Image: Steve Ballmer
Joerg Sarbach  /  AP file
Steve Ballmer, CEO of Microsoft, addresses the media during a news conference at the CeBIT in Hanover, Germany. Without the influx of Web traffic Microsoft bet would quickly follow a Yahoo buyout, the software maker is facing a long slog if it wants to turn its money-losing online services business into a Google-killer.
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updated 5/8/2008 6:26:46 PM ET 2008-05-08T22:26:46

Without the influx of Web traffic that Microsoft bet would quickly follow a Yahoo buyout, the software maker is facing a long slog if it wants to turn its money-losing online services business into a Google-killer.

Since it withdrew a $47.5 billion bid for Yahoo Inc. after talks collapsed, Microsoft Corp. has offered little insight into what "Plan C" will entail. In that vacuum, experts are scraping the bottom of the barrel for ideas, with many concluding that they actually don't know what could get Microsoft out of its pickle.

It is not clear Microsoft can do this alone — and in fact, it's not always clear what "this" is. Some analysts say Microsoft must increase its search traffic to attract advertisers. Others believe Microsoft should concede that market to Google Inc. and find success elsewhere — leapfrogging rivals in areas such as display and mobile advertising.

All that is clear is Microsoft must come up with a Plan C soon, after acknowledging that its Plan A of going solo was troubled, forcing it to turn to Plan B of acquiring Yahoo.

Part of the problem analysts face predicting Microsoft's next moves is that the company has already tried the obvious tactics. It built its own search-ad platform from scratch and spent $6 billion to buy a major online advertising company, aQuantive.

Microsoft overhauled its search engine technology, and most analysts agree that its results are at least as good as Google's. It tweaked the design of its Live Search service to become more like Google. It touted its improvements on billboards and in glossy magazines.

Last year, the company seemed confident that it wouldn't take much to convert the hundreds of millions of Hotmail users, Xbox Live-connected video gamers and Windows Live Messenger chatters into a flood of search traffic.

"We've done a lot of work to get clear strategy and focus," Kevin Johnson, who heads the division that includes online services, told a gathering of financial analysts in July. In November, Johnson detailed aggressive goals that included capturing 30 percent of U.S. search queries.

By January, though, it was apparent Microsoft's efforts weren't working. Its share of U.S. search queries was stuck under 10 percent, behind Yahoo's 22 percent and Google's 58 percent. Microsoft responded by proposing to buy Yahoo for its traffic and search-savvy engineers.

That bid unraveled Saturday, and Microsoft is running out of options. Many expect Microsoft to make another run at Yahoo, or to buy other companies, such as Time Warner Inc.'s AOL, the online software company Salesforce.com Inc. or Facebook, the No. 2 online hangout in which Microsoft already owns a 1.6 percent stake.

For now, Microsoft seems focused on going alone, though the company declined to make executives available to talk about its online plans. In Japan, Chairman Bill Gates told reporters Wednesday that "at this point Microsoft is focused on its independent strategy."

Just two days before Microsoft Chief Executive Steve Ballmer walked away from the Yahoo bid, he outlined to employees a four-part plan to "build the most interesting position in the world in online advertising, media, and the kind of social connected search and media experiences that go along with that."

First, Microsoft must do the basics — a huge search index, lots of storage in the cloud for users — very well.

It must innovate in "quick waves" that force Google to play catch-up.

It must "change the basic experiences" of communication and search.

And it must gain scale.

"We have a strategy and we have ideas in each one of those categories," Ballmer told the employees.

The promise fell flat with analysts who had heard it so recently before.

Part of Microsoft's trouble is all the attention that Google gets. After all, no one uses Microsoft as a verb for search.

Danny Sullivan, editor in chief of the industry news site SearchEngineLand.com, said Microsoft's Live Search has innovative features people would really like.

Its image search results keep growing as users scroll, eliminating the need to click to the next page. Video search thumbnails start playing when the user mouses over them. Microsoft has also launched specialized searches for health and medical information and added some fun features for the celebrity-obsessed.

But nobody knows about that, Sullivan said.

"What's Live Search? You don't even know that it's Microsoft," he said, recommending Microsoft raze the Live brand and rename it Microsoft Search.

In the meeting with employees, Ballmer acknowledged that Microsoft needed to invest in marketing the brand. But when Sullivan considered the idea of more ad campaigns to spread the Microsoft search gospel, he concluded that easing Google's grip on searchers would take more than a good tagline.

When people ditched AltaVista for Google, it was because AltaVista's results were getting worse, Sullivan said, and people sought out a replacement. Unless Google loses sight of its search technology, there's no real reason for people to break their habit.

Microsoft's strength in display advertising, its efforts with its Tellme voice search division and mobile search, and its presence in video game advertising could bolster Microsoft's online business despite its No. 3 position in search.

"It's not just about search, it's about changing the game of advertising," Goldman Sachs analyst Sarah Friar said.

As an example, Friar envisioned using Microsoft's near-ubiquity in the workplace and its recent acquisition of Fast, an enterprise search company, to bring digital advertising into new contexts beyond surfing the Web.

Charlene Li, an analyst at Forrester Research, also believes Microsoft should look beyond search, perhaps pushing ahead with plans to deploy software over the Internet and to get marketers to use a Microsoft platform for mobile and display advertising.

"The problem with a definition of success (is that) when this whole acquisition thing began, it was beating Google, and I think that's the wrong battle to fight," Li said. "I'd rather see them hit Google where it's weak."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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