Microsoft’s next big challenge is to address the threat posed by advertising-supported business models such as Google’s, Steve Ballmer, chief executive, signalled on Monday as the software group launched Vista, its new operating system.

In an interview with the Financial Times, Mr Ballmer said that, having focused on the threat posed by open source software over the past few years, the company had now turned its attention to advertising-funded business models.

”Really getting a clear direction on how we embrace, compete, extend, advertising as a business model – that is a primary issue for me and it extends across the product line,” he said. “We’re the number three seller of Internet advertising in the world, so we’ve embraced, and now the question is where do we go next?”

He underlined the importance of internet search where, according to the latest US figures from Nielsen/NetRatings, Microsoft’s market share continues to fall. It has about 8 per cent of US searches compared with Google’s 51 per cent. Sketching out on paper where Microsoft would focus after Vista, the first three products in the online category were: search, search and search.

Microsoft also lags far behind Google in building up a powerful network of advertisers to feed the internet traffic generated by its search engine. Microsoft has so far failed to narrow the gap through investment in its own search technology and advertising system. Mr Ballmer did not rule out acquisitions to bolster its position. “There may be blockbuster [deals], but the number one thing for us is our own development and let’s call them technology acquisitions.”

The Microsoft chief also raised the prospect that Microsoft might take a different approach to that of rival Google. He said: “The [search] experience leaves a lot to be desired. Something like 50 per cent of searches don’t actually result in an answer to the user’s question …the average search I think is 2.1 words. Isn’t that odd? Why don’t people type more into search queries? Because they have learned the more you type, the more false positives you get.”

He suggested that left plenty of opportunity for innovation in search and that Microsoft, as the underdog, might find it easier to change than those with a bigger market share. “Frankly, if you are market leader, it is a little harder to break out of your pattern than if you are not the market leader,” he said.

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