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Microsoft's online gamble could be smart bet

Analysts grumble that Microsoft is pouring a lot of its Windows and Office profits into its online efforts. CNET News' Ina Fried argues that's not such a bad thing.

As I listened to financial analysts grumble about how Microsoft continues to pour its hard-earned software profits back into its online services effort, I couldn't help but think that maybe Microsoft is on to something.

Wouldn't newspaper industry analysts have had the same grumbles if the Gannetts and Knight Ridders of the world had poured a huge chunk of their profits into online ventures a decade ago at a time when their ad revenues were still enjoying healthy growth? And wouldn't they now say such a move, if well done, would have been brilliant?

Newspapers have traditionally been funded by things like classified advertising in areas like real estate, help wanted, and car sales. Had one of the newspaper companies seen the online threat and said, "We need to own those categories online," perhaps they would be in better shape. Instead, they are faced trying to reinvent themselves at a time when their revenue is in sharp decline.

Of course, it's not a direct parallel. There's an argument to be made that, while newspapers were inevitably going to lose revenue to online sources, Microsoft could steer clear of advertising by focusing on business software.

But if the biggest long-term threat to Windows and Office is free rivals and Web-based services, shouldn't Microsoft be using a significant fraction of its profits to develop its online advertising capacity?

A long-term battle between Microsoft and Google is shaping up. The question is whose economic engine will be stronger. Google is funding its legions of data centers and armies of engineers via online advertising, while Microsoft is using Windows.

Importantly, after reporting weak Windows results in April, Microsoft saw that unit post healthy and better-than-expected 15 percent growth for the most recent quarter.

Obviously, Microsoft needs to execute better on the Web. Pouring money into online ventures is only good if it produces returns. To date, Microsoft has not seen the kind of gains it will need to have to make it pay off. Some newspaper companies did, for example, build online job sites and auto sites and just weren't able to grab enough money to replace the ad dollars being lost. It's not enough to see the threat and try. To prove the grumblers wrong, Microsoft will have to do more than throw money online. It will have to win.