From: mike 


http://www.businessweek.com/magazine/content/07_14/b4028045.htm

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Its stumbles on the Web could open the door for rivals to come after its
core business



Time has always seemed to be Microsoft Corp.'s (MSFT ) ally. In the company
lore, the software giant takes three cracks at a market before establishing
supremacy. The Windows operating system stumbled for years before achieving
domination; so did Microsoft's server software.

But when it comes to developing a viable Internet strategy, Microsoft may
be running out of time. It has long trailed Web leaders Google Inc. (GOOG )
and Yahoo! Inc. (YHOO ), in the use of its search engine and in search-ad
sales. Now it's losing ground. In February, 2005, Microsoft's MSN Search
accounted for nearly 14% of all Web searches, compared with a 46% share for
search leader Google, according to research firm Nielsen//NetRatings. Just
two years later, Microsoft's rebranded Windows Live Search has a 9.6%
share, compared with Google's nearly 56%. That amounts to nearly 300
million lost searches per month. The sense that Microsoft is slipping was
reinforced with a recent shuffling of top executives.

Microsoft's search problems present it with a huge quandary. The company's
revenue from online advertising is relatively small--just $836 million in
the first six months of the fiscal year ending in June, vs.
$5.9 billion in sales of the Windows PC operating system. But the Web is
increasingly the place where computing gets done. Everything from e-mail to
customer-relationship management applications is moving from programs on a
PC to services on the Net. Meanwhile search advertising is exploding: Piper
Jaffray & Co. (PJC ) says it should hit $44.5 billion by 2011, up from
$15.8 billion in 2006.

If Microsoft can't keep pace, it risks seeing its Windows and Office
software franchises erode as Google and others launch Web-based rivals.
"It behooves Microsoft to be there," says Charles Di Bona, an
analyst with Sanford C. Bernstein & Co. (AB ). "If they don't get
there, it gives others a platform from which to attack Microsoft's core
business."

Just as troubling, Microsoft's search problem reflects its approach to new
markets in general. It spends little time focusing on tiny, emerging niches
that generate little, if any, sales. But those are precisely the markets
that can quickly blossom on the Net into meaningful businesses. "Bill
[Gates] and Steve [Ballmer] and the leadership don't understand the value
of small things," says Robert Scoble, a former Microsoftie whose blog
recently took the company to task for its Web missteps. "That cripples
their entire Internet strategy from the start."

Microsoft has already squandered much of the time it spent developing the
search business. Until February, 2005, it licensed search technology from
two companies, Overture and Inktomi. Then it launched a homegrown search
engine, saying at the time that it would win over Web searchers with
results that were more relevant than Google's. Last fall, Microsoft Chief
Executive Steven A. Ballmer told BusinessWeek editors and reporters:
"I think in the next three years, people will say, 'Hey, these guys
are really a major player in online consumer and advertising.'"

There are a number of reasons that hasn't happened yet. First, Google has
performed near flawlessly. Early on, Google used its simple Web site to
cement the impression that to search is to "Google." And because
more people search there, Google has more data with which to target
relevant ads. The result: By some estimates, Google nets at least 50%
higher revenue per search than No.2 Yahoo and other search sites--allowing
Google to keep investing more in improvements. For instance, on Mar. 21 it
revealed a new program to give advertisers the opportunity to pay only when
someone responds to an ad--by purchasing a product, filling out a form, or
some other action--rather than merely when they click on it. That may be
more attractive to advertisers who want concrete results.

Meanwhile, Microsoft has managed to confuse searchers. It elbowed into the
search business on the back of its MSN franchise, a modestly successful
online services business known mostly for its dial-up Internet access
operation. Then Microsoft muddled its message in November, 2005, when it
launched the "Live" initiative designed to turbocharge Web
services, including search, with programs running on PCs. But Microsoft
continued to use the MSN prefix on some Web sites, such as its portal and
shopping page, while using Windows Live for its e-mail and search services.
"You've got people who know Microsoft really well who don't know what
Live means," says Danny Sullivan, editor-in-chief of
searchengineland.com, which covers the business.

For its part, Microsoft says Windows Live services are those users can
personalize, while MSN ones are preprogrammed content. Concedes Microsoft
spokesman Adam Sohn: "We could have been a little crisper." Steve
Berkowitz, who was hired last May to rev up the Web business as senior
vice-president for Microsoft's Online Services Group, declined to comment.

EXECUTIVE SHUFFLE
With product challenges comes the inevitable Microsoft executive shuffle.
Blake Irving, vice-president of the Windows Live Platform group, sent out
an e-mail to his colleagues on Mar. 5 announcing plans to leave the company
later this year to travel the world. Three days later, Christopher Payne,
vice-president of Windows Live Search, who spearheaded search development
efforts, announced he would be leaving to launch his own company.

Then on Mar. 21, Microsoft created a job at the same level as Berkowitz' to
oversee the search and Web ad business. The idea is to increase the urgency
of search by moving it up in the organizational structure. Satya Nadella, a
vice-president who just six months ago took over the company's
small-business software unit, will run the combined group, reporting
directly to Kevin Johnson, president of Microsoft's platform and services
division.

There's plenty of pressure to make this fix stick. Last May, Microsoft
launched adCenter, a technology that takes demographic data (gender, age,
Zip Code) of Web surfers who sign up for various MSN and Windows Live
services and lays it over their search queries. That lets advertisers
tailor ads to specific types of customers and should allow Microsoft to
charge more. But the strategy packs a punch only if Microsoft boosts its
share of search.

Microsoft could still do that. It is betting search will move beyond the
all-purpose Web site where users plug in a query for any bit of
information. That's not a bad idea; many analysts believe the search world
will fragment into vertical sites that focus on niches. The eye-popping
success of YouTube Inc., now owned by Google, is one example. More than
just a place to show off your creations, YouTube has become a place to
search for videos. Microsoft announced plans in February to buy Medstory
Inc., a health-care search engine for consumers. And on Mar. 14 it said it
would buy Tellme Networks Inc. for what one analyst estimated to be more
than $1 billion. Tellme should give Microsoft a leg up in the emerging
market for voice-activated search over a mobile phone.

Microsoft is also trying to nudge its massive customer base over to its
search engine. On Mar. 13 it struck a deal with PC maker Lenovo Group
(LNVGY ) to preload machines with the Windows Live toolbar, which leads
users into its search engine. Microsoft also launched a "trial
program" where it offers some large businesses service and training
credits--from
$2 to $10 per computer--to get employees to use Windows Live Search.

Sure, that amounts to buying business. But with all it has at stake in
search, Microsoft will take it any way it can.
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 /m

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