Microsoft CEO Steve Ballmer paid “lip service” to a Yahoo! deal and cleverly set the stage for acquiring Facebook, during his keynote at the Digital Hollywood Media Summit.

Yahoo!’s stock price shot up on the news of his comments, but I think the press and the markets are missing the big picture: Microsoft’s is using the “potential Yahoo! deal” as a red herring with investors. Ballmer is using Yahoo! to convince the market that Microsoft needs to buy Facebook to compete with Google, and to set a price floor of 50 billion for the acquisition.   Microsoft may be facing a situation where Facebook usage grows so fast that its costs skyrocket, creating a cash crunch, and in this difficult fundraising environment it’s best bet is just to buy Facebook.

I reached this conclusion after analyzing Ballmer’comments and talking to Microsoft execs at the media summit.  Here’s my story from the conference:

Microsoft would spend 47 billion dollars for Yahoo!’s users, not Yahoo! technology. “Small companies you buy for technology, big companies you buy for the customer base.” Ballmer explained. Defending his Yahoo! bid, he said there is still “a compelling set of economics that underpin the idea of a search partnership.”

Microsoft targets “returns to scale” when acquiring a company with a large number of users and advertisers. “The more users you have, the more you know about people’s interests” Ballmer said, and this data is something they could gain from Yahoo!.  Ballmer then pitched Microsoft’s ability to use online behavioral data to create targeted advertising and personalized experiences.

“Our goal is to play the relevance game as well as Google.” Ballmer said.  Microsoft can rise to the challenge because of its many consumer Internet technologies, online businesses and nine billion dollar R&D budget. What he didn’t didn’t say is that Microsoft still needs to buy a big user base in order to feed this engine.

Ballmer needs to make a bold move.  The “Google threat to Microsoft” has been hanging over Ballmer’s head for years. The Google threat emerged on Ballmer’s watch as CEO, and this is the first year since Bill Gates officially retired.  Will Ballmer’s defining moment be to acquire Facebook, not Yahoo!?

Reading between the lines:

• Ballmer is pitching Wall St. on the fact that Microsoft needs to buy online users
• Yahoo! is now just a red herring being used to set a 50 billion price floor for Facebook
• Microsoft’s acquisition of Facebook is imminent

Additional Media Summit Insights

I don’t know.  Maybe “you just had to be there”…You decide:

1) No Mention of Facebook at a Digital Media Conference Keynote?

In Ballmer’s keynote interview with Steve Adler, Editor-in-Chief of BusinessWeek, the two executives stayed far away from discussing Facebook. Wall Street reporters only heard “Microsoft Yahoo! Deal Still on Table!”.

Ballmer and Adler mentioned they spoke in advance about what to discuss on stage. I was the ears for you all in the audience, and their silence about Facebook was deafening.

• No mention of Facebook? Hello… its a digital media conference!

2) Facebook Skips Microsoft Panel

Facebook executive Richard Cooperstein, Head of International Business Development and Strategy, skipped a panel where he was scheduled to speak alongside Brian Hall, Window’s Live General Manager. (Note: I covered Ballmer’s big CES announcement about the Facebook / Windows Live partnership).

• Was Facebook avoiding a PR slip up from an awkward audience question?

3) Facebook on the mind of Microsoft Execs

Microsoft executives I chatted with “offline” at the Media Summit think an acquisition is likely. Note: They didn’t say it is immediate, but saw acquiring Facebook as a matter of course for Microsoft.

One Microsoft exec even cited Facebook’s out of control costs, saying Facebook’s success as a photo sharing application creates unbelievable hosting costs, and that Facebook’s movement toward video will take Facebook’s bandwidth costs beyond what can be covered by the funding provided by Microsoft. He left it at that…

• Companies don’t announce takeovers early, it raises the price of the target…

Am I hearing things?…  Do you think Microsoft is about to buy Facebook?

Editor’s Note: We wrote about the potential for an acquisition back in December of last year. Additionally, this post does not necessarily reflect the views of the editor or AllFacebook only the author of this article.