want to beon the fntier. you dot want to be criticizle. what do you do? you specialrise, really narrowly that i think is timately a mistake. you need someone with a broader judgnt to bring you back a make you think, you know, writing that per and tting the top journa isn't really what you want to do if the whole thing meaningless. even if you get the accolades you want to feel good about what you've done. >> crlie: here is what i don't undersnd about isas well, beyond how you got to this and you explained somthat have cause of your we and paid tribute to her in lots of differenways that i've read i reading about you. i don'understand this. when you have thtrack record

yo did, and reputati u do, suggested that housing prices were going to fall, we were in fo rough sledding, it could leado exactly whas happened. clearly people with lot of money attake should haveeen listening. did ey simp dismiss y? did theyay, thank you very much, profess, now go back up to new haven a write another book. >> that'what they said. >> charlie essentially that was it. it is aquestion of ho do we judge ings. i could have mathematical proof that b and c a d, case clod. i think i would have evailed. othelike me. charlie: do you believe that what we went through with all these mortgage-cked securities and catastrophe that it led , that it simply was a

glitch in securityayings. >> i think so. >> charlie: explain >> companie wereutting togeth in pools, rtgages. and then selling tm off to invests. they were dividing these up to in trenches by risk categories and selling t separate ones of then placed in othdos and -- c-squared. it g very complicated. thenhen the whole system blew up, it was a mess cleing throh the wreckage. people are naturally dismad by at happened. but i take that a something like the sinking of the titanic. engineers when they buil the titanic they we in a rusho get it done, they used the wrong riforts. they have -- the captain was going through iceberg-laden waters.

there were his takes made and mistakes bpeople in a hurry o were that' how we improved. don't think we have any othe chce, really, any other sensible choe butto stick with capitalis make it better -- >> charlie: just make sure. the kindf relation it's not necessily you believe that government should ing out all these new regulations, we nee to have better regulations. some of them ought to be generated by the financi ctor themselves. >> rht. i thin actuall most regutions are generated by peop, most financial relations come i as suggestions by people in the nancial sector, becse government employees are not involv. you have just like i' saying the childrent the playground when they're unsupervised they say we have to make a rul about this or that beuse they're playing the game, they want to know. welso have to take ino all elemts of this soety, there is a problem that people in e

normal sector may not show enough concern for people lower on the economic laer. i think actually one of the big problems tha we are not coronting well right n is the rising economic iquality, that's pt of the rson why i think anger is developing at this stage. then wthrow on the huge hit unployment. peoplere losing the sense that america is for us togetr as the people. that is so precious,hat's why i suppor the effortshat obama has ma and i wish they re stronger. the real mistake that s been made is that foreclures are still at too high aate. unemoyment is at aigh rate. we should have move fter and re directly to protect all these people.

because no we've got kind of a maged anima spirit at this int. it's stillossible -- we've done part of theob. >> charlie: we come out thisbut it's going to tak what, how long? >> in tes of the national bureau o economic research recession dating, it is quite possible thawe will be out of the receson technically this ar. but i'm not so optistic from that. because wean have a double di recessio we can have very slow recovery. that has been the pattern for recentresections. given the amount of damage to the economy, damagto the anim spirits, which georgend i ehasize, not measured that people are looking at this recession as just another in a string of resections. think underestimating the

long term damage. -- >>harlie: what's the nger term damage? >>'ll give you as an example. what w the real surprise in the great depression? there were two aspect of it. i'm making a great depressio palleldvisedly. wee not lely to have as bad an experience ashat. >> charlie: 5% unempyment. >> rht. 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 fm 18929 13 we had 43-month interaction. that was almost e longestin history. but it d come up. we had a rovery from 33 -- from '33 to he 37. peopleorget. that i still the depression beuse the unemployment rate never go below 10%. and then aer hear 37 the economy arted singing -- nking again thereere still no jobs. no no jobs but unemployment rate averag i think 17% from 1931

to 11 where who decade. the puzement then people said is, why isn't the ecomy recoveng? i think that -- there a lot of -- da there's this so many books and ideas written about. this the theme tha george and i phasized is tt maybe the name ou to recovery neglectea failure for animal spirits to co back. what mean by animal spirits is a willingness to spend a willgness to hire people. a willingness to -- we emphasized that busisseally is built o a sense o entrepreneurl sense. the sen of possibility. a sense that we can doomething new and different. 's risky but wre going to do it. when you g in to a bad onomic atmosphere, erything seems o risk y. peoplere pulling back. th i think is probably the

