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Microsoft puts $100M behind search push

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In a move that echoes back to its aggressive takeover of the Web browser market, Microsoft Corp. recently began testing a significantly enhanced version of its own search service, pledging to invest $100 million to push it to the top of the search industry heap.

Microsoft’s massive investment is focused on creating what it calls a "next-generation search experience" that makes searching more relevant and personalized.

The question for currently dominant search engines—especially market leaders Google and Yahoo!—is whether Microsoft can overtake their lead in just a few short years, in much the same way as it gobbled up Netscape’s market share in Web browsers.

Meanwhile, one of Microsoft’s short-term moves—its decision to do away with paid inclusion listings, at least for now—–could impact the search market just as significantly by calling into question one of the search industry’s standard advertising practices.

Analysts note Microsoft has a significant, but not insurmountable, hill to climb. In May, for example, only 28% of consumers surfing on the Web used MSN, compared with 43% who used Google and 32% who used Yahoo!, according to Nielsen//NetRatings. Unlike the browser market—where standardization actually helped push the Web to the next plateau—advertisers like having multiple search vendors. So while market share fortunes may change, it is unlikely any of the big three search companies will disappear, as did Netscape.

"I don’t think the Netscape analogy necessarily works," said Gary Stein, an analyst with Jupiter Research. "Google has so many users and so much momentum. Where the analogy does make sense is that, as they proved with Netscape, when Microsoft does play catch-up it has the ability to catch up fast."

"Microsoft is a bit like a nation that makes a hundred-year plan to take over the world. They don’t enter a market they don’t intend to own," said Fredrick Marckini, CEO of search engine marketing company iProspect. "I don’t think that Yahoo! or Google is losing any sleep right now, but certainly they are going to have to be on their best game."

For now, however, Microsoft’s move will have little impact on search advertisers, including b-to-b marketers, Marckini said. "Unless and until Microsoft creates its own pay-per-click search advertising auction tool like [Yahoo!’s] Overture, the impact on the search advertiser is going to be limited."

Today, Microsoft places Overture’s pay-per-click listings on MSN search pages, so an advertiser that buys an ad from Overture can count on exposure on both MSN and Yahoo!, as well as other locations.

Improving MSN Search

On June 30, Microsoft said it is investing more than $100 million to upgrade its search capabilities, covering "research and development, testing and marketing dollars," according to an MSN spokesperson.

Many of the improvements appeared this month—including a redesigned search home page (search.msn.com) that, among other enhancements, better integrates MSN services such as Expedia (travel) and Encarta (an online encyclopedia). Links to other MSN offerings, such as Hotmail, sports, entertainment and weather, appear beneath the search box.

(Late last week, Microsoft acquired Lookout Software, a company whose technology searches messages in Outlook e-mail, prompting speculation that Lookout’s system would be integrated with the redesigned MSN Search.)

For now, Microsoft will continue to use search results from Inktomi, a search provider Yahoo! acquired in 2002. But that will change soon as well. Microsoft is developing its own algorithmic search technology, and this month began testing it. Microsoft’s system will eventually compete head to head with search technology from Google and Yahoo!

Among the most notable changes, from a b-to-b perspective, in Microsoft’s enhanced search service was its decision to more clearly separate algorithmic search results from paid result links. For instance, it is marking the ads in green-shaded boxes titled "Sponsored Links." In addition, Microsoft is including fewer pay-per-click ads per page than previously, pushing more natural search links to the top of its listings.

Those changes could impact MSN’s bottom line, according to search experts. iProspect’s Marckini said recent research by his company found that previous to the recent MSN search redesign, MSN users were more likely to click on text ads (71% for MSN versus roughly 40% on Google or Yahoo!) than on natural search results, mainly because the text ads were more prominently displayed on its pages. But Marckini predicted MSN’s click-through rates should even out with Google and Yahoo! now that MSN results pages look and feel more like those of its competitors.

No paid inclusion

For its test, Microsoft chose to do away altogether with Yahoo!-enabled paid inclusion, wherein advertisers pay to be in the main search results (but are not guaranteed a specific placement). Analysts estimate the decision could, at least in the short term, cost Microsoft $50 million or more annually in search revenue.

Microsoft said it hasn’t made a final decision on paid inclusion and will continue to evaluate consumer response to the practice.

The move may have less to do with Microsoft’s aversion to paid inclusion in the long term than in the phasing out of its dependence on third parties, such as Yahoo!, for crucial search tools, according to Jupiter Research’s Stein. He characterized Microsoft’s move on paid inclusion as "a recapture of control and a moving away from partner-reliance," adding that industrywide, "I don’t think paid inclusion will go away."

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