Microsoft’s “circular conundrum”

July 25, 2008, 1:53 AM UTC

By Yi-Wyn Yen

To compete with Google (GOOG), Microsoft must get more search traffic so it can sell more advertising.

An analyst kicked off the Q&A session that wrapped up Microsoft’s (MSFT) daylong meeting with Wall Street on Thursday by asking CEO Steve Ballmer how he plans to both increase search queries and relevant ads at the same time. Earlier in the day Ballmer referred to the situation as a circular conundrum because advertisers don’t want to sell on Live Search unless there’s more people using the site, and people don’t want to search on the site unless there are more relevant ads.

Ballmer explained there are three ways to increase Microsoft’s search ad performance. First there’s the Live Search algorithm, and Ballmer says he feels pretty good about that one. Next is building brand reputation, which Ballmer admits is “not going to be easy.” Then comes the toughie: Solving the ad relevancy issue.

“We have some ideas about that,” said Ballmer as he nodded his head and stuck his hands in his pockets. “We are going to have to go way out of the box to get into the box.” Ballmer said the Live Search team is working on “two or three different concepts.”

Ballmer didn’t want to get into the details of how it’ll solve its chicken or egg dilemma for online ads, which means Microsoft still is struggling to hatch a plan.