How Will Microsoft Snare Digital Ads?

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I've heard that same thing many times over the last four years with folks at Microsoft—saying we've got innovative new algorithms, we've got new approaches to search. And they were all interesting, and yet still, as you say, you plateaued. Is there a way to grow search without acquisition?

Yes.

And why hasn't the company been able to do it yet?

Well, some people look and say: Hey, we've been in the search business three or four years. Our competitor in the search business has been at it 10 years or so now. There's work that had to be done to get in the game. Doing that work, the relevance algorithms, the crawling of the Web, managing the size of the search index, that's the work that we've done over that last several years.

Now, our opportunity is how we build on that work in ways that start to change the user experience. You look at the user experience of search, it hasn't changed in the last five to seven years, by us or by our competitors. It's 10 blue links, and some paid listings on the right rail. So I think it's very clear to us that we've got to innovate in the user experience and the business paradigm in ways that are interesting to the consumer.

Is there any scenario in which you could see talking to Yahoo again?

We've moved on. We made a bid that we felt was a very good bid, full and fair offer, and went through that process, and that process has ended. A deal was not to be, and we've moved on.

You talked a bit earlier about engagement mapping. If it works and advertisers place more value on display ads, that could lower the relative valuation that search currently receives.

Right now, search gets more emphasis in the ad spending than perhaps it deserves. And all engagement mapping does is give the advertiser complete perspective to make thoughtful decisions. So I do think that engagement mapping is one way to enable advertisers to really be thoughtful about their investments. And if that attracts them to our ad platform, that's good for us.

But it also has the potential of disrupting Google, since it is far more dominant on search than display.

That's a fact. Google is more dominant on search than it is in display. And I think search gets more credit for conversion than it should. And engagement mapping is a tool that advertisers can use for them to be thoughtful about their spend on display and search.

So what's the impact on Google?

We'll see. Certainly by having tools like engagement mapping you might shift the share of spend. Advertisers may spend less on search, because they find they get more value on display.

Microsoft's history in the online business is mixed at best. Over the last three years, Microsoft has lost $1.5 billion in the Online Services Business division. The company went from sort of one strategy to another. It's also had these branding issues, trying to sort out the difference between MSN and Windows Live. So when you sit here and you say to me you have a strategy, you believe in it, there's a path to success, why should I believe you?

Well, it's fair to say we're not where we want to be. But we also recognize there's a big opportunity, and the opportunity before us is one that represents revenue and profit growth for our shareholders. And it's one that provides strategic value to our other core businesses as we balance from software royalty to online advertising business models.

And so I think in many ways, this strategy that we have now is very similar to what we've learned in other parts of our business. You've got an underlying platform that you want to have value for your own applications as well as third parties, and that's what the ad platform does.

We're making progress. If you look at our top-line ad revenue growth, we've outgrown the industry for at least the past four quarters. It is fair that we are investing, and we're investing in this for the long term. We intend to build online into a core business. It will require investment. And so we are investing dollars in things that are aligned with our strategy, and we're making progress. But we've got a lot of work to do.