• Business Week, Friday, May 9, 2008 10:15 AM

Even before yanking his offer to buy Yahoo, Microsoft CEO Steve Ballmer had begun laying the groundwork for a strategy to compete with Google in online advertising. He's convinced that getting the online ad business right is essential to Microsoft's future as consumers and businesses increasingly switch from desktop software like Microsoft's to free online services that do the same things.

It may be impossible to catch Google in search advertising. But Microsoft has a fighting chance on several other fronts. Perhaps most important is display advertising, the colorful banner and video ads that run at the top or along the side of Web pages. Microsoft is among the leaders in the fragmented field; Google is a bit player.

Google is pushing hard into the display business. In March the company closed on its $3.2 billion acquisition of DoubleClick, a leading player in placing banner and video ads on other companies' Web sites. Still, Microsoft is a fearsome competitor, with nearly unlimited financial and engineering resources. It has proven its determination to take down upstarts again and again, from the Web browser market to the market for mobile-phone software.

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