shiller who gets credit for predicting the housing crisis. >> we went too far with that idea that's part of our problem. we began fed chairman would be reluctant to say any opinion about the markets. because he didn't think he could match the russ come of the market. that was a big mistake. >> charlie: we conclude with the look at the microsoft-yahoo! deal. >> yahoo! is disbanding. they're search team, their engineering. and disbanding the team which built their advertising engine to sell ads. these happen to be some of the

most aspects of engineering in the company there. really yahoo! wants to be top internet company has to have the engineering chops to keep doing that. so it's going to miss out on that, it will save money by these people. >> the big problem here is that yahoo! really, they walked away from the most interesting fight on the internet right now which is search. and they handed it over to microsoft for less than any of the previous deals that were on the table. >> also moving in to the areas that are quite threatening to microsoft. using the profits in search to get in to operating systems, in to online applications, they threaten the cash cow businesses like office and word and excel. and they just recently announced doing operating system for laptops. they already have one for mobile phones, i think microsoft wants

to gain share in search in part to help alleviate that threat. >> charlie: a conversation with shiller and debriefing on microsoft yahoo!, next. captioning sponsored by rose communications

from our studios in new york city, this is charlie rose. >> charlie: the u.s. housing market has shown signs ever improvement after steep losses, some economists contend bottom is near. prices have halted the free familiar. the sector very well, robert shiller, he helped develop -- that later proved to be true. earlier this year he published his latest book titled "animal spirits. human psychology drives the economy and why it matters for global capitalism. i am pleased to have him back on the program. welcome. >> it is looking less dire.

our data the zip shiller data -- that means, but the housing march quote shows a lot of momentum. we're seeing the downward momentum diminished. nd so that is a good sign from a standpoint of home prices, i don't know that it means it's going to be a sudden turn around. the last cycle, that peaked around 1990, home prices by '91 the rapid decline was over. but they didn't increase until '97. so, i think that people who are hoping for a rapid turn around, they could be right, nobody knows these speculative markets. i wouldn't hold my breath. given the situation that the hole economy is in, i am still

concerned about the housing market. >> charlie: just put that aside just for a second where. is the economic recovery? >> well, we are now 18 months from the peak in december of 2007. since then, we've lost 6.5 million jobs making this the severest recession since the great depression. it's already 18 months old. we have not had an 18-month recession since the depression. it's the longest. you might say it should come to an end soon, when it's this old, the turn around seems natural. but we don't really know. it really depends on the outcome of our policies. we have to make our future, forecasting is one thing. we have to have the right policies to bring us to a more prosperous economy. >> charlie: do we have the right policies? >> i think we're making a

beginning. i think that correcting the errors that led to this, i would say moving ahead to a better capital system will take five or ten years. if you look at what happened after the great depression, they were innovating, the government, and private business were innovating for really a decade long period. i think it's really in a sense an opportunity when you have a crisis like this, it's an opportunity for innovation. that's the way we should view it. >> charlie: when you say, lessons -- i assume, i know that you think strongly about this, we need significant more regulation. >> well, i wouldn't say more. i would say better. >> charlie: all right, tell me what better is. >> i don't think -- 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 make rules. businesses make internal rules. families have rules. children on the playground have rules. that is what has to be improved. this has not a time to move toward bigger government. it's better regulations. and i think on top of that, also, we need innovation in the financial sector. this is something that i've been involved for years trying to bring up to the risks are managed better. this crisis was caused by a failure of risk management. and it's a failure right up the ali that financial there wrists ought to they about. i think that they are figuring things out now. and some financial engineering coming not just from the government, i think more from the private sector is what's going to bring us to a better economy. >> charlie: risk management as i understand you mean, is that financial, few major

financial institutions had no idea what they had at risk. therefore, risk management was not effective at all in terms of the mortgage-based securities that have been created. >> well, i think that risk management tools have advanced a lot. but there were errors made, the errors were trusting somebody's -- if quantitative analysis that wasn't quite right. not coming back to our first principles and thinking about what does this analysis -- for example, we had the impression that home prices always go up. and do you know how many financial errors were made because of that? why did we have that impression? it was primarily because people were not lookinglooking far enough back in to history. they mistook a bubble for historical reality. and that pervaded so many

