Microsoft to attack Google with its wallet

Microsoft's plan to pay online shoppers who buy things they find using its LiveSearch service shows just how serious the company is in its quest to take search ad business away from Google. 

But it also reveals how much of Microsoft's strategy is based on thinking that helped it win battles fought more than a decade ago. 

Given how different the landscape is this time around, and how little success Microsoft has had with search so far, it's unlikely that the cash-back strategy by itself will help the company succeed in capturing a meaningful chunk of search market share from Google.

Still, it represents a watershed in the evolution of the search market by putting discounts alongside relevance in how users rate the benefits of a search query.

That could impact Microsoft's smaller search rivals -- including emerging vertical search networks that are attracting a growing number of Web publishers -- as well as a another Silicon Valley search firm with a whimsical name.

The latest cash-back plan helps explain why Microsoft is so desperate to do a deal with Yahoo, even one that falls short of an outright acquisition. For it to have any kind of impact, Microsoft will need to drive a lot more traffic to its LiveSearch service. Getting Yahoo's search traffic would help.

This isn't the first time Microsoft has used incentives to try and goose its search market share. Last June, the company reversed a long slide in its searches and market share when it rolled out LiveSearch with a promotion that let users win points that could be applied to prizes like a Zune player.

But those gains came not at the expense of Google but from Yahoo and other search rivals. Google has continued to add to its leading U.S. market share, for one simple reason -- its searches produce more relevant results that put more money into the pockets of search keyword buyers.

That technology edge is not one that's going away anytime soon. How can we be sure? Because if Ballmer was confident that Microsoft's engineers were about to catch Google in relevance, he wouldn't have tried so hard to buy Yahoo's search technology -- which is inferior to Google's in terms of revenue per search.

As long as Google can give advertisers more money through technology, it will be able to reduce the allure of Microsoft's LiveSearch campaign -- which is essentially the digital equivalent of the co-op advertising payments that product-makers pay to stores to help sell their goods.

Microsoft has a long history of using its financial resources to gain dominance of a market where it had fallen behind rivals' technology.

It spent big to market Windows '95 -- paying the Rolling Stones millions to use the song "Start Me Up" as part of a  big ad campaign. That helped the company solidify its leading position in PC operating systems, even though the graphical interface of Windows '95 was years behind that of Apple's Mac OS.

Microsoft repeated the success in Web browsers, when it pummeled Netscape by giving away Internet Explorer for free -- a bit of anti-competitive subsidizing that led to its being found a monopolist by the U.S. courts.

And in networking software in the late 1990's, the company priced its server software low enough and marketed it heavily enough against Novell's Netware that IT network managers were able to look past their concerns about security and scalability long enough for Microsoft to catch up with and eventually squash its smaller rival.

That last example is one that Google CEO Eric Schmidt is intimately familiar with, having been in charge at Novell at the time. 

But this time around, Microsoft's 20th-Century approach might not provide much of an edge in a 21st-Century market that is rapidly changing. Paying consumers to use its search service won't help with all the consumers who dispense with search altogether and use discovery sites to push them shopping recommendations. 

And unless Microsoft starts subsidizing publishers as well, narrowly-focused vertical search networks that put behaviorally-targeted ads on premium or niche sites will still hold an edge in generating revenue-per-search for their Web sites.

Lastly, Google could easily counter the LiveSearch cash-back plan with payments of its own -- although my guess is that Google engineers would commit hari-kari before allowing their product to be bastardized in that way.

My guess is that Jerry Yang and his fellow technologists would be loathe to start paying users of Yahoo search. Ironically, though, the LiveSearch strategy may end up being less about hurting Google and more effective in forcing Yahoo back to the table -- by making clear how expensive it will be for Yahoo to compete with Microsoft now that the software giant is ready to spend big to subsidize its search business.