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When Liddell talks to investors, he often gets the sense that they don't appreciate the breadth of Microsoft's business. As evidence, he estimates that about half the questions he's asked on conference calls concern the money-losing $3.3 billion Online division - or Windows Live Services, which includes Microsoft's search product and Hotmail - even though it represents only about 6% of company revenues. Of course, that's the division that competes with Google.
Investors aren't the only ones obsessed with Google. The one concrete commitment Gates has made to Ballmer, other than continuing to chair board meetings, is that he will keep working with the search and advertising team. He's promised he'll spend two and a half hours on it each week. Why did Gates decide to focus on this particular problem? Google's overwhelming dominance of online advertising continues to thwart Microsoft's ability to grow its online consumer business. Inside the company, the subject inspires almost daily handwringing sessions.
While Gates talks casually about the likelihood of a "share breakthrough in the search market that's still very much in front of us," at the moment Microsoft is almost hopelessly behind in both market share and mind share when it comes to searching on the Internet. Concedes Gates: "Today you'd definitely say about consumer search and advertising, Couldn't we have gotten in sooner and understood those things?"
There is more involved here than just simple Google envy. Ballmer et al. believe that online advertising is the business where its greatest potential revenue and profit growth lie. So far only about $40 billion of the world's $500 billion in ad spending has moved online. But Ballmer expects the Internet portion to be $80 billion in just two years. While total worldwide spending on business technology is much bigger, around $1.6 trillion, it isn't growing nearly so fast.
So Microsoft is making unprecedented investments in infrastructure. "You have to throw so much in the pot just to play," says Ballmer. This year Microsoft will put about $1.7 billion into data centers and servers for its online business. In addition, the company has been pouring resources into the basic technology of search for almost five years. And it has caught up with its rival by at least one fundamental measure - the relevance of results at Live.com, its search home page. Independent experts now rate Microsoft roughly on a par with Google.
The problem is attracting search traffic in the first place - and right now Microsoft is going in the wrong direction. Its market share of U.S. searches has steadily declined this year, from 9.8% in January to 8.5% in May, according to Comscore. Google, meanwhile, scored 62% of searches in May, and 21% were on Yahoo. Taking a page from the U.S. auto industry, Microsoft recently announced a "cash back" program, in which certain retailers will give a consumers a discount if they buy products they found using Live Search.