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Why can't Microsoft make money online?

By Adam Lashinsky, senior writer
Last Updated: November 26, 2008: 12:30 PM ET

"You've had Ballmer and [chairman Bill] Gates telling the world for years that online success is critical for Microsoft," says Benjamin Schachter, an online-ad analyst with UBS. "But they don't say what success is."

In part, that's because Microsoft is so busy playing defense against Google. Yet Microsoft hasn't done a great job with that either. Even as it has spent money on data centers and marketing gimmicks like giving cash back to users of its search engine - the online equivalent of banks handing out toasters for opening accounts - Microsoft continues to lose share to Google.

Microsoft's portion of U.S. search queries was 8.5% in September, according to comScore, down from 10.4% in January 2007. During the same period, Google's share rose from 53% to 63%. And Facebook, MySpace, Google's YouTube, and other, newer sites have reduced MSN to also-ran status in terms of web popularity.

That at least five high-ranking Microsoft executives have a piece of the online portfolio illustrates another part of the company's predicament. Microsoft doesn't speak with one voice when it talks about the Internet.

Of the current crop of leaders - Veghte, Sinofsky, Nadella, Mehdi, and McAndrews - all but McAndrews cut their teeth on the software business, not the web. McAndrews is very much an outsider at Microsoft, though, right down to having kept his old office in downtown Seattle, which is culturally a world away from headquarters in Redmond.

What's more, the five all report to CEO Ballmer, who temporarily took over from Kevin Johnson - who has yet to be replaced. Now that Yahoo's board has retained a search firm to find that company a new CEO, two of the highest-profile online jobs in the industry are vacant, which can only complicate matters for Microsoft.

Microsoft, of course, has plenty going for it - namely its balance sheet. With $21 billion in cash, the company can afford to spend money on its online operations for years to come. Its overall revenues grew by $9 billion last year, a testament to those dominant franchises Ballmer alluded to in his comments to analysts: Windows, Office, and its server software.

Microsoft also has a well-deserved reputation for never giving up. Indeed, it continues chipping away at initiatives and deals to improve its online fortunes. It recently signed a deal for its search engine to be installed as a toolbar with Sun Microsystems software, the kind of arrangement that Google has used to great effect with manufacturers like Dell and Mozilla's Firefox browser.

Microsoft also aims to get into "cloud computing" through a new service called Windows Azure. That project has been championed by none other than Ray Ozzie, the company's chief software architect, anointed in 2005 as the guy who's supposed to think deep thoughts about the technological future.

Though Microsoft is late to cloud computing (the term refers to software that never needs to be downloaded), it would enable the company to leverage the costs of the data centers it is building primarily for its search business. Still, Microsoft doesn't even intend to light up Azure until late 2009 at the earliest, so this isn't something that's going to contribute to online greatness anytime soon.

Mediocrity never sits well with Microsoft, which is why Steve Ballmer made a play earlier in the year for Yahoo. Sure, Yahoo has its problems. But its immense traffic fed through Microsoft's expensive search-ad system could be just what Ballmer needs to end his long quest for online profits.  To top of page

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