decisions and led to big errors. there was nobody managing real estate risk. that's one thing that i have been trying to correct. if i might talk, my company, macro marketss just launching a new york stock exchange real estate product. we're a for-profit company but this comes out of my sense also of what the economy needs. it needs to develop to a better capitalism. we don't want to go to a bail-out economy where the government is -- in the short run, okay. but we have to plan for a better economy. the failure to manage real estate risk was central to what happened in this crisis. so, that's where we should go. i have another book which i wrote in september, this is an opportunity to develop an improved capitalism. i don't think we have any other way to go but improving capitalism. >> charlie: let's just stay with that. what's the title. new book? >> the other book is, in

september was called "subprime solution." it was proposal, what to do. >> >> charlie: let me understand what you are arguing with your company and what you believe is necessary. you believe that there ought to be a need to have a hedge against real estate speculation, real estate what? >> we need to allow people somehow to adjust their exposure to risks. so that they are bearing them in a proper amount. and also to express their opinion so that we have price discovery. i'm using some jargon here. price discovery means, we find the market price for real estate in five years, that's what our securities are doing. we know what you can plan on. so, we have a price now for real estate in five years which shows it, about seven or eight percent

lower than now in five years. and you can lock that in for business decisions, because there's a market that allows you to. so that's -- of course it's just beginning. when it's big enough, that's where we are. that will make for -- that's the way capitalism is supposed to work. you look at prices, you make -- you think, can i make money on that -- can i make money as builder if prices are 8% lower. maybe i can. if so, hedge it and do it. >> charlie: right. you are saying use derivative at a time when derivatives are the subject of severe criticism. >> i think it's a mistake to criticize derivatives, per se. because derivatives, you know, people talk about credit default swaps as derivative. it's a kind of insurance. if i give it a different name, is anyone against insurance? what about health insurance? anyone against that?

>> charlie: but insurance -- >> health insurance nor a company, that's what credit default. >> charlie: insurance is a management of risk, isn't it? >> absolutely. in fact, you know over the centuries, people who were very resistant to the idea of insurance, it's only in modern times like the 20th century that it became like grandma and apple pie. we all know that insurance is a good thing. derivatives are still -- it's a taped word. but it's the same thing. it's about getting a broader group of people to spread out risks over more people. and to have them pay for the management of the risk. at a premium or price that compensates the other side for taking on the risk. that's insurance, that's derivative. >> charlie: your company, macro markets will create the financial vehicles that will allow you to hedge these risks? >> we have one for the u.s. as a whole. we want to do medical costs. >> charlie: before do you,

that you experimentedded with this in chile, didn't you? >> i did in the not. i've been advocating -- that's some kind of consumer price index management vehicle like the unadad fermto in chilly. >> i have a lot of different proposals. they're all on the same theme of developing financial markets. so that they work for the people. >> charlie: also on this theme: you worship at the holy grail of trying to figure out how to manage risk. >> well, i think that quantitative finance is a really important technology. a little bit like nuclear physics. i know that sounds funny, but -- maybe not quite up to that. but something like -- in the sense that it's a real technology which can improve human welfare, it has dangers if it's not done right. but history has shown overall

that something like that can be managed if we have the right -- we regulate nuclear power, too. for the same reasons, for preserve public safety. there is parallels there. i think that ultimately our society is not going to want to forgo the advantages of applying financial technology just like they apply other technologies. >> charlie: do the things that have happened to us over -- in this economic crisis, global economic crisis, this may be simplistic, simply suggest that mr. debts are not efficient? >> this is another theme of mine which you'll find in "animal spirits." >> charlie: go ahead. >> i think the so-called efficient markets hypothesis which came in around in the '60s, became very popular in the 1970s. i think it was a half truth. what does it mean to say markets

