Microsoft’s two-tiered approach to the net

Competing with Google and Yahoo in the new web-based world is Redmond's big plan

Bill Gates, who earlier this month hosted his 10th annual Microsoft CEO Summit, used his keynote address to show how search features being developed in Office SharePoint Server 2007 and Windows Vista will integrate with a new desktop version of Windows Live Search.

The company is reacting to challenges presented by Google and Yahoo, the rise of Web 2.0 technologies, the concept of web-based services, and how these new technologies, such as near real-time upgrades, are exposing the limitations of packaged software.

Microsoft says the digitisation of everything from business transactions to maps is quickly changing the way people work, and is fostering a combination of software and services that will define the next generation of corporate productivity.

It plans to offer a single interface that returns data collected from the desktop, intranet and internet, and infuse it with workflow and other technologies so users can act on search results.

Gates also debuted two SharePoint products, the SharePoint Search Server, a pure search engine, and Knowledge Network, an add-on that helps people find experts on topics they are researching.

“The idea is taking one basic drive-train that all these things fit into,” Gates says. “You get this cycle of decisions, actions, finding insight. You get those things feeding on each other and people, in a bottoms-up way, get involved in these processes.” He calls this “the last mile of productivity.”

He also demonstrated how services such as Windows Live Local, which provides maps, could be integrated with corporate data to aid in analysis and decision-making, showing how Microsoft plans to remove barriers between corporate data repositories and web-based information.

The demonstrations provided some of the deepest insights yet as to how Microsoft plans to link corporate software with web-based services, which it is developing to support its interest in the lucrative online advertising market dominated by Google and Yahoo.

The challenge for Microsoft is making the transition into the Web 2.0 world of services while keeping such services from marginalising Windows and Office, Microsoft’s core revenue sources.

To do that, Microsoft must develop its Windows Live services to grab more of a share of the online ad market, which Forrester Research says will grow to US$29 billion (NZ$46 billion) in 2009 from US$15 billion today.

“These Windows Live services represent the first across-the-board investment in MSN in ten years,” says Matt Rosoff, an analyst with Directions on Microsoft, a firm dedicated to following Microsoft’s fortunes. “MSN has had a lot of services, but they have never been integrated. I think Microsoft was waiting to see what MSN would become, but now they have seen how Google and Yahoo have grown.”

Getting up to speed and tying services into its corporate software won’t come cheap. Last month, Microsoft CTO Ray Ozzie, who is orchestrating the company’s services strategy, told Fortune magazine that executing the strategy will cost “staggering” amounts of money, including technology and infrastructure investments. Ozzie also told Fortune that while the economic benefits of online advertising are obvious, how the economic model applies to the enterprise market is not.

Microsoft has introduced nearly 20 Windows Live-branded services since November, many of which are makeovers of existing MSN services, or knockoffs of Google or Yahoo offerings, or those of companies Microsoft has acquired.

Earlier this month, Microsoft publicly launched adCentre, which is used to build online ad campaigns and mimics Google’s AdSense and similar technology used by Yahoo. In addition, Microsoft recently acquired DeepMetrix, a web traffic analytics firm, and plans to incorporate its product into adCentre and other online services in a similar way to Google Analytics.

Microsoft also plans additional funding for its online advertising campaign, which will rely on Windows Live to deliver targeted ads to users.

According to a reserach note by investment research and management firm Sanford C Bernsetin, Redmond plans to spend US$1.5 billion of its US$2.3 billion increase in research and development next year on developing services and competing with Google.

Microsoft’s R&D investment is designed to pull it out from behind Google and Yahoo, the number one and two companies in online-based advertising dollars. Microsoft chief executive Steve Ballmer said a few weeks ago that effort would be likely to take five years or more.

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