Chief Executive Officer Steve Ballmer says he plans to spend hundreds of millions of dollars

July 23 (Bloomberg) -- Microsoft Corp. Chief Executive Officer Steve Ballmer says he plans to spend hundreds of millions of dollars to fix the company's unprofitable Internet business. His investors say they want proof he knows what to do with the money.

After walking away from six months of on-again, off-again talks about buying all or part of Yahoo! Inc., owner of the No. 2 Web search engine, Ballmer has left shareholders wondering if he has a plan B.

Microsoft, the biggest software maker, has lost about $90 billion in market value this year as Ballmer vacillated on Yahoo and failed to show how he would crack Google Inc.'s dominance of Internet advertising. Shareholders will look for ideas at a meeting with Ballmer tomorrow, said Kim Caughey, a Fort Pitt Capital Group Inc. analyst in Pittsburgh.

``I'm a little concerned; I'll be honest,'' said Caughey, whose firm manages $1.2 billion and owns Microsoft shares. Ballmer needs to ``put a hot, bright light of clarity on where's all the money going.''

Ballmer, along with Chief Financial Officer Chris Liddell and the presidents of Microsoft's three businesses, will address analysts and investors tomorrow at company headquarters in Redmond, Washington. Spokesman Frank Shaw declined to comment because the information is scheduled for release at the meeting.

Drag on Earnings

The company has spent about $9 billion in the past 2 1/2 years building its Internet business, according to Directions on Microsoft, a research firm in Kirkland, Washington. Microsoft doesn't provide figures.

Liddell said on a conference call after last week's earnings release that spending on the online business, which includes the MSN Web site and Live search engine, will rise by ``several hundreds of millions of dollars'' in the fiscal year that began July 1.

The online business is in a ``period of significant investment'' and will ``be a drag on an otherwise exceptionally good performance'' this year, Liddell said on the July 17 call. Net income rose 42 percent last quarter to $4.3 billion on an 18 percent sales increase.

Microsoft also lowered its full-year earnings forecast. The stock sank 6 percent the next day. It rose 16 cents to $25.80 in Nasdaq Stock Market trading yesterday, and is down 28 percent this year.

The online division is Microsoft's smallest with $3.21 billion in sales last year, or 5 percent of the total of $60.4 billion. The business lost $1.23 billion last year, double the previous year's loss, as it hired more people, built computer data centers, and made acquisitions including $6 billion spent on Seattle-based ad company AQuantive Inc.

`Backup Plans'

In May, Ballmer abandoned his bid for all of Yahoo. The acquisition would have tripled Microsoft's share of U.S. online queries. Sunnyvale, California-based Yahoo rejected a bid of $47.5 billion.

He then attempted to persuade Yahoo to sell its search business. Instead, Yahoo struck a deal to carry ads from Mountain View, California-based Google.

Ballmer next may look at Time Warner Inc.'s AOL unit, said Laura Martin, an analyst at Soleil Securities Group Inc. in Los Angeles. ``AOL is more valuable to Microsoft in a world where Yahoo is aligned with Google,'' Martin said in an e-mail.

``It seems like somewhere there's just a whole bunch of backup plans and he's working through all of them,'' said analyst Tony Ursillo at Loomis Sayles & Co. in Boston, which manages more than $135 billion and owns Microsoft shares.

Not Chasing Microsoft

Ballmer should fund a startup company within Microsoft that would have a relatively small budget but creative freedom, Ursillo said.

``It would be nice if they could somehow create a group from scratch there that could tackle this space with some new ingenuity and someone could chase Microsoft for once,'' he said. ``The consistent element throughout that series of `me too' investments has been heavy investment of capital.''

Advertisers in the U.S. will spend $51 billion by 2012 on Internet promotions, according to technology researcher EMarketer Inc. in New York.

Microsoft had 9.2 percent of U.S. searches last month, up from 8.5 percent in May, Internet site tracker ComScore Inc. in Reston, Virginia, said. Google's share fell to 61.5 percent from 61.8 percent, while Yahoo's grew to 20.9 percent from 20.6 percent.

Yahoo Possibility

A deal with Yahoo may still be possible. Yahoo gave billionaire investor Carl Icahn three seats on its 11-member board this week to end a proxy fight before its Aug. 1 annual meeting. Icahn had pressed to replace the Yahoo board and make the sale to Microsoft.

Yahoo's value may be declining, Fort Pitt's Caughey said. Yahoo yesterday said its second-quarter profit fell 18 percent to $131.2 million, or 9 cents a share, as the Internet company spent more to develop new technology.