are efficient? it means that the prices reflect information. they pool all the information and they become a better price than any single person could. there's some truth to that. >> charlie: markets have perfect information so to speak. >> but we exaggerated the truth. we went through an era from the '70s to the present of -- it's almost like a new religion. we worship the markets. we went too far with that idea. that's part of our problem. we began, the fed chairman would be reluctant to say any opinion about the markets because he didn't think he could match the wisdom of the market. that was a big mistake. >> charlie: you use the word "irrational exuberance" before the fed chairman did. >> i don't think so. i think it was his term. i was talking to him on couple days before -- sounds like alan greenspan, but i do think it's a good term, that's why i use it

as the title of the book. because it 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 profession has gotten too hung up on rationality. people have a rationale side, yes, that's important to recognize. but they also have ab animal spirit side and it's really important to understand that side if you want to understand economic fluctuations like the one we're in now. >> charlie: explain. >> the big problem that economists, theoretical economists have had in our opinion, and george and my opinion, is they never figured out what drives the economy. what is the ultimate source of these fluctuations up and down. now, they got it partly right. but i think they omitted -- we, both are strongly feel that they

omitted very important point. it's the inconstant see of human behavior, that humans will become optomistic, over optimistic and drive the economy in to -- >> charlie: humans will believe that housing prices will never go down. >> that's exactly. how in the world did they get that idea? once they -- george and i emphasize that it's driven by stories. that narratives drive -- for example -- >> charlie: the animal spirit is driven by stories. >> right. people have story of their lives. a story of my country a. story of what epic am i -- what great historical things are happen. >> charlie: what movie am i in? >> that's exactly right. people tend to view themselves -- >> charlie: we've seen this movie before they sometimes will say. can ahead. >> what was happening in the 1990s there was sense of possibility. we were entering the new millennium. the internet had just been discovered. young people were setting up dot.com companies.

these stories were very powerful, because they suggested what we should be doing. i felt -- we feel like a lose fer we're not part of this. >> charlie: it suggests old rules didn't apply. >> so then you forgot history, you made the same mistakes again. >> charlie: can you measure this emotional fact that the animal spirits are there and that human emotions are not constant? can you measure that? can you factor that in to further understand markets? >> well, back in 1947, george katona set out, he was at the university of michigan, in -- set out to start measuring human confidence. in 1951, he created the university of michigan consumer sentiment index, which was later followed by the conference board, consumer confidence index. there are people who try to quantify this with some success. i find their research very

interesting, but i wish there were more of it. it's those two groups that are doing that, academia, academic economists have generally dismissed that kind of measure. i think that measuring the animal spirits is still an infant industry. michigan has been doing this for 60 years. >> charlie: there's also this factor that's at work in things like this. if the guy across the street, or person across the street is taking a lot of risk, and making a lot of money, then the pressure on you to do the same thing and especially if you're job or future is at stake, is huge. >> right. you're getting at some aspects of herd behavior. the word herd behavior is maybe not -- it's partly -- it is so complicated, one thing that comes in is that if i don't do it. everyone else is doing something. they're making money on it now. i don't know that this is ever

going to come to an end. it's not clear. it's a difference of opinion. do i just not participate? like people are writing subprime loans i'm a mortgage originator. that's where all the action is, they're making a lot of money. and if i say i won't do that, i kind of get left behind. i'm looking old. you're getting owlier and nothing is happening. those kinds of thoughts enter, it's not the economists lately. the established paradigm they don't generally represent those kinds of human emotions. i think part of what we're doing is influenced by psychology, by neuroeconomists -- >> charlie: what is neural commission? >> i think that's exciting new branch which i am not -- i am not a practitioner of. trying to meld brain research with commission. we have to understand how the

brain functions. they put people in a functional magnetic resonance imaging device watch what's going on inside their brain -- >> charlie: when they're doing what? >> making economic decisions. and we -- >> charlie: like what? you make economic decision, buy this hem or not, whether i trade this security or not? >> let me give you example. in switzerland, they had people play games with each other, economic games while they were -- i don't remember the details exactly. there was a point in the game when some players showed vengeance to each other. in other words, they're not making a good business decision, they're doing something which actually cost them money, it appears to be -- >> charlie: because they want to retaliate. >> some economists said, that well, maybe there was some rationale reason why they -- this was part of a grand

