Search is on for how Microsoft can beat Google

Without the influx of Web traffic that Microsoft bet would quickly follow a Yahoo buyout, the software maker is facing a long slog if it wants to turn its money-losing online services business into a Google-killer.

Since it withdrew a $47.5 billion bid for Yahoo Inc. after talks collapsed, Microsoft Corp. has offered little insight into what "Plan C" will entail. In that vacuum, experts are scraping the bottom of the barrel for ideas, with many concluding that they actually don't know what could get Microsoft out of its pickle.

Some analysts say Microsoft must increase its search traffic to attract advertisers. Others believe Microsoft should concede that market to Google Inc. and find success elsewhere -- leapfrogging rivals in areas such as display and mobile advertising.

All that is clear is Microsoft must come up with a Plan C soon, after acknowledging that its Plan A of going solo was troubled, forcing it to turn to the Plan B of acquiring Yahoo.

Part of the problem analysts face predicting Microsoft's next moves is that the company has already tried the obvious tactics. It built its own search-ad platform from scratch and spent $6 billion to buy a major online advertising company, aQuantive.

Microsoft overhauled its search engine technology, and most analysts agree that its results are at least as good as Google's. It tweaked the design of its Live Search service to become more like Google. It touted its improvements on billboards and in glossy magazines.

Last year, the company seemed confident that it wouldn't take much to convert the hundreds of millions of Hotmail users, Xbox Live-connected video gamers and Windows Live Messenger chatters into a flood of search traffic.

"We've done a lot of work to get clear strategy and focus," Kevin Johnson, who heads the division that includes online services, told a gathering of financial analysts in July. In November, Johnson detailed aggressive goals that included capturing 30 percent of U.S. search queries.

By January, though, it was apparent that Microsoft's efforts weren't working. Its share of U.S. search queries was stuck under 10 percent, behind Yahoo's 22 percent and Google's 58 percent. Microsoft responded by proposing to buy Yahoo for its traffic- and search-savvy engineers.

That bid unraveled last Saturday, and Microsoft is running out of options. Many expect Microsoft to make another run at Yahoo, or to buy other companies, such as Time Warner Inc.'s AOL, the online software company Salesforce.com Inc. or Facebook, the No. 2 online hangout in which Microsoft already owns a 1.6 percent stake.

For now, Microsoft seems focused on going it alone. Chairman Bill Gates said Friday that Microsoft will focus on expanding its own advertising and Internet search business after withdrawing its takeover offer for Yahoo Inc.

"We have always felt we could do very well on our own, and now that's the path we are focused on," Gates said in an interview in Jakarta, Indonesia.

"The standard strategy for us is to just hire great engineers and surprise people at how well we can compete, even with a company that's got a strong lead," he said.

Gates said Microsoft remained open to making acquisitions, but declined to comment on possible candidates.

Just two days before Microsoft Chief Executive Steve Ballmer walked away from the Yahoo bid, he outlined to employees a four-part plan to "build the most interesting position in the world in online advertising, media, and the kind of social connected search and media experiences that go along with that."

First, Microsoft must do the basics -- a huge search index, lots of storage in the cloud for users -- very well. It must innovate in "quick waves" that force Google to play catch-up. It must "change the basic experiences" of communication and search. And it must gain scale.

"We have a strategy and we have ideas in each one of those categories," Ballmer told the employees. The promise fell flat with analysts who had heard it so recently before.

Part of Microsoft's trouble is all the attention that Google gets. After all, no one uses Microsoft as a verb for search.

Danny Sullivan, editor in chief of the industry news site SearchEngineLand.com, said Microsoft's Live Search has innovative features people would really like.

Its image search results keep growing as users scroll, eliminating the need to click to the next page. Video search thumbnails start playing when the user rolls a mouse over them. Microsoft also has launched specialized searches for health and medical information and added fun features for the celebrity-obsessed.

But nobody knows about that, Sullivan said.

"What's Live Search? You don't even know that it's Microsoft," he said, recommending that Microsoft raze the Live brand and rename it Microsoft Search.

In the meeting with employees, Ballmer acknowledged that Microsoft needed to invest in marketing the brand. But when Sullivan considered the idea of more ad campaigns to spread the Microsoft search gospel, he concluded that easing Google's grip on searchers would take more than a good tagline.

When people ditched AltaVista for Google, it was because AltaVista's results were getting worse, Sullivan said. Unless Google loses sight of its search technology, there's no real reason for people to break their habit.

Microsoft's strength in display advertising, its efforts with its Tellme voice search division and mobile search, and its presence in video game advertising could bolster Microsoft's online business despite its No. 3 position in search.

"It's not just about search," Goldman Sachs analyst Sarah Friar said. "It's about changing the game of advertising."