Microsoft Lost in Space

"They had no choice," he said in an interview. "They missed search; they missed music; they are in danger of losing control of the desktop."

One New York-based hedge fund manager sold his position in Microsoft about a month ago, not because he anticipated Thursday's results but because "we finally decided we might as well put our tech investments where will get more value."

Asked if the company's new direction encourages him to reconsider, he said it wouldn't. "How do investors know [the heavy spending] isn't just a black hole?"

Although Microsoft was vague about how it will spend the extra money, most analysts say the lion's share will go to Internet-related ventures.

"Ballmer and Gates and those guys look at Google(GOOG Quote) and Yahoo!(YHOO Quote), and say 'Why aren't we doing that?'" says Matt Rosoff, an analyst with Directions on Microsoft.

Until recently, Microsoft was unclear on the online business model, he said. "Now they are clear, and it's advertising."

Rosoff says Microsoft will pour money into its Ad Center -- a platform for paid search results -- beef up the long underfunded MSN, even build a data center in eastern Washington to handle increased Web traffic.