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Microsoft devoted much of its recent analyst day to search. Here's an excerpt from a note to clients by Citigroup analyst Mark Mahaney containing a summary of the key points:

GOOG: A Brief Update On Search from MSFT's Analyst Day

Catching up on the details of MSN Search – Based on the Analyst Day presentations and on conversations with several of the MSN personnel made available during the day, we’ve updated our thinking of the status of MSN Search.  We believe that the top three priorities for MSN search are 1. Improving the relevance of MSN’s search algorithm; 2. Improving the natural language or answers capability of MSN search; and 3. Developing local and mobile search solutions.

Although it is very hard to verify, Microsoft maintains that it has improved the relevance of its search engine to levels that are close to Yahoo! and Google.  Specifically, MSN’s customer satisfaction studies indicate that MSN’s search engine has improved from a 10 point gap to Google to a 6 point gap over the period of the last year.  During the day, MSN executives reiterated their goal of surpassing Google in terms of search relevancy by mid2006.  We don’t have a strong point of view as to whether Microsoft will be able to reach this goal.  But we do assume that Google’s engineers aren’t just sitting around waiting for their algorithms to be out-relevanced.

Then there’s the question of whether MSN will be able to develop enough advertiser interest to gain critical mass for their search engine.  Currently, MSN’s AdCenter solution for advertisers is in beta.  But only in France and in Singapore.  Our new take is that beta AdCenter solutions for the U.S. and other markets will not be rolled out until early 2006. This raises the question of whether MSN will really drop Yahoo!’s Overture service when the existing deal terminates in mid-2006.  Our working assumption – which we believe is conventional wisdom on the Street – is that Yahoo!s Overture business with MSN will end completely in mid-2006.  We still believe this is the most likely scenario.  But at the margin, we believe the odds of some sort of partial extension have increased.

MSN also demo’ed its new global mapping service, which we viewed as impressive.  And MSN also indicated that it was exploring new pricing models for search advertising, such as ROI (return on investment) pricing.

All in, our takeaway is that Microsoft is more committed than ever to online search.  And this is a clear risk for Google.  But our call is that for the forseeable future – call it 12-18 months – this is a manageable risk.  Continued innovation and execution have been critical success factors for Google to date, and they will continue to be going forward.

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Source: Microsoft's Focus on Search Targets Google (MSFT, GOOG)