Inside Microsoft's war against Google

Google isn't giving any ground. It's pushing hard into the display business, even as it builds on its lead in search. In March the company closed on its $3.2 billion acquisition of DoubleClick, a leading player in placing banner and video ads on other companies' Web sites. Google plans to combine DoubleClick's display technology with its own technologies—and its broad base of advertisers—to establish a stronger position in the market. "Google now has the leading display ad platform," said Google CEO Eric Schmidt at the time, adding that together the companies will be able to "dramatically improve the effectiveness, measurability, and performance of digital media." Google also bought YouTube, the top video site on the Web, although it hasn't generated much revenue from it so far.

There's plenty of skepticism that Microsoft can make real headway even in display advertising. The company has floundered in the online ad business so far. Besides getting trounced by Google in search, Microsoft has flummoxed consumers with a muddle of online products, including its dueling MSN and Live brands. The Yahoo deal would have more than doubled the size of Microsoft's Web audience, to north of 250 million visitors a month, and tripled its online ad revenues, to $10 billion. Without Yahoo, the company is expected to generate $3.3 billion in online advertising this year, compared with Google's $22 billion. Microsoft has lost $1.5 billion in its online division over the past three years. "They're behind the eight ball," says Charles Di Bona, an analyst at Sanford C. Bernstein & Co.

Persistent competitor
Still, Microsoft is a fearsome competitor, with nearly unlimited financial and engineering resources. It has proven its determination to take down upstarts again and again over the years, from the Web browser market to the market for mobile-phone software. "We're very persistent," said Ballmer at a wireless conference last year, "If we don't get it right, we'll keep coming and coming and coming."

Plenty of advertisers would like to see Microsoft succeed, if only to blunt Google. Although they appreciate the effectiveness of Google's search ads, they're nervous about one company dominating the online advertising market. "Competition from an advertiser's perspective is a really good thing," says Rob Master, director of media for North America at consumer products giant Unilever Group.

For Ballmer, this isn't just about taking Google down. Indeed, it's hard to overstate how important it is for the company to master online advertising. While Microsoft is phenomenally profitable today, adding $1 billion each month to the cash hoard from its lucrative software business, it faces a serious long-term threat. The company's fortunes have been built on software that runs on PCs, especially its Windows operating system and its Office word-processing, spreadsheet, and e-mail programs. But that kind of software is beginning to shift online. People with pretty much any kind of computer can go to the Web and use applications for things like word processing and communication. The programs are typically available for free, funded by online advertising. Google is offering a number of these programs, and there are a flock of others doing the same, such as upstart Zoho.

So far, the shift to online software is more of a drip than a flood. The programs often don't work as smoothly as, say, Microsoft Office, and they can require some tech savvy to use. But the shift seems sure to accelerate in the years ahead, and no company has more to lose than Microsoft. If the tech giant doesn't develop a strong ad business to pay for programs it will eventually have to offer online, it will face big trouble. "Microsoft's biggest fear is that once you start putting Google [software programs on the Internet], then the price Microsoft can charge for its software will erode markedly," says David B. Yoffie, a professor at Harvard Business School. "Just the threat means that Microsoft has to be able to offer advertising as a choice."

That's why there are few jobs more important at Microsoft than Lorizio's. Kevin Johnson, president of the division that includes Microsoft's online operations, says the salesman and his team are "front and center" in the battle for the online ad market. Unlike the stereotypical Microsoftie—a frumpy, maladjusted code freak—Lorizio is every bit the polished professional. He's tall and lean, a gym rat when he's on the road. A salesman at Yahoo before he joined Microsoft in 2005, he favors starched shirts and designer shoes.

He grew up in an Italian Catholic family just outside of Boston. His dad ran a trucking business, and his mother taught him to cook classic dishes like braciole. The 43-year-old still lives in Boston, though his primary office is in New York. And when he talks, the New Englander in him shows through, turning words like park into "pahk" and idea into "idear."

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