strategy. but earns fhare found that looking at their brain that region of the brain was activated at the time that they were being apparently vengeful. it is the same pleasure center that -- it was -- that makes you happy when you're sexually fulfilled or things like -- i'm making loosely from a study that -- >> charlie: this is interesting stuff i'm telling you. .. what it means is that economists who say it's all rationale are wrong. because we can see with the neural imaging devices what the emotions that accompany these economic decisions are. we now know that vengeance is part of what drives people. you've heard people say it, i'm going to do this for the principle ever it. i don't care if it costs me money. we now know that that's not just talk, that is how people feel. that's part of animal spirits,

that george and i talk about. that people getting angry and they get resistant. they don't want to make a deal with someone that they don't trust or they feel is wronged them. unfortunately that is part of an economic contraction. that is part of what's happening now. >> charlie: what is it about you, you, that makes you so fascinated by this? >> it could be my wife, who is a psychologist. >> charlie: yes. that's interesting. >> it is interesting. i talk to her a lot. >> charlie: how is she influenced you? >> she brings me back to reality. >> charlie: she does? >> i think george's wife, too. he's married to janet young, who was chairman of the council. of economic advisors is now president of the san francisco fed. she is a smart woman. i think both of our wives bring us back to reality more, it's easy in academia to go off on a tangent.

and i think my work improved, i think george ace work improved when we married. >> charlie: because you did what? rather than going off on tangents it was like a reality check? >> the thing that -- the academic incentive system is, you want to be on the frontier. you don't want to be criticizable. what do you do? you special rise, really narrowly. that i think is ultimately a mistake. you need someone with a broader judgment to bring you back and make you think, you know, writing that paper and getting in the top journal isn't really what you want to do if the whole thing is meaningless. even if you get the accolades you want to feel good about what you've done. >> charlie: here is what i don't understand about is as well, beyond how you got to this and you explained some that have because of your wife and paid tribute to her in lots of different ways that i've read in reading about you. i don't understand this. when you have the track recd

you did, and reputation you do, suggested that housing prices were going to fall, we were in for rough sledding, it could lead to exactly what's happened. clearly people with a lot of money at stake should have been listening. did they simply dismiss you? did they say, thank you very much, professor, now go back up to new haven and write another book. >> that's what they said. >> charlie: essentially that was it. >> it is a question of how do we judge things. if i could have mathematical proof that a, b and c and d, case closed. i think i would have prevailed. others like me. >> charlie: do you believe that what we went through with all these mortgage-backed securities and catastrophe that it led to, that it simply was a

glitch in security sayings. >> i think so. >> charlie: explain. >> companies were putting together in pools, mortgages. and then selling them off to investors. they were dividing these up to in trenches by risk categories and selling the separate ones off. then placed in other cdos and -- cdo-squared. it got very complicated. then when the whole system blew up, it was a mess cleaning through the wreckage. people are naturally dismayed by what happened. but i take that as something like the sinking of the titanic. engineers when they built the titanic they were in a rush to 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 by people in a hurry who were that's how we improved. i don't think we have any other choice, really, any other sensible choice but to stick with capitalism, make it better -- >> charlie: just make sure. the kind of regulation it's not necessarily you believe that government should bring out all these new regulations, we need to have better regulations. some of them ought to be generated by the financial sector themselves. >> right. i think actually most regulations are generated by people, most financial regulations come in as suggestions by people in the financial sector, because government employees are not involved. you have -- just like i'm saying the children at the playground when they're unsupervised they say we have to make a rule about this or that because they're playing the game, they want to know. we also have to take in to all elements of this society, there is a problem that people in the

normal sector may not show enough concern for people lower on the economic ladder. i think actually one of the big problems that we are not confronting well right now is the rising economic inequality, that's part of the reason why i think anger is developing at this stage. then we throw on the huge hit to unemployment. people are losing the sense that america is for us together as the people. that is so precious, that's why i support the efforts that obama has made and i wish they were stronger. the real mistake that has been made is that foreclosures are still at too high a rate. unemployment is at a high rate. we should have moved faster and more directly to protect all these people.

