Microsoft plans big investments in search

CEO tells analysts it is a ‘two-horse race’ between software giant, Google

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updated 8:32 p.m. ET July 24, 2008

REDMOND, Wash. - Microsoft’s CEO defended the software maker’s decision to invest heavily in its unprofitable online business, but shed minimal light Thursday on specific steps it will take to challenge Google in the wake of the failed bid to buy Yahoo.

Analysts arrived for a yearly meeting at Microsoft Corp. headquarters hoping for new details about the software maker’s online strategy, on the heels of Wednesday’s news that Kevin Johnson, a key executive in Microsoft’s pursuit of Yahoo Inc., is stepping down.

But aside from an announcement that online hangout Facebook will build Microsoft’s Live Search engine into its site, executive presentations offered more cheerleading than fresh insights.

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On stage, Chief Executive Officer Steve Ballmer filled in for Johnson, president of Microsoft’s Windows and online operations since 2005, to sketch out how the software maker is thinking about investing in its online business. Last week, the company announced $500 million of additional spending for fiscal 2009, but didn’t say how the money would be spent.

(Msnbc.com is a joint venture of Microsoft and NBC Universal.)

Ballmer didn’t disclose dollar amounts Thursday, but indicated Microsoft would focus the bulk of that investment on search technology, data center infrastructure, Web indexing and marketing, and called search the mission-critical part of the online business.

Search is “a two-horse race” between Microsoft and Google Inc., Ballmer said, making only passing reference to Yahoo Inc.’s current position as the second-largest search and advertising provider. The executive said Google and Microsoft are the only two with the resources to play in what he sees as a $1 trillion market.

However, Microsoft must “ante up” to get in the game, Ballmer said repeatedly, laying out investments of as much as $1.2 billion to $1.5 billion a year, including the $500 million announced a week ago.

“Everything you read, everything you watch, everything you want to communicate, all of those experiences are going to happen over the Internet,” Ballmer said, calling search “the killer app, if you will, for this new world. How do I find the merchants? How do I find the people? How do I find the information?”

Ballmer said Microsoft has found itself in a chicken-and-egg bind that’s hampering its ability to compete with Google. To get more search advertisers, Microsoft needs more search traffic. To get that traffic, it needs more advertisers.

Microsoft’s $47.5 billion bid for Yahoo, which collapsed in May, and its later attempt to make a smaller deal for Yahoo’s search operations, was one way to solve that pickle, Ballmer said.

CONTINUED: "There are alternate approaches"

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