If you want to be beat Google, would you like to throw more manpower to beat Google's search algorithms or would you rather try and change the search paradigm.If I want to beat Google? I would throw everything I have got at an AdSense killer.
AdSense is now about half of Google's revenue and their future growth. Microsoft should strangle Google's air supply, their revenue stream.
Targeting ads well to content is hard. Google AdSense does not do a great job of it yet. Advertising should be useful, relevant, and interesting content -- information about products and services you want to hear about -- and it is not. There is a real opportunity here to do it better.
This is where I think Microsoft should focus the majority of its attention.
Microsoft should have its tech and R&D teams develop better targeting through personalization, segmentation, real-time optimization, and content analysis.
Microsoft should use its size to make deals that allow it to offer much deeper ad inventory (e.g. ads for individual products at Amazon or eBay, individual articles at a magazine, specific homes at a real estate broker, or specific video content from NBC).
Microsoft should use its market power to be the exclusive ad provider for large sites like major newspapers, big online magazines, and traffic giants like AOL or MySpace.
Microsoft should use its cash reserves to make being an advertising provider unprofitable for others, lowering ad broker revenue share to near 0%.
Microsoft should ruin AdSense, undermine it, destroy it. There should be no business in AdSense-like products for anyone.
Now, yes, experimenting with new tools, building MSN search, and doing R&D is a good idea. Microsoft may come up with a game changer, perhaps even one that Google and Yahoo cannot immediately copy.
But I think the strategy to win is different. If Microsoft wants to win, it should play to its strengths. It should not seek to change the game. It should seek to end the game.
See also my previous posts, "Kill Google, Vol. 2" and "Kill Google, Vol. 1".