Microsoft: Internet Search Battle Far From Over

Microsoft badly trails Google in the key Internet search market. It holds just a 9% share, compared with Google's 60%. The software maker's quick-fix strategy, buying out No. 2 player Yahoo, went down in flames earlier this year. Ultimately, it was Google that cozied up to Yahoo.

Given the setbacks, one could hardly blame Microsoft if it gave up on the search market and stuck to applications and operating systems. But the stakes are too high. Search advertising is lucrative in and of itself -- Google's search-related revenues topped $4 billion in the most recent quarter -- and it's also a gateway for selling new-wave cloud services, such as hosted storage, e-mail, and office apps.

Microsoft, therefore, won't go down without a fight. "We're not where we want to be in terms of market share, but we're working on it," said Martin Stoddart, senior product manager for Microsoft's Live Search business group, in an interview Monday.

Indeed, through the first nine months of 2008 Microsoft committed more than $1.5 billion to acquiring search, or search-driven businesses -- including a $1.3 billion buyout of enterprise specialists Fast Search & Transfer.

What's behind the moves? Microsoft believes current search technologies and services are far from perfect. Even Google's vaunted algorithm frequently fails to yield what the consumer is looking for. "There's a great deal of room for improvement," said Stoddart, following a presentation he delivered Monday at the Mixx Canada digital marketing and advertising conference in Toronto.

As a result, Microsoft thinks the battle for control of the search market is far from over. If the company can cobble together the right combination of new technologies in the years ahead and integrate them into a user-friendly whole, then it can catch, and even overtake, Google, said Stoddart.

As an example, Stoddart points to technology Microsoft gained through its acquisition earlier this year of Powerset, a deal reportedly worth more than $100 million. Powerset specializes in an esoteric form of Web querying called semantic search. The technique uses a variety of linguistic tools to interpret the meaning of search phrases in an effort to produce the most accurate results. The method has been in development for more than 10 years.

"We needed a better understanding of user intent," said Stoddart, who declined to speculate on when Powerset's technology would be fully integrated into Microsoft Live Search.

Microsoft is also acquiring services that deliver saleable products based on certain types of search queries. The company's buyout of e-commerce portal Ciao in August gave it an offering that can potentially match Google Product Search. Microsoft's April deal to acquire Farecast provided a sophisticated database for searching, tracking, and purchasing airline tickets and predicting price movements. "We want to deliver the best search results and simplify key tasks," said Stoddart.

Stoddart also said Microsoft sees "interesting opportunities to change the value proposition between the customer and the search engine." In May, for instance, Microsoft introduced its Cashback program, which gives consumers small rebates on items purchased from certain stores via Live Search. Skeptics argue that the effort is merely an attempt to bribe shoppers away from Google.

The big question is whether such efforts will ultimately bring Microsoft into closer competition with its archrival. For Microsoft, it's a daunting task. As of August, Google led the U.S. search market with a 62% share, according to ComScore. Yahoo ranked No. 2, with a 20.5% share. Microsoft was a distant third with a share of just 9%, down 0.06% from the previous month.

Still, Stoddart insists it's early days in the search market, and that current technologies only scratch the surface in terms of the full potential of Internet search. "This has only just begun," he said.

Microsoft shares were up 3.9% to $25.99 in early afternoon trading Tuesday, following Monday's Nasdaq sell-off.