because now we've got kind of a damaged animal spirit at this point. it's still possible -- we've done part of the job. >> charlie: we come out of this, but it's going to take, what, how long? >> in terms of the national bureau of economic research recession dating, it is quite possible that we will be out of the recession technically this year. but i'm not so optimistic from that. because we can have a double dip recession. we can have very slow recovery. that has been the pattern for recent resections. given the amount of damage to the economy, damage to the animal spirits, which george and i emphasize, not measured that people are looking at this recession as just another in a string of resections. i think underestimating the

longer term damage. -- >> charlie: what's the longer term damage? >> i'll give you as an example. what was the real surprise in the great depression? there were two aspects of it. i'm making a great depression parallel advisedly. we're not likely to have as bad an experience as that. >> charlie: 25% unemployment. >> right. 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 from 18929 to 1933 we had 43-month interaction. that was almost the longest in history. but it did come up. we had a recovery from 33 -- from '33 to he 37. people forget. that it still the depression because the unemployment rate never got below 10%. and then after hear 37 the economy started singing -- sinking again there were still no jobs. no no jobs but unemployment rate averaged i think 17% from 1931

to 1941 where a whole decade. the puzzlement then people said is, why isn't the economy recovering? i think that -- there's a lot of -- dash there's this so many books and ideas written about. this the theme that george and i emphasized is that maybe the name our to recovery neglected a failure for animal spirits to come back. what i mean by animal spirits is a willingness to spend, a willingness to hire people. a willingness to -- we emphasized that business really is built on a sense of entrepreneurial sense. the sense of possibility. a sense that we can do something new and different. it's risky but we're going to do it. when you get in to a bad economic atmosphere, everything seems too risk y. people are pulling back. that i think is probably the

most important reason why the depression lasted for so long. i'm not predicting anything as bad as that. but thinking that it is plausible that we will have trouble climbing out of this. we'll have the nber saying the resection is over. then three, four, five years from now home prices may be even lower. i don't know. that's a guess. i don't know. the whole thing is just disappointing. the reason it's disappointing is because we haven't moved to a business environment that is conducive to starting important -- some people will do it. but it won't be at the normal level. that's why i think that we want to have more -- i talked about a lot of these in "subprime solutions" they sound a little radical and different. but ideas that expand on

capitalism to make it work. make it work as it should. >> charlie: that's your next book? >> i don't have a next book in mind right now. >> charlie: how capitalism can work. >> it's ip both of these books. >> charlie: you also worry about sort of the psychology of america. maybe psychology of other peoples and other countries as well. but that somehow the belief in the work ethic has been eroded. >> that's right. this is why people sometimes are angry with people in finance. they have a sense that finance is all about picking money up fast -- >> charlie: financial engineering, they didn't build anything, didn't make anything, they? how used inside information there for it's all unfair that they made billions of dollars. >> in fact i think unfairness probably -- another theme in "animal spirits" unfair behavior tends to grow during a boom period.

so, business ethics do slip somewhat during a growth period. the problem is, that people getting angry about that. but in fact there's nothing wrong -- i've met many fine people in finance. i've trained them. i have thousands of former students -- >> charlie: not running hedge funds or something. >> i guess there's -- but i come back to it. the biggest problem facing this country is not this crisis. it's the growing inequality. i think that we have to -- another theme in my book. i've written another book about it. >> charlie: what was the title that have? >> i had a book called "new financial order" in 2003 but i thought in that book that we should manage inequality in a scientific way. we have to have a plan so that inequality doesn't get worse. i don't think we have any reason to want it to get worse. so why don't we spend now, time,