most important reason why the depressionasted for so long. i'm not predicting ything as bad as that. but thinking that is plausible that we wi have trouble climbing outfhis. we'll have the nber saying the resection is over. then three, ur, five years from now homrices may be even lower. i n't know. that's guess. i don't ow. the whole thg is just disappointing. threason it's disappointing i because we haven't moved to a business environment at is coucive to starting important -- some people wl do it. but it won'te at theormal level. that why i think that we want to have more -- ialked abo a lot of these in "subprime soluons" they sound a little racal and diffent. but ideas that expand on

capitalism to make it work. make it work a it should. >> charlie: th's yrext book >> i don't have next book in mind right now. >> charlie: how capitalism ca work. >>t's ip both of tse books. >> charl: you also worry out sort of the psychology o america. ybe pchology of othe peoples another countries as well. bu that somehow the belief in th work ethic h been eroded. >> that's right. this is why people sometimes are angry with people in fance. they have a sense thatinance all about picking money up st -- >> charlie financial enneering, they didn't build anything, didn make anything, they? how used inside inrmation there foit's all unir that ey made billions of dollars. >> in fact i think unfairness prably -- another theme in "animal spirits" unfair behavi nds to grow during boom period.

so,usiness ethics dlip somewhat during arowth period. the problem is, that peopl getting angry abouthat. but in fact there's nothing wrong -- ie met many fine people in fince. i've trained tm. i have thousds of forr studts -- >> charlie not running hedge funds something. >> iuess there's -- but i come back to it. the bigst problemacing this country is not this crisis. it's the growing inequality. i think that we have to -- anothe theme in mybook. i' written another book about it. >> charlie: what was the title that have? >> i had a book cald "w nancial order" in 23 but i thought in tt book that we should manage inequality a scieific way. we havto he alan so that inequaty doesn' get woe. i don't thinwe have any reason to want i to get wors so why don't we spend now, time,

thinng -- no presidential cann daylight has ever mentioned this. maybe it too --we don't wt ass warfare we want to start inking about the forceshat can be offset. this is fundamental. why is the healthcare issueo importt right now? i think it'sundamentally because medical technogy is improving to the point where it's developing a lot o expensive procedes that can save and prolong people's live give them useful more years. now we're realizing that come and equality is worse than w thought. because people who are poor will die younger. they didn't used to that way. but once we have expeive procures that can prolong lives, how can we dy that? to lower income people. so to me it's even more fundamental than the healthcare debate now. it getting the income a

equality maned so it doesn't become a huge problem in the futu. to me, it's technical problem how to do that. just as cash. >> charlie: a technical problem? >> i'd like to see -- okay. m talking about somany books here. >> charlie: we're tking about ideas. i'm interested thed idea. >> have another paper with len berman called -- maybe i shouldn't bring thingsp like is which i so pitically dynamite. let me just lay it o. we thi the -- >> chlie: don't sensor yourself. n't edit yourself. >> i getting angry e-mail ever time bring this up. this is really risk management. we don't know how bad the income anequality is going toet. it cld get better, could get worse. it's a risk. let's put in a system tt nages the risk. th proposa we have is to index

th tax system for inequality. so that, the plan is in the fure, if inequality gets wse weutomatically raise tas on thewealthy. 's not -- obama --congress are talki about taxingtaxing the rich toay for the -- >> charlie: healthcare. >> health car that sounds so logical. but afte the fact, you try to do that, it createsit call problems. we havto plan r the next dede. let's write in to the law now that that's going to happen. my son is now a phd student i philosophy. it's my son, my next generation will carry a more etherl level. for me think of myself as humblengineer. who has -- fincial engeer. i'm awe of a technolog of riskanagement. i'also aware of a technology of social sciences. psyclogy, sociology, we

mentioned neuroscnce. i am trying think like an engineer to put the things together to make something that works. i think it's not jus me, i ink this is the new paradigm. >> charlie: the n paradigm is... >>o quote thaler and others they have book called "nge" and in that ok they talk about choice architeure. but the ideas to design financial and economic ctracts aroundeople. knowing the way they behave. and nudgg them in a dirtion that works. th manages the risks and nages their -- that becomes part of a functiong economy. i mention sunstein now part of the oba administratio i take it as vy inspiring that iee

people likthis involved at the highest level of our government. i think that this is new. th is like the new deal. we are thinking at betr lel, a more enlightened leve abouhow to chan our economic policies. think it's a process, we haven't heard e end of this by any means. but i think that the application of finanal technology connection with applicatio of our understandg of the human species and human mind is a breakthrough fntier, we're breaking thrgh right no and m hopefu that we'll have better countryn the u.s. and in oer countriesround t world. >> charlie this book is called nimal spirits" how mum human psychologyrives economy and why it matr for global catalism. george ackerloff and rober j.

