Microsoft Boasts Search Engine Progress

Steve Ballmer, CEO Microsoft, speaks about connectivity during the Strategic Account Summit at the Microsoft Corp. headquarters May 4, 2006 in a Redmond, Wash. file photo. First-quarter earnings have been surprisingly strong, and corporate America is on pace for its 16th straight quarter of double-digit profit growth. (AP Photo/Kevin P. Casey, File) (Kevin P. Casey - AP)

"I think this is one of the rare cases where we're being underestimated," Gates said.

On Thursday, Ballmer reiterated the company's dedication to improving its search position.

"We are hardcore about having the best search offering ourselves, with our partners," Ballmer said. "We'll just keep at it and at it and at it, and I have confidence in our ability to build a loyal user base."

Getting more people to use its search engine _ and potentially see advertising on it _ will be one way that Microsoft can succeed with its online advertising platform, adCenter.

But Ballmer said the search engine is just one piece of the puzzle.

The ambitious platform aims to eventually let companies advertise across multiple Microsoft products, including television and online video games, so Ballmer said the company's success also depends on things like drawing more people to its MSN portal, e-mail and instant-messaging offerings.

Microsoft is pouring money into its MSN online arm, which it sees as a key area of growth. Ballmer said Thursday the company plans to spend $1.1 billion in research and development for that unit in its fiscal year ending in June 2007, up from $500 million in the 2005 fiscal year and $700 million in the current fiscal year.

Ballmer said Microsoft's No. 1 research and development priority is to develop ways to deliver software as a service over the Internet, rather than in more traditional ways such as a CD in a retail box.

That fast-growing and highly competitive field includes everything from consumer offerings such as e-mail and photo-sharing to business applications that can be accessed online.

Companies ranging from Google to Salesforce.com Inc. have found success in this field, while Microsoft still mostly delivers its software in more traditional ways. But Ballmer said Thursday he doesn't think the company is lagging its competitors, noting that Microsoft has strong technical expertise and a loyal online user base with products like its MSN Messenger.

Microsoft's plans to substantially increase overall research and development costs through the company's next fiscal year surprised analysts last week and sent Microsoft shares tumbling.

In the wake of Wall Street's reaction, Ballmer said he realized he needs to do a better job of persuading investors to be optimistic about how the increased spending could boost long-term growth.

"I have tried to be clear with our shareholders ... that there was a whole bunch of new innovation that we were investing in that I thought could drive growth," Ballmer said. "I think maybe people heard me more about the opportunity to drive growth than they heard me about the need to invest to drive growth."

Microsoft shares rose 27 cents, or 1.2 percent, to close at $23.44 in trading on the Nasdaq Stock Market on Thursday, a day after the stock slid to a new 52-week low.