September 18, 2003

Microsoft is still trying to drive growth by investing in everything from small business software to video games and now has quietly set its sights on a new industry: searching the Internet.

Chairman Bill Gates, Chief Executive Steve Ballmer and a handful of other executives sat down in February to answer a question asked countless times before in the world's largest software maker's 28-year history. Should Microsoft build or buy? What they decided was to build technology that would eventually surpass Google Inc.'s ability to sift through the Web and return results relevant enough to make it the top Internet search destination.

"The decision to build or buy came down to our ability to innovate," said Kirk Koenigsbauer, strategy manager at Microsoft's MSN Internet portal. "Our ability to innovate is predicated on our ability to own the platform," he added, a clear sign that Microsoft thinks it can only beat Google if it owns the technology.

For now, however, Microsoft won't comment on how widely it plans to use search technology. While it is a company-wide effort, Koenigsbauer said that any developments will be led by MSN and used to enhance the portal. But analysts have interpreted the decision to build as a sign that Microsoft has greater ambitions for search, including plans to make it part of the Windows operating system, the company's main cash cow.

"Any time Microsoft builds something into the operating system, they don't want to get that from anyone else," said analyst Matt Rosoff of Directions on Microsoft, an independent research group based in Kirkland, Washington. Koenigsbauer, who attended the February meeting, declined to discuss Microsoft's plans for search beyond MSN. Nor did he disclose the number of people or amount of money the company will invest in the project.

Jupiter Research analyst Joe Wilcox, however, said that with its large concentration of software talent and nearly $50 billion in cash, Microsoft could out-invest any competitor for years. "Look at the so-called browser wars," he said. "In about 18 months Microsoft released three versions of the Internet Explorer and caught up with Netscape."

The company is "very, very serious about search," he added. At the core of Microsoft's decision is a belief that search technology is still in its infancy. "Search engines are doing a good job but not a perfect job," said Koenigsbauer, adding most search results today "don't deliver the results people are looking for."

Search results tailored to individual users based on a history of their interests and searches is one area that Microsoft is looking at, Koenigsbauer said. Analysts said such a service would be ideal for Microsoft since it could leverage its control over the Windows operating system, which runs on more than 95 percent of the world's PCs.

Moreover, they said Microsoft's real motive is to build search into its various software products and most likely into the next Windows version, which is code-named Longhorn. Gates has promised that Longhorn, which is expected to launch in 2005 or 2006, will include database technology to make it easier for users to track and find information on their computers.

"Long-term, all roads lead to Longhorn," Wilcox said. This isn't the first time that Microsoft has put the search market in its crosshairs. In 1997, the company looked into developing search for MSN, but decided to team up with Inktomi instead.

"We'll continue to partner with Inktomi in the near-term but at some point we'll go on our own," Koenigsbauer said. That also brings into question MSN's alliance with Overture Services Inc., OVER.O a leader in search-based advertising. Koenigsbauer said the partnership is continuing for the "medium-term," and Microsoft is happy with its relationships with both companies, which are set to become part of Yahoo Inc. YHOO.O , an MSN competitor.

Yahoo, under pressure from Google, has been buying search technologies and marketing its services in television commercials to attract visitors to its site.

Source: Reuters

        

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