And things aren't expected to turn around any time soon. Microsoft said Thursday that its Internet services business will produce less sales growth over the next two quarters than the company had previously forecast.
Where it once forecast that revenue might grow by as much as 11 percent, the company now sees full-year sales growth in its Internet services business of.
"Success continues to elude Microsoft in this market," Technology Business Research analyst Allan Krans said in an e-mail interview. He said Microsoft is hardly alone, with other rivals also struggling to keep pace with Google.
"Given Google's large head start in the market and its ongoing momentum, we think it will be very difficult for Microsoft to have a real impact in the online search market during 2007," Krans said. "However, Microsoft continues to take a long-term approach to this market, and plans to keep the investment dollars flowing into its ad business."
Microsoft has been investing heavily to try and grow its ad-backed businesses, aiming to build a second Windows Live brand to sit alongside its MSN business. In recent years, the company has shifted to its own technology for both the underlying search engine and for paid search.
The shift from Yahoo's Overture engine to Microsoft'shas had a particularly strong impact, with Microsoft in the amount of revenue the company derives from each search query. The company is also losing ground in terms of overall share of the search market.
A report on December Internet traffic from ComScore Networks showed Microsoft losing half a percentage point of market share in U.S. Web queries, down to 10.5 percent. Google and Yahoo both posted gains, to 47.3 percent and 28.5 percent, respectively.
"On the search side you are correct we lost market share," Microsoft CFO Chris Liddell said in response to an analyst's question on the company's earnings conference call. He said he is "clearly not happy with that."
Liddell said Microsoft continues to "take a long-term view of this business" and that the company is making progress in some areas. The company also hopes this year to turn the tide in its revenue per search query. "We still expect to get revenue per search equal to where we were a year ago by the end of this year," he said.
Other parts of Microsoft's advertising business are doing better, he said, pointing to the display advertising business.
"Clearly there is a better story on the display side," he said. "We are growing broadly in line with the market...We're comfortable with the progress we're making there."
The company is investing billions in its advertising business, but the company's forecast Thursday shows it meeting overall financial goals only because of better than expected strength in its core Office and Windows franchises.
Microsoft appears committed to growing the business organically, Krans said, adding that he doesn't believe the company will buy Yahoo, a prospect that has been the subject of on-again, off-again rumors.
"Although the company does acquire, most of Microsoft's purchases are smaller-scale, tuck-in acquisitions that fill gaps in current product offerings," Krans said. "Yahoo's current market cap is $38.37 billion, which would be a large purchase even for Microsoft."