Microsoft's Ballmer Boasts of Search Engine Progress

Two years after conceding his company erred in failing to develop its own search engine, Microsoft Corp. (MSFT) Chief Executive Steve Ballmer boasted Thursday of progress in fighting industry leaders Google Inc. (GOOG) and Yahoo (YHOO) Inc.

Microsoft has, in a relatively short time, advanced in two key areas by creating its own search engine and online advertising platform.

But the software maker still has plenty of work to do — and Ballmer admits that he'd have preferred to have gotten started sooner.

"It would've been nice, there's no question," Ballmer said Thursday in an interview with The Associated Press.

Still, Ballmer defended the company's progress so far.

"I like to tell our people, 'I like the years when we make at least a year's progress in a year,'" Ballmer said. "I think we've made more than two years' progress in the last two years, so I'm excited about that. And yet, we have a whole lot more innovation that we want to bring to these areas."

Ballmer spoke at the same online advertising conference where two years ago, he described his company's search error as "the thing I feel worst about over the last few years."

Redmond-based Microsoft only recently began using its own technology for delivering search results, and it remains substantially less popular than Google and Yahoo. Nielsen/Net Ratings reported that Google had 49 percent of the U.S. search market share in March, while Yahoo had 22.5 percent and MSN Search had 11 percent.

Microsoft executives have repeatedly argued that the industry is just beginning to understand the potential of Internet search and that Microsoft is in it for the long term.

"I think we'll look back on this as the DOS era of search," said Christopher Payne, a corporate vice president in charge of Windows Live Search, referencing the very early days of the computer operating system.

Microsoft Chairman Bill Gates, speaking at the same conference Wednesday, conceded that Google has done "a great job" on building a search engine and advertising platform.

But he insisted Microsoft's effort is strong.

"I think this is one of the rare cases where we're being underestimated," Gates said.

On Thursday, Ballmer reiterated the company's dedication to improving its search position.

"We are hardcore about having the best search offering ourselves, with our partners," Ballmer said. "We'll just keep at it and at it and at it, and I have confidence in our ability to build a loyal user base."

Getting more people to use its search engine — and potentially see advertising on it — will be one way that Microsoft can succeed with its online advertising platform, adCenter.

But Ballmer said the search engine is just one piece of the puzzle.

The ambitious platform aims to eventually let companies advertise across multiple Microsoft products, including television and online video games, so Ballmer said the company's success also depends on things like drawing more people to its MSN portal, e-mail and instant-messaging offerings.

Microsoft is pouring money into its MSN online arm, which it sees as a key area of growth. Ballmer said Thursday the company plans to spend $1.1 billion in research and development for that unit in its fiscal year ending in June 2007, up from $500 million in the 2005 fiscal year and $700 million in the current fiscal year.

Ballmer said Microsoft's No. 1 research and development priority is to develop ways to deliver software as a service over the Internet, rather than in more traditional ways such as a CD in a retail box.

That fast-growing and highly competitive field includes everything from consumer offerings such as e-mail and photo-sharing to business applications that can be accessed online.

Companies ranging from Google to Inc. have found success in this field, while Microsoft still mostly delivers its software in more traditional ways. But Ballmer said Thursday he doesn't think the company is lagging its competitors, noting that Microsoft has strong technical expertise and a loyal online user base with products like its MSN Messenger.

Microsoft's plans to substantially increase overall research and development costs through the company's next fiscal year surprised analysts last week and sent Microsoft shares tumbling.

In the wake of Wall Street's reaction, Ballmer said he realized he needs to do a better job of persuading investors to be optimistic about how the increased spending could boost long-term growth.

"I have tried to be clear with our shareholders ... that there was a whole bunch of new innovation that we were investing in that I thought could drive growth," Ballmer said. "I think maybe people heard me more about the opportunity to drive growth than they heard me about the need to invest to drive growth."

Microsoft shares rose 27 cents, or 1.2 percent, to close at $23.44 in trading on the Nasdaq Stock Market on Thursday, a day after the stock slid to a new 52-week low.