Microsoft to spend $1.1 bn on MSN, up 50%

Daisuke Wakabayashi

REDMOND, Washington: Microsoft Corp. Chief Executive Steve Ballmer said on Thursday that the company will not slow down its research and development after hiking it next year to build out its software services business.

"If you have a successful product, you continue to invest in it. I don't think people should think of these as one-time events," Ballmer told Reuters in an interview, a week after the company shocked Wall Street with its investment plans.

The increase in capital spending may be slightly front loaded, but all in all next year's R&D increases are here to stay because software services are key to Microsoft's long-term future, Ballmer said.

Microsoft said it plans to spend about $6.2 billion in research and development in the current fiscal year ending June 30. Goldman Sachs analyst Rick Sherlund estimates R&D spending to increase to $7.8 billion in the next fiscal year.

The world's largest software company caught investors off guard last week when it said it would sacrifice billions of dollars in profit next year to invest in new business areas. Ballmer said earlier in the day that software services was the company's top R&D priority.

Investors complained about the lack of clarity in Microsoft's plans to compete with Internet rivals Google Inc. and Yahoo Inc. for online advertising dollars and pushed the shares to three-year lows.

Ballmer said the company needed to clarify for shareholders the importance of its investments online, because advertising presented such lucrative growth potential.

"This is key to the long-term growth of the company. It's key to making sure we're a player in advertising business, which I think is an important business for software company to be in," said Ballmer.

"We've got great long-term growth. I believe we need to invest to get that growth. I believe it is better to grow a lot consistently for many years than get a bump in any one year," he said.

Microsoft plans to increase R&D spending at its MSN Internet unit by more than 50 percent to $1.1 billion in fiscal year 2007 from around $700 million this year, Ballmer said to a room full of advertising executives earlier in the day.

Those investments and other spending to increase advertising revenue through upcoming online services such as Windows Live and Office Live will be a "significant" boost to sales at many Microsoft businesses, according to Ballmer.

"An increasingly high percentage of our revenue will come out of advertising," said Ballmer. "We're about $2 billion, $2.5 billion in advertising this year. These are not small numbers."

Shares of Microsoft rose 27 cents, or 1.17 percent, to $23.44 on Nasdaq. Prior to Thursday trade, the stock had fallen 15 percent since April 27, when the company forecast next year's earnings below Wall Street estimates