• Fortune, Thursday, May 29, 2008 11:01 AM

Kevin Johnson has one of the hardest jobs at Microsoft: Figure out what to do about Google, whose advertising revenues recently surpassed Microsoft's gross sales from Windows, the software giant's top-selling product. In a series of interviews with Fortune, Johnson reveals that "Plan A" of his Google strategy was to buy Yahoo. Now that that didn't happen, it would appear that "Plan B" is to acquire the Web giant's search business.

Microsoft is near the bottom of the advertising revenue totem pole, with a modest $2 billion in global revenues. Google, with $8 billion, is near the middle, but all of it comes from online advertising, which Microsoft estimates will grow from $40 billion globally this year to more than $80 billion by 2010. This means there's a lot still up for grabs.

Johnson admits: "We are not where we want to be in [online services] yet, and we've been in this position longer than we'd all like." One strategy to change that is to migrate Microsoft's Windows business to something Johnson calls "software plus services." He says the company's Windows Live Services could eventually dominate the Web like Windows software dominated the desktop. Search, content, and communications and social networking, are the other key ad-supported areas. Microsoft's advertising platform, which has been built through acquisitions, is the underlying engine that powers these four areas, Johnson says. "The more ad inventory you can get, the better job you can do to target ads, drive efficiency, and deliver better yield for publishers," he says.

Read the whole story at Fortune »