REDMOND, Wash.--In the wake of Microsoft's, online chief Qi Lu outlined why the business is so important to Microsoft and how the company hopes to make headway.
For one thing, he promised the crowd of financial analysts, it can be a huge money maker.
"When you are at scale it can be a hugely profitable business," Lu said.
The problem is that many of the costs are the same even if you are not operating at scale, which is the place Microsoft has found itself. "Even if you have one user you have to crawl the whole Web."
But the challenge goes further, he said, noting that smaller players, by their nature, have fewer ads to show, meaning those ads are less relevant and the search experience is not only less profitable, but less desirable for users.
The Yahoo deal will help Microsoft in the scale arena. Combined, the two companies would have more than triple the search share that Microsoft has on its own. That said, the combined entity still has less than half of Google's share.
"With larger scales there are several important advantages," Lu said. "There is an almost immediate lift in the quality of user experience."
For example, suggested searches are based on a fairly simple algorithm, but one that gets much better the more queries a search provider sees.
But, even beyond the scale issues, Lu acknowledged that Microsoft also faces a brand challenge. He said that studies show that given a choice between Google's brand with another provider's results and Google's results with another provider's brand--users will choose the Google name, which has become synonymous with search.
"People will prefer the Google brand because of the strength it has," said Lu, whofrom Yahoo at the end of last year.
Answering those challenges won't happen overnight, he said.
"We want to be brutally honest about where we are," he said. "It's going to take time."
Microsoftin June and has seen a slight bump in market share, though it remains to be seen whether it can hold onto and build on that initial interest.
"Overall the early feedback from the market has been encouraging," Lu said. "It's a good step, but it's the first step in a long, long journey."