Update: Microsoft and Powerset confirm deal

Microsoft plans to integrate Powerset's semantic search technology with some of its own natural-language technology in development in Microsoft Research

Microsoft and Powerset confirmed Tuesday that Microsoft will purchase the search-engine startup. The news comes several days after a rumor about the deal circulated on the Web.

[ See related video of Eric Knorr's visit to startup Powerset and a demo of its search engine. ]

Neither company mentioned the price of the transaction on separate blog entries, where they made the announcement.

Microsoft said through its public relations firm that the companies are not disclosing the terms of the deal. Last week's rumor set the price at about $100 million.

In a blog entry attributed to Microsoft senior vice president Satya Nadella, the company said the Powerset team will join Microsoft's Search Relevance team and stay in San Francisco, where the startup is headquartered. Powerset has 63 employees that will remain in their current office, Microsoft said.

Powerset is pioneering semantic search, technology that Nadella said is valuable to Microsoft's direction for its search engine.

Analysts said that while the technology from Powerset is valuable, Microsoft was probably most interested in the engineers. "[Microsoft is] buying a company that's done some fairly innovative work, but in the early stages of development," said Nick Patience, an analyst with The 451 Group. "They bought it for the people."

That said, Powerset's semantic search technology is potentially valuable.

Semantic search attempts to extract meaning from search queries and Web pages rather than simply matching them up with relevant links based on keywords or previous or related searches. Search-engine leader Google still primarily uses keywords to deliver search results.

"We know today that roughly a third of searches don't get answered on the first search and first click," Nadella wrote. "Usually searchers find the information they want eventually, but that often requires multiple searches or clicks on multiple search results."

He cited two specific problems for the delay in finding information with traditional search methods -- differences in phrasing or context between a user's search and the way information is expressed on Web pages, and lack of clarity in the descriptions for each Web page in the search result.

Powerset is currently testing a search engine that attempts to understand the meaning of Web pages, in part using technology licensed from Xerox's PARC subsidiary. That technology creates a semantic representation of Web pages by parsing each sentence and extracting its meaning.

While the company's technology looked impressive in a demonstration, it is uncertain whether Powerset can scale it to work across the Internet, said Greg Sterling of Sterling Market Intelligence. Powerset has applied its search to relatively small segments of the Internet, such as Wikipedia. "That's a key question: whether or not something that they've accomplished with Wikipedia ... can translate to the entire Web," he said.

Patience agreed that scaling the technology could be an issue. "It's an interesting application of semantic technology that's yet to be proven on any size. Wikipedia is not large," he said.

An acquisition by a company with deep pockets, like Microsoft, could be just what Powerset needs to scale its technology to the entire Web.

In a blog entry attributed to Powerset's Mark Johnson, the company believes that Microsoft will help it deliver its technology to a wider audience much more quickly than the startup could do itself.

"Microsoft shares our goal to improve search through deeper analysis of queries and documents, and understands that our technology and expertise will play a key role in the evolution of search," he wrote. "With an existing search infrastructure, incredible capital resources, unlimited data, a leading search team, and clear mission to revolutionize the search landscape, Microsoft can rapidly accelerate our progress in building semantic search technology and bringing it to full Web scale."

While the acquisition may appear to be a knee-jerk reaction following Microsoft's failed attempt to buy Yahoo, that's unlikely to be the case, Patience said. "This is not really an alternative to buying Yahoo," he said. "It's an unproven technology with no revenue."

Powerset doesn't offer Microsoft the strong brand, users and multitude of Web properties that Yahoo would have, Sterling agreed. "This is not a substitute for what they were going for with Yahoo," he said. "This isn't the answer to Microsoft's prayers."

While Yahoo researchers are also doing work on semantic search, Microsoft might have better luck developing and commercializing Powerset's technology than if it had made the Yahoo acquisition, Patience said. "The question is, would the Yahoo people have already left or gotten lost inside the greater Microsoft?" he said. "These [Powerset] guys have a better chance of influencing Microsoft search direction than the semantic engineers at Yahoo would have done."

Microsoft plans to integrate Powerset's technology with some of its own natural-language technology that has been in development in Microsoft Research, Nadella wrote.

The company will disclose more details on how it will use Powerset's technology in its Live Search engine at a later date, he added. Microsoft said it expects the deal to close in a few weeks.

For years Microsoft has been looking for ways to bolster its search strategy, and since the Yahoo deal fell through it is under even more pressure to boost its search market share.

Since search-based advertising is the largest slice in the online advertising pie, Microsoft must increase the profile of its Live Search engine in order to build this part of its business.

Live Search is seen as far inferior to Google's search engine, and also ranks behind Yahoo in terms of how often it's used.

This story was updated on July 1, 2008

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