Ballmer Defends Microsoft's $6.2B R&D Plan


Speaking at a Microsoft Network Summit, Microsoft CEO Steve Ballmer said the company may have surprised some in the financial community with the size of its planned investment in its online business in fiscal 2007 but he said it's necessary to outseat competitors.

Microsoft will launch an interactive ad service with AT&T that is now "under the radar" as well as a variety of enhanced AdCenter and Live! platform services including Windows Live! Local, Ballmer said.

Ballmer said Microsoft also will increase its spending on capital expenditures fivefold to $500 million in fiscal 2007, which begins July 1.

"A global infrastructure is not inexpensive. In the AdCenter platform there's a big technology challenge and a big business challenge," said Ballmer, claiming there are only two or three companies that can deliver the infrastructure to handle customer demand and advertisers' needs. "Our No. 1 priority is software as a service."

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As part of that, Microsoft will develop better user experiences through its Windows Live! and Office Live! platforms including customized Live! services and Office authoring services for consumers and small businesses as well as large companies.

Microsoft also will commit resources to develop local and domain-specific searching technology as well as searching macros that allow end users to "customize their view of the world and what's on the Internet," Ballmer said.

During Ballmer's presentation, Microsoft previewed early prototypes of its enhanced AdCenter API set that will allow advertisers to create keyword groups that map to MSN groups. This will allow advertisers to do bulk uploads and extensive reporting for more targeted ad campaigns.

Microsoft also plans to begin pilot testing this summer a contextual advertising service that allows advertisers and content providers to harness audience intelligence beyond paid search.

For example, one service now in pilot testing allows advertisers to create image ads and match them by category. Through an advanced matching algorithm, for example, advertisers will be able to target luxury car buyers and choose to run their ads on a certain set of URLs or for a select category of buyers.

The AdCenter contextual targeting service will initially be offered for MSN properties but will be expanded to third-party companies as it becomes commercially ready, Microsoft said.

Microsoft also is working on future online advertising technologies such as demographic prediction and enhanced interactive TV and video services, the company said.

The demographic prediction services will provide a sophisticated analysis of keywords and URLs to provide advertisers with enhanced demographic targeting.

NEXT: A Long Road Ahead The company will also debut an interactive video and TV service akin to "Speed Bump" service available on Tivo that allows consumers to interact with programs and products shown on those eprograms. For example, a viewer can click on a coat worn by a television actress to access information and pricing about that product or click on a sports event and voice instant message it to a friend.

Microsoft is committed to having a "more and more significant footprint" in the online advertising arena and is building an ecosystem of advertisers, agents and search engine marketing companies to build out the Adcenter platform, Ballmer said.

It took millions of developer hours to build the Windows software platform and it will take many advertisers and partners to build out Microsoft's online services and AdCenter platform, Ballmer said.

But it won't be an overnight success.

"We're just out of the gate on Windows Live! and we have a lot of work to do with large and small content producers and advertisers who want to do business over the Internet," the CEO said. "As a platform provider, we understand better than anyone else how a rising tide can lift all boats."

Before the keynote, Goldman Sachs analyst Richard Sherlund said in a report that he expects Microsoft will try to make more money on software services beyond the search market to offset the hefty investments.

"Clearly, Microsoft has a long ways to go and key will be its adcenter monetization engine which is still in test mode," Sherlund said. "We would expect Microsoft to do a better job of monetizing search and also begin to leverage its emerging Windows Live, Office Live and XBox Live platforms and other upvoming Internet services to serve up ads including display ads and contextual ads and leverage a developer ecosystem for third party content."

Microsoft also announced Thursday it acquired Vexcel Corp., a Boulder, Colo.-based ISV that offers photogrammetry, imagery and remote sensing technologies. Financial details of the acquisition were not disclosed. It will be used in Microsoft's Virtual Earth and Windows Live! Local services.