Per the WSJ, Steve Ballmer announced that Microsoft will radically increase spending on its online business to keep pace with Google and Yahoo:
[Ballmer] said the spending would include $1.1 billion in 2007 on its MSN online business, compared with $500 million in 2005. "We will invest as much on this online opportunity as any of the other bigger players in the market," Mr. Ballmer told about 700 advertising executives [at a big shindig in Seattle]. A report from Reuters adds that the aforementioned $1.1 billion will be for R&D spending and that the company will up MSN's CAPEX from $100 million to $500 million.
Well, good, then we don't have to write off Microsoft in the online business just yet. Alas, if Steve thinks keeping pace with Google is only going to cost this much, he's a tad out of date. Google will likely spend CAPEX of $1.5-$1.7 billion this year, versus Steve's $500 million, to say nothing of next year. As for R&D, meanwhile, Google exited Q1 on a run-rate of $1 billion, up more than 100% year-over-year. Google's R&D spending for Q306-Q307, therefore, will probably be closer to $2 billion. Microsoft's newfound commitment--which will probabably generate significant divisional losses--might allow it to keep pace with Yahoo's spending, but Google's should still leave it in the dust.
The WSJ adds that Ballmer said Microsoft was "impatient and determined" to play a bigger role in the online advertising market. Again, good. The only chance Microsoft has is if it is humiliated and pissed off. Even then, I think the chance of real success is small, but absent this passion, it would be zero.
[Updated after original post to add data from Reuters.]