Update: Microsoft and Powerset confirm deal

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.