This week in Microsoft

Company has hinted that it will flex its checkbook more during the next year--and now we know where it intends to bulk up.

Microsoft has hinted that it will flex its checkbook more during the next year--and now we know where it intends to bulk up.

The company announced last week during its earnings announcement that it would pay out far more than expected in the next 15 months--roughly $2.4 billion, according to estimates--as it bulks up several of its new business efforts, particularly its online services.

This week, CEO Steve Ballmer gave details of just how much of Microsoft's extra spending will be devoted to building up its Internet services business. Acknowledging that Microsoft's stock has plunged over the uncertainty created by its investment plans, Ballmer said the MSN unit plans to spend $1.1 billion next fiscal year on research and development, up from $700 million in planned spending this year. The online unit also plans to spend $500 million on capital expenses in fiscal 2007, up from $100 million in fiscal 2005 and an estimated $300 million this year.

Microsoft also demonstrated its AdCenter engine, which it now uses for 100 percent of its search advertising in the U.S. Until recently, the software maker relied on paid search technology from Yahoo and still uses that company's engine in many overseas markets.

Last quarter, Microsoft shifted the majority of its U.S. queries over to AdCenter. But even with an increase in the number of search queries, the MSN unit faltered. It saw its revenue per search query drop, one of several factors that pushed the unit back into the red.

Acknowledging that Google has grabbed an early lead in search and Internet advertising, Microsoft Chairman Bill Gates pledged that his company would "keep them honest." Speaking to a crowd of MSN's largest advertisers, Gates said that Microsoft would prefer not to be coming from behind.

He also gave credit to his rival, saying Google has "done a great job on search and what they've done with advertising." But he reiterated his position that search today is still too much of a treasure hunt and promised that better things are in store.

"We will keep them honest, in the sense of being able to do better in a number of areas," Gates said.

CNET readers did not waste the opportunity to skewer Gates and Microsoft on this statement.

"This has got to be the most blatant use of "psychological projection" we've ever seen from a company that has made a marketing strategy out of the technique," wrote one reader to's TalkBack forum.

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