shiller. if you d't want to read this now, nothing i can sayhat uld make you want to read it after listening to this convertion. it is a fascinating inquiry tt go far beyond economics in terms of the way human nature works. my tnks to bob shiller,hank you very much. >> my pleasure. microst and yahoo! announced sterday a partnership in the search and advertising business. under the deal yahoo!'s website will be powered by microsoft new sear engine, binge. yahoo! will t 88% o the ad revenue from searches onts tes for the first five ars. wi the parership the two hope to ta on google which currently commands about 65% share of the u.s. market. reement follows microsoft's faed take ov bid for yahoo! showshe continuingmportance it is placing on search.

joining me from redmond, washington, is nick n field of the "wall street journal." here in new york, th me, steven levy of "wire magazine an erick schonfeld coed for of chcrunch blog. i am pleased t have all here. nick, telle, how this deal happened first. >> it startedast year wh the e.o. of mrosoft, steve bamer, making a unsolicited bid for closed to $48 billion to acquire i can't ovment never happened, yao! resistedhe offer. temp apartfast forward to about janry, yahoo! has new c.o., carol bartes and microsoft and yahoo! start lking about a more limit dealnot a full blown acisition in which microsoft basically take overhe search operations, handle the search operations on yahoo! in exchange for some value. and the deal went throug all

sorts of fits and starts and finely arrived at the deal y described a momentgo. all of this being designed to improve microsoft's fairly po position in search right now which street a highlylucrative rket, the online advertising maet that accompanies search. and one that microsoft reall has not had much success in o its own. >> charlie: is this a gd deal for just crosoft or od al for microsoft and yahoo!? >> the shareholds of both companies seem to thk it's a better deal r microsoft than it is for yahoo the stock of microsoft went up a bit yesterday, u a bit today, yahoo! is down. one the problems yahoo! has is th they had st of almost set exptation that they re going to get a b chuck, multi-billion dollar check from microsoft r exchange for a deal. that didn't happen. instead what yahoo! is getting isery hh percentage of the ad revenue from adverting sold

on search that microsoft delivers. so so, both parties argue it's bett for yahoo! to get this becaus there getti more -- bigger chunk of th shared ad revenue on ongoing basis but n g up front check at seems to disappoint people. >> charlie: so, what's t judgment of people who lookt n terms of whether yahoo! would have been bett to take the original dl that ballmer offered or tak the deal they have now >> well, i don't tnk there's any question tt yahoo shareholders would be betterff if they hadccepted the original $48 blion deal. i don't know wha yahoo!'s last market capitalizatn is, they're down a l. so, i don't think microft though regrets not acquiring all of yahoo! think they're fairl happy wi the positi that they're in. they also have managed to improv their own me grown search engin which is now call binge, and have started

inch up a littleit in maetshare. so i think microft probably comes out a little bit ahead here, bu still both parties argue at yahoo! is going to thrive as well becausehey no longer ha have investn search. >> charlie: the this going to snea >> the up front ney really isn't t evacuee to yahoo! the acuee is,ahoo! disbanding. their search team. their engineering. and disbanding t team which built their advtising engine to sell ads on search. the happen to be some of the most important aspects of engineering at company there. really if yahoo! wants t be top internet cpany has to have the engineering chops to keep ing that. so, 's going to mis out on that. itill save money by not hiring those people to pay those are the people you want on your company. also, this deal is a litt

complicate yahoo! aually is going to sell some of these adso the emium customers. a lot of ctomers, those in the long tail,hey just go onhe website and buy the ads just straight there like you buy somethinfrom amazon. a big customer eds someone to work with them and tell them what words to buy, it'sery complicateyou how much to bid these things are allone by bidz. yahoo! is doing tha part, microsof has technology which meanshose people wo for hoo! have to go bac and forth to redmo talk to a lot of people to be familiar with how that works. there's a little complication in how they're going to be able to do that take on google and build up the share beyond what it has combined with yahoo! >> crlie: did bingmake a difference here fact, the fa that bing has gotten the microst srch engeneral as gotten good reviews? >>ut for o months.

but it'sade a ltle time? who knows. holem here is that yahoo! really -- they walked away from the most intesting fight on the iernet right now which is search. and they handed i over to microsoft for less than any o e previous deals tt were on the table. the for real deals on e table go back to 45 $8illion to% of yahoo! and billion dollar payment for the seah part of the siness. the gag l deal tha got squashed. thiseal was the worst of all the deals. and as steve mentions, the deal introduces yao! sas people selling microsoft's search product. yahoo! sales people he enough problem talking to yahoo! engines. now they have talk to microsoft engineers. what if something goes wrong?

