July 24 (Bloomberg) -- Microsoft Corp. Chief Executive Officer Steve Ballmer plans to spend at least $1.2 billion a year for the foreseeable future to compete with Google Inc. because the opportunity in online advertising is too big to ignore.

``The amount of economic value we have the opportunity to create by pursuing this world in which everything goes digital is at least 40, 50, 60 percent more than our economic value today,'' Ballmer, 52, said today at a meeting with analysts at company headquarters in Redmond, Washington.

Microsoft, owner of the No. 3 U.S. search engine, is struggling to take market share from leader Google and working to justify continued investments to its shareholders. The company said today social-networking site Facebook Inc. will run Microsoft ads with its searches, expanding on a deal for other promotions. Online ad sales will double to $51 billion in the U.S. by 2012, according to New York-based EMarketer Inc.

``If you think you can be successful with patience, it's a relatively small investment,'' Ballmer said.

He said he didn't know how long spending increases would continue. ``We're going to need to continue to invest until we get greater scale in this business,'' Ballmer said. Microsoft must ``ante up in a significant way'' to compete in Internet technology, keeping pace with Google's annual spending on research and development.

``We're going to certainly have to think about the bogey as at least $1.2 billion or $1.5 billion a year to stay competitive, let alone reinvent on the R&D side,'' Ballmer said. ``That is a big number.''

Dollars Evaporating

The world's largest software maker, which failed in an effort to buy Yahoo! Inc. this year, will focus the additional money on boosting the online business and increasing marketing of personal computers and phones to consumers, Ballmer said. Ads for mobile handsets may help put the Web unit in a better position, he said, after ad sales fell short of estimates last quarter.

``The average investor believes that every dollar they invest is going to evaporate,'' UBS AG's Heather Bellini, the top software analyst in an Institutional Investor survey, said in an interview with Bloomberg Television from the event. ``None of us really believe that a plan B that the company has is really credible.''

Ballmer admitted the online business isn't where he would like it to be and said shareholders often question why the company doesn't abandon the effort.

``Why are we pursuing this? I get this question from shareholders,'' he said. ``We don't have a lot of trillion-dollar markets that are being transformed. That's at least a big enough opportunity that at our size, our market cap, we have to go after those opportunities.''

Facebook Deal

Microsoft fell 99 cents, or 3.8 percent, to $25.44 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have fallen 29 percent this year, about twice as much as the Standard & Poor's 500 Index.

Senior Vice President Satya Nadella said Facebook, the most popular U.S. social-networking site, will use Microsoft search ads later this year. Microsoft bought a 1.6 percent stake in Palo Alto, California-based Facebook for $240 million in October and the site already runs banner ads from Microsoft.

The company today said it will buy Aliso Viejo, California- based DATAllegro Inc. to add data-management technology to its software for server computers. Terms weren't disclosed.

Microsoft's online unit, its smallest at 5.3 percent of the company's $60.4 billion in sales, lost $1.23 billion last year. The software maker spent more on computer data centers and acquired Seattle-based ad company AQuantive Inc. Kevin Johnson, who led the business, will leave to be CEO of Juniper Networks Inc. in September, Microsoft said yesterday.

Wrong Tree

``They are barking, in our view, up the wrong tree,'' said David Stepherson, a fund manager at Hardesty Capital Management in Baltimore, who helps manage more than $600 million including Microsoft shares. ``They have a treasure chest of money that they could be investing in their core competency, which in our view is clearly software.''

Microsoft sought to shore up the online business by attempting to buy Sunnyvale, California-based Yahoo, which rejected offers for $31 and $33 a share. Microsoft has since made at least two offers to buy Yahoo's search business, a deal that would triple its share of U.S. Web queries.

Yahoo instead struck a deal with Google to run ads alongside some of its search results. Billionaire Carl Icahn, who had threatened to oust Yahoo's board at its annual meeting next week, reached a compromise with the board and will now get three seats.

Microsoft had 9.2 percent of U.S. searches last month, up from 8.5 percent in May, said Internet site tracker ComScore Inc. in Reston, Virginia. Google's share fell to 61.5 percent from 61.8 percent, and Yahoo's grew to 20.9 percent from 20.6 percent.

No talks with Yahoo are being held now, Ballmer said today.

``Does that mean that nobody will every talk to anybody again?'' Ballmer said. ``I suspect the answer to that is also no. It's a long time and it's a big world.''

Ballmer said the acquisition wouldn't make sense at the wrong price and if regulatory review couldn't be completed before the U.S. presidential election.

To contact the reporters on this story: Amy Thomson in New York at athomson6@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net

Last Updated: July 24, 2008 18:27 EDT