thinking -- no presidential canned daylight has ever mentioned this. maybe it's too -- we don't want class warfare we want to start thinking about the forces that we can be offset. this is fundamental. why is the healthcare issue so important right now? i think it's fundamentally because medical technology is improving to the point where it's developing a lot of expensive procedures that can save and prolong people's lives. give them useful more years. now we're realizing that income and equality is worse than we thought. because people who are poor will die younger. they didn't used to be that way. but once we have expensive procedures that can prolong lives, how can we deny that? to lower income people. so to me it's even more fundamental than the healthcare debate now. it's getting the income and

equality managed so it doesn't become a huge problem in the 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 talking about ideas. i'm interested in thed idea. >> i have another paper with len berman called -- maybe i shouldn't bring things up like this which i so politically dynamite. let me just lay it out. we think the -- >> charlie: don't sensor yourself. don't edit yourself. >> i getting angry e-mail every time i bring this up. this is really risk management. we don't know how bad the income and equality is going to get. it could get better, it could get worse. it's a risk. let's put in a system that manages the risk. the proposal we have is to index

the tax system for inequality. so that, the plan is in the future, if inequality gets worse we automatically raise taxes on the wealthy. it's not -- obama -- congress are talking about taxingtaxing the rich to pay for the -- >> charlie: healthcare. >> health care. that sounds so logical. but after the fact, you try to do that, it creates lit call problems. we have to plan for the next decade. let's write it in to the law now that that's going to happen. my son is now a phd student in philosophy. it's my son, my next generation will carry a more ethereal level. for me i think of myself as humble engineer. who has -- financial engineer. i'm aware of a technology of risk management. i'm also aware of a technology of social sciences. psychology, sociology, we

mentioned neuroscience. i am trying to think like an engineer to put these things together to make something that works. i think it's not just me, i think this is the new paradigm. >> charlie: the new paradigm is... >> to quote thaler and others they have book called "nudge" and in that book they talk about choice architecture. but the idea is to design financial and economic contracts around people. knowing the way they behave. and nudging them in a direction that works. that manages their risks and manages their -- that becomes part of a functioning economy. i mention sunstein now part of the obama administration, i take it as very inspiring that i see

people like this involved at the highest level of our government. i think that this is new. this is like the new deal. we are thinking at a better level, a more enlightened level about how to change our economic policies. i think it's a process, we haven't heard the end of this by any means. but i think that the application of financial technology in connection with application of our understanding of the human species and human mind is a breakthrough frontier, we're breaking through right now. and i'm hopeful that we'll have better country in the u.s. and in other countries around the world. >> charlie: this book is called "animal spirits" how mum human psychology drives economy and why it matter for global capitalism. george ackerloff and robert j.

shiller. if you don't want to read this now, nothing i can say that would make you want to read it after listening to this conversation. it is a fascinating inquiry that goes far beyond economics in terms of the way human nature works. my thanks to bob shiller, thank you very much. >> my pleasure. microsoft and yahoo! announced yesterday 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 get 88% of the ad revenue from searches on its sites for the first five years. with the partnership the two hope to take on google which currently commands about 65% share of the u.s. market. agreement follows microsoft's failed take over bid for yahoo! shows the continuing importance it is placing on search. joining me from redmond,

washington, is nick win field of the "wall street journal." here in new york, with me, steven levy of "wired" magazine and erick schonfeld coed for of techcrunch blog. i am pleased to have all here. nick, tell me, how this deal happened first. >> it started last year with the c.e.o. of microsoft, steve ballmer, making an unsolicited bid for closed to $48 billion to acquire i can't hoovment never happened, yahoo! resisted the offer. temp apart, fast forward to about january, yahoo! has new c.e.o., carol bartes and microsoft and yahoo! start talking about a more limited deal, not a full blown acquisition in which microsoft basically take over the search operations, handle the search operations on yahoo! in exchange for some value. and the deal went through all

