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Playing catch-up with Google

newsmaker Steve Berkowitz, in charge of MSN and Windows Live, talks about what Microsoft has to do to make strides online.

At Ask.com, Steve Berkowitz didn't have enough resources to take on Google. Now, at Microsoft, he has plenty of money, but still has a lot of work to do.

Berkowitz joined Microsoft in April, where he was given the task of helping build a cohesive ad-funded business around all of Microsoft's disparate online businesses, from MSN to Windows Live.

"I believe Microsoft can change the world," Berkowitz, senior vice president in the company's online services group, said in a recent interview. "I don't believe I can change Microsoft. I believe I can help it evolve.

In his first sit-down interview with CNET News.com, Berkowitz talked about the challenges for Microsoft, the future of Internet advertising and what it's like being an outsider in Redmond.

We're once again hearing about a lot of advertising-based businesses. Do you have a sense of what good ones are?
Berkowitz: I would say that a good advertising business will be one that really starts to bring relevance. Today, the delivery of the information--the advertising--even within search is still not anywhere near as good as it can be. So, to me, it really is going to be where relevance takes hold.

Today, the delivery of the information--the advertising--even within search is still not anywhere near as good as it can be.

And it needs to evolve from text-based (advertising) to understanding the intent. So, as we get more to the intent factor of users, the advertising will get better and better and better.

I don't think we've seen the potential of what advertising can fund. It's funded so many businesses historically, and the Internet is just a natural extension of that. I think it will fund a lot of businesses going forward. I think it can change the paradigm in a lot of different areas.

We've seen a little bit of the reverse in video. People are paying for TV shows that, historically, got funded by advertising.
Berkowitz: Well, I actually think that it gets back down to convenience. It's about the experience. They've made it so it's a microtransaction, no different than a natural evolution of pay-per-view.

But I think it's a subset (of overall TV viewers). If you think about the total number of videos that people are truly paying for, it's a very, very small portion of the world.

How much time have you spent thinking about moving to ad-based things that have historically been purchased software?
Berkowitz: It gets back to separating out the enterprise from the consumer. I don't see much of a business model change on the enterprise side of the world. There's so much around security and so much around control and so much around the way the enterprise needs to work that I don't really see that changing.

You'll start to see Microsoft work together much more naturally than it has in the past. Instead of focusing on the products, it will focus on the customer of the product. That will break down lines across things, because that's the way the world is going. That thinking will change the way Microsoft operates, which I think will make Microsoft a more competitive company in the consumer space.

What is it like coming into Microsoft from the outside?
Berkowitz: Well, it's kind of like going to a new country. The good news is they speak English and eat French fries, but it's definitely different. I've worked for Robert Maxwell, I worked for Pat McGovern at IDG, I worked for Barry Diller, and now I work for Bill and Steve. So it's kind of an interesting experience.

What's fun about it is that it is an information worker environment, which is very different. It's not a call center environment. So it's fascinating, the intellect. The challenge, of course, is how do you make all this intellect into a singularly focused type of thing, when it has such a broad charter and so many different points of view?

Looking at the MSN business, Microsoft decided before you arrived to shift to its own ad engine. Since the switch, ad revenue per search is down. It seems like AdCenter, at a dollars-and-cents level, has yet to pay off.
Berkowitz: You have to realize that Microsoft has two fundamental strategies right in this space, one which I think of as overarching, which is: How do we own the direct relationship with the advertiser?

That's the AdCenter concept, and not just in search. It's going to be in a broader set of media, where we can deliver a contextual solution by the end of our fiscal year, this year, and do a few other things as we start to look at the world. So it's about that relationship with the advertiser.

The other thing, the other mission for Microsoft, is to build a relationship directly with the consumer and proprietary audience.

For us, the challenge is that it's an investment. I think that's the biggest difference between Microsoft and where I worked at Ask.com, with the kind of investment we can make.

If we can grow our audience and continue to retain the audience, AdCenter is a great investment. Now, if we can't win the audience game, then AdCenter may not be a great investment. But it has a great potential to touch this $500 billion advertising market, which is three times as big as the software market.

When do you see a point in the battle with Google where you guys aren't really investing, to try and catch up to what they're doing?
Berkowitz: Well, I think there are some places we're investing to catch up, and I think there are other places like (Virtual Earth 3D) we're investing to be ahead. The challenge for Microsoft is we have to get the basics right. I don't consider that catch-up, I just believe it's what we have to do. Then we have to innovate through different ways, we have to realize that technology is the enabler and not the answer.

I think there are areas we're ahead. In instant messaging, we're way ahead of Google.

