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Microsoft to Keep Spending Big on Search

Microsoft search spending
UPDATED: For large stockholders and analysts who would like Microsoft to slow down its spending on its as-yet-unprofitable portal and search businesses, the company has one message: No way.

Company executives stood their ground despite repeated questions by analysts questioning Microsoft's huge investments in its money losing Online Services Business.

At Microsoft's (NASDAQ: MSFT) annual financial analysts meeting Thursday, senior corporate executives from CEO Steve Ballmer on down the ranks said that continued investments in areas such as online advertising and search will continue, as well as spending on consumer technologies such as Windows Live.

"If we're going to be in this game, we're going to have to ante up," Ballmer told the crowd of financial bigwigs attending the meeting, which Microsoft holds annually following its year-end results to provide a briefing for influential stock-pickers and analysts.

Just in the area of online search, Microsoft needs to spend between $1.2 billion and $1.5 billion in fiscal 2009 to help the company "reinvent" search, Ballmer said. That's because much media is not yet in digital form, and neither is most advertising.

"All media are becoming digital," Brian McAndrews, senior vice president of the Advertiser & Publisher Solutions Group, told the audience.

While Microsoft is making its case for continued spending in advertising, search and media, it's doing so just days after posting another sizable loss for the unit overseeing its Web portal, ad services and search businesses.

Microsoft last week reported record revenues and earnings for fiscal 2008. But its Online Service Business division posted a $1.23 billion operating loss on revenues of $3.2 billion -- double the loss it experienced a year earlier.

Making its case

A common criticism at these affairs has been that the company spends too much on R&D. This year, executives admitted that online ads, search and consumer technologies are speculative and highly costly areas.

But in the long run, those segments are important, they said.

Ultimately, the company sees search as "at least a trillion-dollar opportunity," Ballmer said, and an area that the company's executives view as crucial to Microsoft's long-term future.

"The best information you get from a consumer is if you know what they're searching for," Ballmer added.

Microsoft executives shied away from providing much detail on one particular area of search-related spending, however.

While declining to talk at length about the company's failed bid for Yahoo (NASDAQ: YHOO), Ballmer also reiterated that the play was a "tactical" move that began to look less appealing as the negotiations dragged on.

One of the factors that Microsoft said forced its hand in abandoning the bid is the pending change of administrations following the November elections. The company did not want to have to deal with two administrations over its proposal to acquire either all or part of Yahoo, it said.

Liddell took a more value-driven view of the collapsed plan.

"We take the view that Yahoo is a declining asset," Liddell said. "What's changed is time passed and Yahoo's value eroded."

[cob:Special_Report]To highlight Yahoo's diminished importance to Microsoft -- or perhaps, to put a happier face on the failed deal in front of Microsoft's biggest investors -- Ballmer described the online search and advertising business as a "two-horse" race between Google (NASDAQ: GOOG) and Microsoft.

However, Ballmer said that talks with Yahoo may continue.

"Does that mean that nobody will talk to each other again? I think that's a 'no,'" he added.

Ballmer also briefly discussed Wednesday's resignation of Kevin Johnson, president of Microsoft's Platforms & Services division, who is leaving to run Juniper Networks.

At the same time Microsoft announced Johnson's departure, Microsoft also said his unit would be split into two groups -- Windows and Windows Live, and Online Services, both of which will report to Ballmer.

The Windows and Windows Live group will be headed by three senior vice presidents, Steven Sinofsky, Jon DeVaan and Bill Veghte. Satya Nadella, another senior vice president, will continue to lead Microsoft's search, MSN and ad platform engineering.

Besides a number of demos, there were a few product-related revelations during the analysts meeting as well.

For instance, Veghte said that Internet Explorer 8, an early version of which was shown off recently to Web developers at Microsoft's Mix08 confab, will begin broad beta testing later this summer with plans to ship this year.

Additionally, Chief Software Architect Ray Ozzie told attendees that much of the company's software-plus-services initiative will be fleshed out by this time next year.

"Over the course of fiscal 2009, you'll see the whole software-plus-services vision play out and I think you'll be pleased," Ozzie said.

Meanwhile, executives said more than once that Windows 7 – the follow on, and perhaps the lifesaver, for Windows Vista – is still on track for release in late 2009 or early 2010.

Asked about whether Windows 7 will fix application incompatibility problems that have slowed Vista adoption, Ballmer quipped, "We're hard at work and the design goal is compatibility from the get go."

(Updated to add further comments from Microsoft executives.)