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Microsoft's MSN revenues increased a mere 1 percent year over year, and declined from last quarter even as rivals Google and Yahoo! posted strong growth.
During its quarterly earnings call on Thursday, Microsoft executives said they are disappointed with the results and are pilot testing a new end-to-end paid search advertising platform in Singapore and France they expect will improve MSN search revenue. Microsoft plans to begin testing the service in the U.S. soon.
For the quarter ending Sept.30, MSN showed 1 percent year-over-year growth to $564 million. After being questioned by one financial analyst, however, executives confirmed that MSN revenues declined sequentially even as Google reported 15 percent growth, and Yahoo followed with 6 percent growth.
"Search advertising revenue has not been as strong as we'd like," said Scott Di Valerio, corporate vice president and chief accounting officer at Microsoft.
Aside from the new "Advertising Center, Microsoft is working to develop its algorithmic search capabilities and will integrate search into its desktop and server software, he said during the analyst call.
Microsoft reported $598 million in MSN revenue in the fourth fiscal quarter of 2005, $581 million in the third quarter, $606 million in the second quarter and $559 in the first quarter of FY05.
""We are conscious of that and will address it in the future,' said Microsoft CFO Chris Liddell.
The news comes as Microsoft Chairman and Chief Software Architect Bill Gates and Microsoft CTO Ray Ozzie prepare to take the stage on Monday to unveil the company's next generation software-as-a-service strategy.
During the earnings call, Liddell said the company's recent reorganization into three business divisions -- including the Platforms and Services Division -- is intended to address the growing market for Internet-based services such as search and CRM.
He also said executive changes are being made to drive that growth and noted that Lotus Notes and Groove Networks creator Ozzie is "taking more of a presence" at Microsoft corporate.
Goldman Sachs analyst Rick Sherlund said the success of Google, Yahoo, eBay and Salesforce.com could undermine traditional platforms and industry leaders.
"Reading the tea leaves, it would appear that Microsoft is again under assault by changing technology and as with Netscape, off to a slower start than others such as Google," Sherlund wrote in his report Thursday.