Microsoft CEO Steve Ballmer hasn’t ruled out a possible acquisition of Yahoo but says that Microsoft usually doesn't make acquisitions as large as the rumoured $50bn deal for the internet company.

Ballmer was asked about the acquisition rumour, at least indirectly, during an interview before an audience at the Software 2007 conference in California on Wednesday.

After giving a presentation about Microsoft's enterprise software, Ballmer was asked by moderator M.R. Rangaswami of Sand Hill Group about Microsoft's acquisition strategy. While not mentioning Yahoo, Rangaswami asked Ballmer if 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 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."

Rangaswami did not ask about subsequent rumours about some kind of partnership or collaboration between Microsoft and Yahoo, short of an acquisition. The rumoured deal is seen by analysts as an attempt by Microsoft and Yahoo to tackle tackle Google's growing dominance of internet advertising.

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 mobile phone are "software-defined experiences", but the "monetisation 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 monetise it," he said.