Microsoft, Google may go head-to-head

Microsoft's path to expand the Windows empire is leading directly to search king Google.

The software company this month quietly launched a new search program called MSNBot, which scours the Web to build an index of HTML links and documents. The homegrown system--which performs robot functions previously left to Inktomi and other partners--may pose a significant threat to Google if Microsoft fulfills its promise to make the program a cornerstone of its overall PC and services strategies.

MSNBot is believed to be the first step in a multiyear plan to build new search technology that bridges Microsoft's home and business customers. Company executives hope the program will eventually prove to be the elusive technology that binds its various Web sites, applications and, of course, the dominant Windows operating system.

Microsoft could then connect the search engine of its MSN portal to new file technology planned for the next version of Windows, code-named Longhorn, which will make it easier to search e-mail, spreadsheets and documents on PCs, corporate networks and the Web. The result would be a powerful technology reaching from the desktop to the greater Internet that could displace Google as the Web's leading search engine.

"What Google has done in terms of doing a great end-user experience has led us to basically go back and redouble our efforts," Microsoft Vice President Yusuf Mehdi, who oversees the MSN division, said at a conference held by investment bank Goldman Sachs last month. "We are investing a lot to build what we expect and hope will be the best-in-class search service in the near future."

The move begs obvious comparisons to earlier Microsoft campaigns, including the infamous undoing of Netscape Communications in the browser market. But Microsoft is not trying to unseat a leading rival simply to catch up with a market it had underestimated, as it has in previous battles. The company would be moving in its current direction even without the presence of Google, because search is expected to evolve into a pivotal part of its business.

Nevertheless, Microsoft may use some familiar tactics in the search market, most notably by integrating and distributing the technology throughout its many products and services. The company could, for example, embed connections to related Microsoft search and mapping functions directly into Word documents or Web sites built with Windows development tools.

The goal is vintage Microsoft: Keep customers within the Windows universe; build demand through popular functions such as search; and bypass the need for services from competitors. This strategy, in theory, will give consumers more incentive to buy Windows software and use Microsoft services, while taking away revenue that Google receives for search results.

"The fact that Longhorn is on the horizon raises questions to whether search services will be integrated into the Longhorn experience and what the ramifications will be to other folks," said Michael Gartenberg, an industry analyst at Jupiter Research. "Microsoft has long demonstrated they don't have to be best at something, but they have to be good enough for people to use their default settings."

The search initiative is part of a broader Microsoft plan to revamp all of its major product lines, including Windows, MSN, the Office package of business applications, and server software. It is a key business strategy with a mission that's as unwieldy as its name, "Longhorn Wave Innovation."

Stirring up search

The value Microsoft places on search became apparent more than a year ago when the company began outlining plans for Longhorn, which is scheduled to debut in 2005. The operating system will include a central engine that can search a PC's morass of Word documents, Outlook e-mailings, Excel spreadsheets and PDF (portable document format) files with a single tool--a function that has escaped the PC industry, and Microsoft in particular, for decades.

"Microsoft's target will be to create little perceived difference between Web search and local search," said Chris LeTocq, an analyst at Guernsey Research.

Neither Google nor Microsoft made executives available for this report. However, in a recent interview with The Seattle Times, Microsoft executive Jim Allchin said condescendingly: "Google's a very nice system, but compared to my vision, it's pathetic."

Google, for its part, may have to make some critical decisions to avoid a fate similar to that suffered by other Microsoft victims, which have been forced out of their core businesses and into unfamiliar territories. Pressure from Microsoft pushed browser maker Netscape to the Web portal market, for instance, and RealNetworks from media players to subscription content services.

"The big question is: Will Google turn into a portal?" said Matthew Berk, an analyst with Jupiter Research. "The truth of the matter is, they have no idea. They see one market and go after it. They build things literally one day at a time."

Microsoft CEO Steve Ballmer stressed the role of search in the company's strategies as part of an all-hands memo sent to Microsoft employees this month. In discussing new products and marketing related to Longhorn, Ballmer identified search as one area where Microsoft will offer "new end-user functionality and services." As part of his "integrated innovation" message, he said the company needs to "reach out broadly" through search, consumer services and other avenues to grow.

The need for diversity is well warranted. Although Microsoft has more than $40 billion in cash reserves, it has long depended primarily on two products, Windows and Office, to generate the bulk of its profits. The company has had mixed results at best in repeated attempts to establish MSN as a money-making consumer venture, but the company believes that more capable search services may be the key to the portal's success.

The business of commercial search has become a cash windfall not only for Google and rival Overture Services, but also for partners such as MSN, America Online and Yahoo. Google and Overture share revenues with their distribution partners every time someone clicks on a sponsored link. But Google's advantage over Overture stems from its role as a commercial search provider and a highly trafficked engine, allowing it to receive higher margins while decreasing its reliance on portal partners--a model Microsoft is hoping to replicate.

Digging up cash

The numbers show why. Overture contributes heavily to the bottom line of MSN, which receives revenue from the search service in return for exposure on the portal's site. Although Microsoft doesn't break out these figures, MSN executives have compared them in scale with Overture's contribution to Yahoo, which amounted to $54 million last quarter, or 20 percent of its total revenue.

At the same time, while commercial search pays the bills, algorithmic search keeps the customer happy. MSN has deals with Inktomi and LookSmart to power its Web search results, though the future of its deal with Inktomi has been questionable since Yahoo acquired the company late last year.

"At this point, we are interested in developing the technology in-house," MSN group product manager Lisa Gurry said in an interview last week.

If Microsoft holds true to form, signs of its custom search engine will soon proliferate. As the company proved with browsers, media players and so many other products, it has myriad distribution points at its disposal and can exploit them at will to increase usage and market share. Already, sources close to the company say that it plans to incorporate a search toolbar into the Internet Explorer browser that will use MSN's new engine.

Still, for all its resources and influence, Microsoft has yet to find a runaway winner in consumer services--and, in fact, continues to suffer from the failures of its last high-profile initiative launched three years ago. A planned consumer-oriented Web service, called .Net My Services, was eventually shelved because of market confusion, a lack of partners and other factors.

This time, some industry veterans believe, Microsoft may finally have learned the painful lessons of its many miscalculations on Web-related businesses, which date back to the early 1990s when the software giant initially failed to grasp the significance of the Internet as a whole.

"They are not going to make the same mistake twice. They are going to cover all the bases and make sure they have a play in every piece of the Internet," said Laura Didio, an analyst at The Yankee Group.

"They do not like coming in second."