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Microsoft's Mission: Search and Destroy

By Jay Greene Few people are harder on Microsoft's missteps than its own chairman. So when TV personality Charlie Rose asked Bill Gates during an on-stage interview at the World Economic Forum in Davos, Switzerland, on Jan. 28 why Redmond initially relied on technology from others for its Web-search business, Gates didn't mince his words: "We were stupid as hell."

Microsoft (MSFT) gave itself a quick education. After just 20 months of development, it launched a new Web-search service on Feb. 1, built from the ground up with homegrown technology. MSN Search, which replaces technology licensed from Yahoo! (YHOO), is available in 10 languages and includes tools to help Web surfers refine queries for more relevant results. It also taps Microsoft's Encarta encyclopedia software to provide direct answers to specific questions.

GOOGLE SLIP IS SHOWING. "We're going after the core problem, which is customers saying they can't get their questions answered," says Yusuf Mehdi, Microsoft vice-president.

The search engine is Microsoft's most ambitious effort to elbow its way into a business dominated by Google (GOOG). According to comScore Networks, which tracks Web traffic, Google led in Web-search volume, accounting for 34.7% of all searches in December, 2004. Yahoo came in second at 31.9%, followed by MSN's 16.3% share.

But Google hardly has a lock on the business. Its share slipped from the figures for December, 2003, when it held 35%, vs. Yahoo's 27.1% and MSN's 15.4%. Some of those gains came as a result of Yahoo and MSN improving the customer experience, according the Keynote Systems (KEYN), a San Mateo (Calif.) outfit that tracks Internet customer satisfaction.

"A TOUGH SLOG." Keynote measured customer experience at search sites in May, 2004, and again in October of that year, finding that Yahoo and MSN had begun closing the gap with leader Google. Bonny Brown, Keynote's director of research and public services, believes the new MSN search will trim that gap even more. Says Brown: "Clearly, the race is on."

MSN has no illusions of displacing Google anytime soon. Instead, it wants to continuously chip away at its lead. One place to start: the 20% of Web surfers who say Google is their primary search engine, yet have MSN as the home page on their browsers. Forrester Research analyst Charlene Li says if MSN could win back all of those customers, it would nearly close the market-share gap. "It's going to be a tough slog to displace Google," Li says. "But for Google, that's the risk."

So how does the new MSN Search stack up? It's in the game. Search results are on par with results from rivals. Its Instant Answers feature is a nifty little tool that taps Encarta to answer direct questions such as "Who was George Washington's Vice-President?" and "Who won the 1994 Stanley Cup?" But even Mehdi acknowledges that more work could be done, particularly in the Search Near Me feature that's supposed to spit out Web sites close to the surfer's location.

BILLION-DOLLAR QUEST. The fact that Microsoft is in the game could be enough in itself to rattle Google. That's because Microsoft may eventually build links to MSN Search into its two giant monopolies -- the Windows operating system and its Office suite of productivity applications. Microsoft's next version of Windows, code-named Longhorn, is scheduled to launch at the end of 2006, with a version of Office to debut simultaneously.

If MSN Search is baked into those products, it could vastly improve the service's volume. It might not have been much of a threat if the MSN Search technology wasn't very good. But Li believes it's good enough -- and is bound to get better. "You're going to see MSN gaining share as a result," Li says.

That gives Microsoft reason to hope that the search business might provide a means to reclaim a bit of the financial vigor of its youth. The company, which turns 30 this year, saw revenues climb an average of 36% each year throughout the 1990s. So Microsoft, with sales approaching $40 billion, is looking for new businesses that have the potential to add $1 billion or more in annual sales.

Search is one of the few markets with that sort of promise. Industry researcher eMarketer predicts that this business, which generated $3.9 billion in 2004 sales, will hit $7.4 billion in 2008. Microsoft needs just 14% of the total to generate $1 billion in revenue.

RELENTLESS FOCUS. And it's sparing little expense to build that business. Microsoft has spent more than $150 million developing the new technology. And it's about to launch a new marketing campaign, including Super Bowl ads in six local markets -- Boston, Chicago, Philadelphia, San Francisco, Seattle, and Washington, D.C.

Anyone who has followed Microsoft knows it often makes mistakes -- but it's never "stupid as hell" for very long. The software giant plans to pursue the search business with the same relentlessness with which it has gone after so many other businesses. MSN's Mehdi, a veteran of Microsoft's Internet Explorer business, which stalked and eventually overtook Netscape's Navigator browser, says leaders often stumble. "I've seen it happen on multiple products multiple times," Mehdi says.

That should give pause to every other company angling for a piece of the search business. Greene is BusinessWeek's Seattle bureau chief

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