Despite financial losses, Microsoft looks to increase investment in online services

Microsoft CEO Steve Ballmer sought to justify to financial analysts the losses from the company's online services group and to defend plans for increasing investment in the group.

Ballmer stepped in to speak for Kevin Johnson on Thursday at the company's annual financial analysts meeting. Johnson has been president of the Platforms and Services division, and his plans to leave the company to serve as CEO of Juniper Networks became public on Wednesday.

"I wanted to make sure that people making announcements in our online business were actually going to be here in three weeks," Ballmer joked. "We wish Kevin the best at his new assignment at Juniper."

Johnson has been head of Microsoft's online business, which recently reported a $488 million loss in operating income for the fourth quarter, more than double the $210 million operating loss the division saw last year.

That loss is insignificant when examined in light of the division's potential, Ballmer argued. "This year our [online services business] loss was about 5 percent of our operating income, and yet the amount of economic value we might create ... is 40, 50, even 60 percent or more of our total economic value," he said.

The amount of investment that Microsoft plans to plow into online services is relatively small from an overall company standpoint and will offer a real opportunity to grow the company's market value, he said. "I think it's a very good risk return," he said.

It's unclear even to Ballmer how long the company might have to continue this level of investment in online services. "How long is that going to go on? I'm not sure. But we're going to need to continue to invest until we get greater scale in this business," he said.

Ballmer spoke briefly about the company's discussions, currently on hold, with Yahoo, but seemed to take pains to exclude Yahoo from a short list of companies capable of innovating search. "Google and Microsoft are really the only two companies that can do this," he said, after describing the need for changes in the search market. "This category is ripe for innovation," he said.

Beyond search and advertising, Ballmer also argued that the shift to online services will help Microsoft's enterprise business. As Microsoft begins selling hosted offerings to businesses, it has the opportunity to offer support and service level agreements, for a price. "We see the overall pool of opportunity increasing," he said.

Microsoft has been chasing Google's significant lead in the search business and trying to catch up to other enterprise vendors that are shifting to offering services rather than software.