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By Udo Hohlfeld

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In July, Microsoft reported its financial results for its full fiscal year 2008 (ending June 30). With almost no surprises in many areas, Microsoft's Online Services Division continued to underperform, reporting a $488 million loss in operating income, compared to $210 million during the same quarter last year. For the year, the Online Services Division racked up an operating income loss of $1.2 billion, compared to $617 million the previous year. The result is just another hint a Microsoft's woes in the advertising and search space and its unfortunate battle with market leader Google. In 2007, Microsoft bought a 1.6% stake of Facebook, a popular social network. This cost Microsoft roughly US $ 240 million and since then, rumors about a complete acquisition regularly have come up. Last week, Microsoft announced that the partnership with Facebook has been extended to include search. Finally good news for Microsoft after a row of setbacks in its efforts to catch up with Google in the search market. Yahoo, whom Microsoft tried to acquire earlier this year for about US $ 47.5 billion, was successful defending against this move; and also later successfully fending off Microsoft and Yahoo investor billionaire Carl Icahn, who agreed to break Yahoo apart, with the search business going to Microsoft and other parts of the company to interested media companies (Time Warner, News Corp.). Instead Yahoo struck a deal with Google that could net both companies millions in revenue. The agreement covers paid search and content match but not algorithmic search. Under the agreement, advertisers continue to pay Yahoo for clicks served by Yahoo from Yahoo's Panama and Content Match marketplaces. Advertisers pay Google directly for each click on Google paid search results shown on Yahoo-owned and operated networks including affiliate sites. Google passes on a certain share of this revenue to Yahoo. Yahoo estimates to gain US $ 800 million of revenues from this deal in the first year. The Yahoo-Google alignment may make Time Warner's AOL service more valuable to Microsoft. At least, to improve its performance in the search market and gain a larger part of the connected advertising revenue, AOL is an option for Microsoft. Another strategy may be to invest in niche markets, e.g. semantic search, advertising in games, etc. and acquire focused expertise as Microsoft did with the acquisition of Powerset, a pioneer in semantic search. It seems that with investments in disruptive technologies Microsoft only can challenge Google. Areas in which neither company can build on its existing business and technologies still offers a fair competitive environment in which the better, the faster and the smarter actor wins. Microsoft will increase its pace of activities, which certainly will affect the whole industry. Microsoft is determined to win and Steve Ballmer, CEO of Microsoft, has said repeatedly that the company is in the search game for the long haul. And one of its strengths is, that it has the resources to fund its efforts and survive even bad times. A first new move was announced already: July 23, Microsoft reorganized its Online Services Business into two separate groups - one that oversees its online advertising and search properties and another that runs Windows Live services and Windows OS - which both will report directly to CEO Ballmer. The game has entered into the next round. Resources: Microsoft Announces Reorganization of Windows and Online Services Business http://www.microsoft.com/presspass/press/2008/jul08/07-23CorpNewsPR.mspx Microsoft seeks an Ad Friend in Facebook http://dealbook.blogs.nytimes.com/2008/07/25/microsoft-seeks-an-ad-friend-in-facebook/ Microsoft on the Google-Yahoo! Deal: The Future of Internet Advertising, Consumer Choice and Competition http://www.microsoft.com/Presspass/presskits/googleyahoo/default.mspx

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