I think there are areas we're ahead. In instant messaging, we're way ahead of Google. In terms of search, we're behind Google, but we're catching up dramatically, and I think we'll catch up in places. But it's getting that basic flavor right. Once we get it right, then it becomes a battle of what does the consumer want, and how do we create a better consumer experience? Google has its challenges there, and we have our challenges in other places.

You mentioned that the technology is the enabler, not the solution. A lot of the initial Windows Live services are pretty geeky. Is that the strategy?
Berkowitz: No, that has to do, again, with what was the focus of the company. It's understanding where technology begins and where the consumer experience begins and where the technology ends. So sometimes I think we get ahead of ourselves in technology, and we think that the technology, which is cool to us, is actually what consumers want.

But it's hard, because you've got two sets of constituencies: You've got the technorati--the people who want to see the new, cool, innovative stuff--and then you've got the person who really wants to just kind of evolve their experience. And we have to balance that.

The company has leaned itself towards a lot of the kind of really whiz-bang cool stuff, but that's not what wins the day at the end of the day. We have to find a way to do a better job of thinking about the customer and what the customer wants.

We have to find a way to do a better job of thinking about the customer and what the customer wants.

And I think you'll see that, I think you'll start to see things from us. It's going to take me 12 to 18 months to get my hands on it from the product development side, but you're going to start to see us move to a much more consumer-friendly kind of evolution.

The Google purchase of You Tube--I'm kind of curious what you guys make of that.
Berkowitz: First of all, what that tells you is that audience is important. They didn't acquire it for technology, they acquired it for audience. But what they realized is that user-generated video is a platform, and that they need to integrate that platform into the Google experience. That's why we're launching Soapbox, because YouTube, as a destination, really is more of a gadget that you use as a certain piece of your experience, but it's not a total experience. So I think they bought it because they realized it's a way to step up audience, it's a way to monetize video in the long term, and it's the way to get that user-generated video. That brand and experience are just as important as technology.

Obviously, lots of people are interested in user-generated video; the big question is, why is it interesting for advertisers?
Berkowitz: I don't know how interesting it's going to be for advertisers. To me, it's interesting for audience, and I believe if you aggregate audience, you'll find different ways to get the advertisers.

You may never be able to monetize user-generated video, because of all the issues that you have with the person who created it. Do they get any revenue from that? Or, once they've uploaded it, it's now public domain, and will that change when people start making money on it? It's not about how you make money on user-generated video, it's how do you make money on audience in total? That's just one component of it.

Do you think that we're going to see a lot of revenue sharing between content creators and the technology-advertising companies like Microsoft?
Berkowitz: Mm-hmm. I come from the book business, so I believe in that it takes writers like you and other people to make the content more valuable. I think that user-generated is great, but trust is so important, and that there's a real value and cost in creating that content.

It's kind of one of the reasons why I like MSN as a strategy, and Live as a strategy, is because we're not going to be in the content business, but we're actually offering content providers the ability to aggregate. We aggregate audience and share with them that audience for them to go forward. We're taking "best of breed" partners and bringing that content to people, whether it be through Live, or in a different experience, or through MSN. You'll see us absolutely partner with content providers, because there's a huge value to that.

(If) they help create stickiness to the audience in general, they earn the right to have a significant portion of the revenue that comes from that content they create.

Where do you see Yahoo in all of this?
Berkowitz: I think of Yahoo (after) having run a small public company. Now, Yahoo is not a small public company, but because it doesn't have the resources and it doesn't have a diversified revenue stream, it has a challenge. So the challenge for them is: How do they manage their margins at the same time (as they) compete with Google (which has money to invest)? It's going to be a challenge for them to balance the need for investment.

What do you make of your old company, Ask.com? Where do they fit in?
Berkowitz: I like what they do. I think that they have been very innovative. But it's a challenge. I think that the benefit that Ask has today is being part of (Barry) Diller's network of sites. It actually can become the audience, kind of the "mortar" to the "brick" that Barry has built. So I see it as a real strategy and a real positive for Barry.

I think they'll continue to fight for share, battle in search, but I think the long-term benefits to the company are going to be that it will unlock the value of IAC (InterActiveCorp, Barry Diller-backed owner of Ask.com) in a lot more ways than IAC could have unlocked the value before. They may gain share, they may not gain share, and they'll do great things. It's hard to compete just at the level of investment that's going on in the technology space. But at the end of the day, Barry has a good company. There's a lot of things they can do.

Are there areas that people are pushing that overestimate what advertising can do?
Berkowitz: I think search will hit a ceiling at some point.