I'll say it again...Wow.  Henry Blodget has another piece on Microsoft today and it has again blown me away (not in a good way).  I feel bad for picking on the man and in fairness he did put up some competent financial analysis for his conclusions.  But statements like this still boggle my mind...

Search just isn't strategic to Microsoft, no matter how obsessed Steve Ballmer is with beating Google.  Microsoft can't do everything--no company can--and winning the search war is not critical to Microsoft's long-term survival.  Protecting its operating system and office suite monopoly is critical, however, and that business is also under attack.

This leads him to the conclusion that Steve Ballmer is wasting Microsoft's money by putting 5 to 10% of their operating income into Search technology.

Now on the surface what Mr. Blodget is saying seems to make sense.  But if you (a) have a decent knowledge of Microsoft history and (b) understand the changes in the technology field you start to realize his logic is flawed. 

In order to explain that statement let me quickly lay out the primary anti-Trust allegations against the Microsoft Windows monopoly.  They were...

1.  Microsoft uses the Operating System to boost other products (e.g. bundling products like Internet Explorer into the Operating System).

2. Microsoft creates hidden APIs in Windows that are used to make their products work better than competitors (e.g. Microsoft Office was enjoying speed and functionality it's competitors couldn't duplicate because of these hidden APIs)

3.  Microsoft pushed it's weight around with OEM PC companies by creating restrictions that favored Microsoft Products (e.g. companies like Dell would be forced to make Microsoft products the default on new computers or be punished with higher fees for Windows)

So what do all these have in common?  They are all situations created because the Desktop OS was the gateway between the user and other products.  This allowed Microsoft to steer users into their own products which in turn created other monopolies.  But that advantage always came from Windows (via the desktop) being the starting point to the rest of the computing experience.

The problem now is more and more people are bypassing the desktop and heading straight to their web browser.  This makes the first web site they go to of tremendous value because it, and not the desktop, is now the gateway between the user and the rest of the computing experience.  It, not Windows, steers the user to other products and services. 

That is why Microsoft is determined to conquer the Search market.  Because they realize (from personal experience) that controlling the gateway largely determines whose products win in the long run and right now that control is almost all in Google's hands. 

As an example of how this works you can easily see Google's office products starting to do to Microsoft Office what Microsoft Office did to Wordperfect and Lotus 1-2-3.  You see the beginnings of this in Google leveraging it's search engine to create Gmail and then leveraging Gmail to promote Google Office (when you get an office document in Gmail it asks if you'd like to open it in Google Office)

So in closing the Windows monopoly is simply not where the gateway is at anymore.  Which makes fighting to control search not only a strategic goal for Microsoft but the same strategic goal that made the Windows monopoly worth protecting in the past.