sorts of fits and starts and finely arrived at the deal you described a moment ago. all of this being designed to improve microsoft's fairly poor position in search right now which street a highly lucrative market, the online advertising market that accompanies search. and one that microsoft really has not had much success in on its own. >> charlie: is this a good deal for just microsoft or good deal for microsoft and yahoo!? >> the shareholders of both companies seem to think it's a better deal for microsoft than it is for yahoo! the stock of microsoft went up a bit yesterday, up a bit today, yahoo! is down. one of the problems yahoo! has is that they had sort of almost set expectation that they were going to get a big chuck, multi-billion dollar check from microsoft for exchange for a deal. that didn't happen. instead what yahoo! is getting is very high percentage of the ad revenue from advertising sold

on searches that microsoft delivers. so so, both parties argue it's better for yahoo! to get this because they're getting more -- bigger chunk of the shared ad revenue on ongoing basis but no big up front check that seems to disappoint people. >> charlie: so, what's the judgment of people who look at it in terms of whether yahoo! would have been better to take the original deal that ballmer offered or take the deal they have now? >> well, i don't think there's any question that yahoo! shareholders would be better off if they had accepted the original $48 billion deal. i don't know what yahoo!'s latest market capitalization is, they're down a lot. so, i don't think microsoft though regrets not acquiring all of yahoo! i think they're fairly happy with the position that they're in. they also have managed to improve their own home grown search engine, which is now called binge, and have started

inch up a little bit in marketshare. so i think microsoft probably comes out a little bit ahead here, but still both parties argue that yahoo! is going to thrive as well because they no longer ha to have invest in search. >> charlie: the this going to sneak. >> the up front money really isn't the evacuee to yahoo! the evacuee is, yahoo! disbanding. their search team. their engineering. and disbanding the team which built their advertising engine to sell ads on search. these happen to be some of the most important aspects of engineering at a company there. really if yahoo! wants to be top internet company has to have the engineering chops to keep doing that. so, it's going to miss out on that. it will save money by not hiring those people to pay. those are the people you want on your company. also, this deal is a little

complicated. yahoo! actually is going to sell some of these ads to the premium customers. a lot of customers, those in the long tail, they just go on the website and buy the ads just straight there like you buy something from amazon. a big customer needs someone to work with them and tell them what words to buy, it's very complicated you how much to bid these things are all done by bidz. yahoo! is doing that part, microsoft has technology which means those people work for yahoo! have to go back and forth to redmond 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 ad share beyond what it has combined with yahoo! >> charlie: did bing make a difference here at fact, the fact that bing has gotten the microsoft search engeneral as gotten good reviews? >> i think bing made a big difference.

now from bing, bing is only out for two months. but it's made a little bit of a gain in share, .4%. is that going to last over time? who knows. yahoo! didn't want to find out. the big problem here is that yahoo! really -- they walked away from the most interesting fight on the internet right now which is search. and they handed it over to microsoft for less than any of the previous deals that were on the table. the foyer real deals on the table go back to 45 or $48 billion offer in february of 2008. the revised search deal which included $8 billion to buy 16% of yahoo! and a billion dollar payment for the search part of the business.

the gag l deal that got squashed. this deal was the worst of all the deals. and as steve mentions, the deal introduces a lot of complexity, right? now you're going to have yahoo! sales people selling microsoft's search product. yahoo! sales people have enough problem talking to yahoo! engineers. now they have to talk to microsoft engineers. what if something goes wrong? who are they going to yell at? are the microsoft engineers go tg like that being yelled at by yahoo! sales people. >> charlie: nick, you're in redmond, what does this do for steve ballmer? >> it gives him a fighting chance to a market that he said is strategic. they have yahoo!'s marketshare they could go to 30% of

shares -- 30% of searches in the u.s. and that's significant. now the question is, does it decline from there? can they increase it? if they do that, how much money do they make off of it? because of course microsoft is losing money in its internet search business right now. but they just want to gain the share. they say they get eyeballs, search is scale business that they will start to improve the quality of the search. because they can do all sorts of things, make ads more relevant. if they do they they think they can of a flywheel affect and eating in to google's share. the other thing that this let's them do is, gag sell not only strong in search with -6r 5% plus share but google moving in to the other areas that are quite threatening to microsoft. they're using their profits to get in to operating systems, in to online applications, that are free. that threaten the cashcow