whare they going to yell at? are the crosoft engines go tg like that bngelled at by yahoo! sales pple. >> charlie nick, you'r in redmond,hat does this do for eve ballmer? >> itgives him a fighting chance to amarket that he said is strategic. they have yahoo!'s martshare they cou go to 30% shar -- 30% of seares in the u.s. and that's significant. now the question is, doesit decline from tre? can they increase it? if they do that, how much mon do they make offf it? because of course microsoft is losing money in its intert search businesright now. but they just wanto gain the share. they say the get eyebls, sear is scale business that they will stt to improve the qualy of the search. because they can do all sorts

things, make ads more relevant. if they do ty they think they can of a flywheel affect and eating in to google's share. the other thing thathis let's them do is, gag sell notonly strong in search wi -6r 5% plushare but google moving in to thether are that are quite threatening to micsoft. they're ung their profits to get in to operatinsystems, in to online applications, that are free. thathreaten thecashcow business like offi and word and exce they just recently annoued that they'reoing to be doing operating systemoraptops. th already have one for mobile phones. and i think microsoft wants to ga share in search inart to help alleviate that threat. >> charlie: and wt about leadership of yahoo!? carol parts? >>ell, she physical she had to do something. but i think in this case by targeting the searcteams and

taking i away, some pple wonder whether thas going to really take the glue, which keepthe portal together there. the search that yahoo! d, had about ree times the size of what microsoft search mainly because so many ople come to yahoo! and they searchhere. so it reallywas an opportunity for yao! to gr out there and do more. she says this isoing to enable them tooncentrate on the other things that they do. bu having ver strongearch team and engineering tt comes with tt, with theearch and with theeally comicated engineering yohave to do toe able t sell ads on searches that's very complex. r reasons we can get i to it really helps if your share grows. those engiers aren't going to be ae to filt through the rest of the company tohelp you do these other thingthere. if u look at. team, it's goingto tak well over year for this to come to fruitio with is deal. if i'm working as enginee for

hoo! n, what's my future? >> charlie: that's losin talent is big issue. and building o the old. >> whois onef the most talented people at microsoft, the one they talk is qi lu the guy w came fro yahoo! nt to microsoft yahoo! he'she technology ader that bright guy who is leading microsoft sech. >> charlie: wt abo aol? what's going to hpen tool? >> so, i thinkol is a great example here. because you'vegot tim armstrong who came from goog now the c.e.o. of aol he took what is a hobbled coany, and is taking it in a new directi away from the sweet spot that ggle or yahoo! omicrosoft already dominated. he's hiring hundds of journalistjournallistshich as you knowrom your politico piece at very, very valuable

assets. is kind of crete eighting not just one part his busiss creating this sort of new newsstanonline. is doing lot of intesting things. why didn'tcarol parts do that? why didn't she double wn, u camake argument that ultimately she hadto do something becae she doesn't have microso's windowsmoney. doesn't hav google search money. ultimately search is expeive. maybe she th is to get out of the the siness ultimately. but microsofneeds her search volume. why not double dow investin search and get bette deal down the line? or merge with aol whin they become public? >> charlie: saking of one finalssue, anti-trust, nick. is google worried about anti-tst of the marketshare? with this deal be subject to anti-trust implications, questions? >> google is i think worried, s, about their future

anti-tst. inhis particular cas with microsoftand yahoo! ty argue that togethethey have30% of the market. compared to google's 65%. so they tnk they ll have strong. they will face tough strut knee. they're prepared, i think, to real fight with google. it's unclear what google is going too. the was talk today a this microsoft meing i was at of google empling sort of thi party advocacy groups to fight the deal. but google is the big gorilla here. it's a little chlenging for them to make an argument that thiss going tobe anti-competitive. gole has -- >> it's irony. last year, when therewas threat of microftuying hoo!,

google wanteto make a a deal with yoo! of t search. microsoft complained about it. and sa to the justice department, successfully argued that we can't do this. because yahoo! would end its search team. there would be lessompetition there. ess what. >> chaie: take over the search team. is there feeling with the sech backs getting good marks and now this deal is mrosoft is back and can divera lot more than people, maybe mh strongering that pple assumed it was s six months ago when the effo to buy yahoo! ce to noing? there is a feeling on the swing. windows 7 is coming o which theyope will era the sort of disdaiever windows vista which was a troubled opeting system with technical problems. bing is doing wel they hav done innovativ stu

in gam. some peoe think that they have placedoo much emphasis on sear and neglted mobile ones. they have pretty poo offering there. apples gothe ie phone and others are doing well in that caogry. they gotome big chlenges in other areas as well. microsoft no dbt bett off today in search than was before. but we shouldn't orstimate what their advantage . evenf they have 30% of the searchmarketshare. th don't have 0%f the revenues they're giving 88% that have back to yahoo! >> charlie: nick win field, "wall street journal" near. ick schonfeld from techunch. steve see levy officer "wired" ank you ver captioning sponsored by rose communicatis captioned by media access gro at wgbh acce.wgbh.org