Microsoft CEO Steve Ballmer refused to rule out a possible acquisition of Yahoo although he pointed out that the company doesn't usually make large acquisitions.

Ballmer was asked about the acquisition rumor at the Software 2007 conference in Santa Clara. He was asked by moderator M.R. Rangaswami of Sand Hill Group whether Microsoft would acquire a company with a "$40 billion or $50 billion" valuation, a reference to published reports last week that Microsoft was in negotiations earlier this year to acquire Yahoo for about that amount.

Microsoft never discusses potential acquisitions, Ballmer said, but added, "We have not, by default done a lot of big acquisitions ... but we wouldn't rule it out."

Ballmer also discussed Microsoft's response to the "software as a service" trend in which businesses access software applications through the Internet, usually for a monthly subscription fee, rather than buy a licence to install software on a computer. The latter is the business model that Microsoft perfected over the last 32 years.

Instead, Ballmer promoted "software and service" that would retain the licence model and provide services.

Although software has evolved into a service available in what he called "the Internet cloud," he cited consumer electronics as an example of another model. Apple's iPod or Motorola's Q cell phone are "software-defined experiences," but the "monetization model" for them is in the hardware, Ballmer said.

Microsoft recognises that market dynamic. As the company evolves into the software and service model, "we'll also continue to see evolution not only in the way we build our software and deliver it, but in the way ... we monetize it," he said.