businesses like office and word and excel. they just recently announced that they're going to be doing an operating system for laptops. they already have one for mobile phones. and i think microsoft wants to gain share in search in part to help alleviate that threat. >> charlie: and what about leadership of yahoo!? carol parts? >> well, she physical she had to do something. but i think in this case by targeting the search teams and taking it away, some people wonder whether that's going to really take the glue, which keeps the portal together there. the search that yahoo! did, had about three times the size of what microsoft search mainly because so many people come to yahoo! and they search there. so it really was an opportunity for yahoo! to grow out there and do more. she says this is going to enable them to concentrate on the other things that they do.

but having very strong search team and engineering that comes with that, with the search and with the really complicated engineering you have to do to be able to sell ads on searches that's very complex. for reasons we can get in to it really helps if your share grows. those engineers aren't going to be able to filter through the rest of the company to help you do these other things there. if you look at. team, it's going to take well over year for this to come to fruition with this deal. if i'm working as engineer for yahoo! now, what's my future? >> charlie: that's -- losing talent is big issue. and building on the old. >> who is one of the most talented people at microsoft, the one they talk is qi lu the guy who came from yahoo! went to microsoft yahoo! he's the technology leader that bright guy who is leading microsoft search.

>> charlie: what about aol? what's going to happen to aol? >> so, i think aol is a great example here. because you've got tim armstrong who came from google now the c.e.o. of aol he took what is a hobbled company, and is taking it in a new direction away from the sweet spot that google or yahoo! or microsoft already dominated. he's hiring hundreds of journalistjournallists which as you know from your politico piece that very, very valuable assets. is kind of crete eighting not just one part of his business creating this sort of new newsstand online. is doing lot of interesting things. why didn't carol parts do that? why didn't she double down, you can make argument that ultimately she had to do something because she doesn't have microsoft's windows money. doesn't have google search money. ultimately search is expensive. maybe she that is to get out of

the the business ultimately. but microsoft needs her search volume. why not double down, invest in search and get better deal down the line? or merge with aol within they become public? >> charlie: speaking of one final issue, anti-trust, nick. is google worried about anti-trust of the marketshare? with this deal be subject to anti-trust implications, questions? >> google is i think worried, yes, about their future in anti-trust. in this particular case with microsoft and yahoo! they argue that together they have 30% of the market. compared to google's 65%. so they think they will have strong. they will face tough strut knee. they're prepared, i think, to really fight with google. it's unclear what google is going to do.

there was talk today at this microsoft meeting i was at of google employing sort of third party advocacy groups to fight the deal. but google is the big gorilla here. it's a little challenging for them to make an argument that this is going to be anti-competitive. google has -- >> it's irony. last year, when there was threat of microsoft buying yahoo!, google wanted to make a a deal with yahoo! of the search. microsoft complained about it. and said to the justice department, successfully argued that we can't do this. because yahoo! would end its search team. there would be less competition in there. guess what. >> charlie: take over the search team. is there a feeling with the search backs getting good marks and now this deal is microsoft

is back and can deliver a lot more than people, maybe much strongering that people assumed it was say six months ago when the effort to buy yahoo! came to nothing? >> there is a feeling on the upswing. windows 7 is coming out which they hope will erase the sort of disdain ever windows vista which was a troubled operating system with technical problems. bing is doing well. they have done innovative stuff in games. some people think that they have placed too much emphasis on search and neglected mobile phones. they have pretty poor offering there. apples got the i he phone and others are doing well in that cateogry. they got some big challenges in other areas as well. >> microsoft no doubt better off today in search than it was before. but we shouldn't over estimate what their advantage is. even if they have 30% of the search marketshare. they don't have 0% of the

revenues they're giving 88% that have back to yahoo! >> charlie: nick win field, "wall street journal" near. erick schonfeld from techcrunch. steve see levy officer "wired" thank you very captioning sponsored by rose communications captioned by media access group at wgbh access.wgbh.org