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Microsoft ready to lose more money online

Software maker says online market is too juicy to pass up, but any real gains in revenue won't be immediate. Profits are even further off.

Microsoft plans to continue to invest (read: lose money) in online services.

Microsoft CFO Chris Liddell Microsoft

In its fourth-quarter earnings conference call on Thursday, Microsoft CFO Chris Liddell said the company would pour hundreds of millions of additional dollars into its online advertising business.

"We do not make these investments lightly," said Liddell, who noted that the loss will be "a drag" on the rest of the company. However, he said it is worth the cost, given how the size of the online advertising market is measured in tens of billions of dollars.

Liddell noted that the market is projected to grow to $80 billion by 2012, making it one of largest potential growth areas for Microsoft.

That may be true, but it's also an area that is experiencing near-term weakness, weakness that Liddell said reared its head last quarter and is expected to continue at least for the next six months.

Pressed by an analyst as to when Microsoft might see its online business stop being a drag on the bottom line, Liddell said he wasn't going to give a forecast for 2010 or 2011.

"I can't promise you you are going to see a massive turnaround in the short term," he said.

Liddell said two-thirds of Microsoft's planned spending increases are related to driving increased search business.

Microsoft's plans include more toolbar programs with computer makers, deals with other software makers and Internet service providers, as well as a faster rollout of its Live Search Cashback program. The company will also look at more vertical acquisitions, he said.

Microsoft's decision to invest more in the business came during the quarter, Liddell said, as a deal with Yahoo seemed less likely--especially after Yahoo made its own deal with Google..

Liddell also outlined Microsoft's latest proposal to Yahoo, a search deal that he said has revenue guarantees of $19.5 billion to $26.5 billion over 10 years.

For the first five years, Microsoft guarantees $2.3 billion. After that, both companies have an option to renew the deal, but at very different prices. If Microsoft unilaterally renews, it has to pay Yahoo $3 billion, while Microsoft's guarantee drops to $1.6 billion if Yahoo alone wants to renew.

"We continue to believe our proposal is a compelling one," Liddell said. Yahoo also detailed the offer in a regulatory filing, but reached a very different conclusion on the value presented by Microsoft's offer. Yahoo says in its filing, which consists of slides it is presenting to investors, that the $3 billion guarantee is below what Yahoo expects to be making 5 years to 10 years from now.