Correction to This Article
This article misstated the amount of money that Microsoft plans to invest in its online businesses. The company said it will spend at least $1.2 billion a year in that area, not $2.5 billion

Microsoft to Spend $2.5 Billion a Year To Keep Pace in Race With Google

Microsoft CEO Steve Ballmer sees big opportunity in online ads.
Microsoft CEO Steve Ballmer sees big opportunity in online ads. (Bela Szandelszky - AP)
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By Dina Bass and Amy Thomson
Bloomberg News
Friday, July 25, 2008

Microsoft plans to spend at least $2.5 billion a year for the foreseeable future to compete with Google because the opportunity in online advertising is too big to ignore, Microsoft chief executive Steve Ballmer said yesterday.

"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 said at a meeting with analysts.

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

"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 $2.5 billion," Ballmer said.

Microsoft, which failed in an effort to buy Yahoo 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-ranked software analyst in an Institutional Investor survey, said in an interview with Bloomberg Television. "None of us really believe that a plan B that the company has is really credible."

Ballmer said the online business isn't where he would like it to be and said shareholders often question why Microsoft, the world's largest software maker, 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."

Microsoft fell 99 cents, or 3.75 percent, to $25.44 . The shares have fallen 29 percent this year, about twice as much as the Standard & Poor's 500-stock index.

© 2008 The Washington Post Company