Microsoft Joins Search Party

Never shy about arriving late, Microsoft(MSFT) is expected to launch a new version of its search service Thursday as the software titan seeks a stronger spot in that lucrative corner of Internet advertising.

Consumers can expect a significant improvement over the so-called alpha version of algorithmic search unveiled this summer, which Charlene Li, a principal analyst with Forrester Research who covers media and marketing, simply called "ugly." The beta version will likely remain tucked away at a more obscure Internet site than Microsoft's flagship MSN address, but will likely move to MSN a couple of weeks later, Li speculated.

A representative for Microsoft called numerous media reports about the Thursday launch of a beta version of MSN search "speculation" and declined further comment.

Currently, Microsoft is using search engine technology from Yahoo!'s(YHOO) Inktomi division and paid search results from Yahoo!'s Overture division. Microsoft is expected to replace the Inktomi technology with its own algorithmic technology but to extend its contract for Overture paid search results after it expires in June 2005, according to American Technology Research analyst Mark S. Mahaney. (Mahaney does not cover Microsoft and has a buy rating on Yahoo! and a hold rating on Google(GOOG). His firm doesn't have an investment banking arm.)

Microsoft's decision to develop its own search technology undoubtedly must be taking some cues from Google, the most heavily used search site in the U.S., whose stock has been on a tear since its much-ballyhooed IPO. Google search sites commanded 36.1% of U.S. Internet searches in August and 51% of U.S. toolbar searches, followed by Yahoo! sites with 30.6% of searches and 43% of toolbar searches, and MSN/Microsoft sites with 14.4% of U.S. searches.

Google, which generates sales from ads posted with search results, more than doubled its top and bottom lines in its recently completed third quarter, earning $52 million on $806 million in revenue. Microsoft's MSN division, which generates revenue from paid search results and other Internet advertising, trails behind Google's business considerably, earning $77 million in operating income on $540 million in revenue in the September-ending quarter.