It's ancient history by now--and certainly not news--but it's worth noting that Microsoft (NASDAQ:MSFT) still hasn't made any headway in the search-and-portal game and, in fact, is falling farther and farther behind. As a result, it is not surprising that Steve Ballmer is now warning media companies that Google (NASDAQ:GOOG) is the Evil Empire -- because no other competitive tactic has worked.
Microsoft is at least no longer embarrassing itself by suggesting that Google and Internet domination are only a matter of time. Instead, perhaps, it is marshaling its energies to fight a far more critical battle: protecting its crown jewels from Google-hosted web apps that threaten to pick off low-end users of Outlook, Word, Office, etc. one by one.
How badly is MSN/Windows Live doing these days? In Q3, advertising revenue rose only 5%, once again the slowest rate of growth of the big four (even lagging Yahoo's pathetic quarter). Display advertising on portals, email, etc., was up, but search revenue was down again, despite AdCenter having been rolled out to the entire U.S. market.
Just as bad, the division's operating income/loss fell from a gain of $68 million last year to a loss of $130 million this year--despite a change in accounting for search revenue from net to gross (MSN used to record its net revenue after sharing a portion with Yahoo, et al).
Microsoft is cranking up the R&D and marketing spending to try to compete with Google, but thanks to Google's now 4X revenue advantage (ex TAC), this is a losing battle. Google spent more than $300 million on R&D in the quarter, about half of MSN/Live's total expenses for the period, and it still generated a massive profit. As Google continues to grow, this disparity (or MSN/Live's losses) is only going to become greater.