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Microsoft promises Wall Street that its 'list of ideas' will get Google

Will look at metrics too

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Having alarmed Wall Street with its $2bn spending plans, Microsoft mounted a charm offensive at its annual financial analyst summit Thursday to try and convince stockholders that investments in search, internet advertising and search will pay off.

Kevin Johnson, co-president of platforms and services, led a parade of execs trotting out key growth indicators and previews of forthcoming technology while the heads of server and tools and Microsoft Office outlined opportunities against Linux and open source.

Investors looking for something to assuage earlier concerns, though, will have been heartily disappointed, as Microsoft offered nothing fresh or distinct from the competition, and indicated that - despite its plan to spend millions of dollars - the internet and paid-search strategy is still being worked out.

Microsoft last week outlined its spending plans for fiscal 2007. The company will this year spend $450m on marketing and launches, $450m on sales force and general market growth, $1bn on "development of high-growth products and new products and services," $500m on online services such as adCenter, Office Live, CRM Live, Live.com and search, and $300m on costs and acquisitions.

It was during the previous, third-quarter results call that Microsoft CFO Chris Liddell shocked Wall Street by outlining an unexpected $2bn spending plan. The amount led one analyst to deduce Microsoft "must" be building some kind of Google killer - a conclusion denied by Microsoft.

Johnson claimed Thursday Microsoft's experience in building and running platforms, its ability to deliver "compelling" user interface "experiences", and its networks of partnerships with developers and "thousands and thousands and thousands" of partners mean it will unleash a "disruptive" change upon the industry, despite coming shockingly late to the internet, search, and software as a service. Chief technology officer Ray Ozzie, meanwhile, picked up the mantra of business growth from software, services, subscriptions and licensing.

Microsoft is placing its faith in an ability to monetize PCs, servers and cell phones running Windows plus its Hotmail, MSN Messenger and MSN Spaces properties. To that end, Microsoft claims 850m PCs, 24m Xboxes, 325m "Live IDs" - people who singed in to a Microsoft service during the last 30 days - 260 users of its online mail, 240m users of messenger and 220m on Spaces.

Johnson, the former group vice president of Microsoft's worldwide sales, marketing and services appointed to his new role last September, put some dates on when Microsoft expects payback. Between 90 and 180 days on planned new content for MSN, six to 18 months for Windows Live and 12 to 24 months for adCenter, Microsoft's internet ad search engine.

Demos of Microsoft offerings elicited tepid applause from analysts gathered at Microsoft's Redmond, Washington, campus. On display were Widgets - sorry, that's Apple's technology that came out last year, we mean "Gadgets" - that will run streams of information like stock results on a web site or on the Windows Vista desktop. Users can filter searches of stock data from Yahoo Finance, CNN Money and MSNBC.

Ok, but what about search and advertising? Microsoft will have to get back to Wall Street on that. "We are looking at the operating metrics every day. Our R&D teams are innovating and tuning the algorithms every day," Johnson said. "We have a list of ideas and things we are going to build into adExpert to continue to build and advance that. That's at the heart and soul of unleashing that disruptive business model."

Turns out this disruptive business model will be measured using the same time honored practices and metrics employed by Microsoft's rivals. These include paid views, per page views, live accounts that are not duplicates, service usage, click-through rates, usage, revenue per search and number of advertisers.

Analysts sifting for tangibles in this potpourri would also have been unsettled by Microsoft's forecast for its core Office businesses. Jeff Raikes, business division president, predicted seven per cent CAGR during the next three years. The caveat is that Office faces three challenges: the tendency for Office users to stay on older versions and not to upgrade, the presence of open source - OpenOffice, StarOffice and IBM's Workplace - and the specter of online writing and collaborative services.

So stepped up Bob Muglia, senior vice president for server and tools, to set a more upbeat tone on the struggle between Windows and Linux. Having been trounced by Linux on growth rates, Muglia predicted Windows would make its comeback in the next 18 months. Muglia said Windows had lagged Linux in high performance computing, the web and security, but Microsoft is taking steps to address these markets.

Measures taken include the launch of Windows Compute Cluster Server for HPC, deals with a series of OEMs to build small form factor edge-of-network security devices on Windows, and changes in Windows and IIS to address the combined power of Linux and Apache.

Muglia expects a turn around in HPC and the web this year, but security will take 18 months. But, hey, who's counting?®

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