PLANYC 2030

Qi Lu has had more than his fill of losing to Google. For a decade, the technologist led development of Yahoo!’s Internet search technology and watched Google eclipse his company to become the Internet’s brightest star. He left Yahoo in August with vague plans to start a company or return to his native China. Then Microsoft CEO Steve Ballmer came calling. He wanted Lu to consider taking over Microsoft’s online operations and lead the charge against Google one more time. Ballmer promised the company was willing to invest vast resources to compete, even if it took years to pay off. “The more I thought about it, the more it seemed like a duty,” says Lu, during an interview at the software giant’s Redmond (Wash.) headquarters on a balmy May day. “There’s a chance—a genuine chance—that we can make the search landscape a whole lot more competitive and healthy.”

He may be one of the few people who believe that. But Microsoft is giving Lu more backup than he’s ever had before. On May 28, the company was set to unveil an ambitious new search offering called Bing. Instead of just finding promising Web links, the site is designed to help consumers more easily make complex decisions—like what car to buy or where to go on vacation. The goal is to create a loyal base of fans who routinely use Bing for certain types of queries, rather than default to Google. To support the launch, Microsoft is gearing up its biggest search marketing blitz ever, one that could run as much as $100 million. “We’re going [to show] consumers that the two guys that really care about helping you navigate the Internet are us and Google,” says Ballmer “This will be the first time we will step out and say, ‘We’re not just sort of a general online player. We’re really a player in search.’ ”

The stakes are high. Microsoft was slow to recognize the importance of search, only starting to build its own technology in 2003. Since then, the effort has contributed to barrels of red ink in the company’s Internet business, including more than $3.5 billion in losses in the past three years. Yet Microsoft has only lost ground with its Live Search, dropping to just 8% of U.S. searches, while Google has grown to 64%. Microsoft has missed out on billions in potential revenues that might have goosed its stock, which is stuck at the same level it hit in 1998. Worse, Google is using its dominance in search to attack Microsoft’s most lucrative businesses—including its Windows operating system and Office suite of business software.

Most search experts believe Lu (whose name is pronounced CHEE-loo) will struggle to do much better against Google this time. The search kingpin is refining its own technology all the time, and the data it gathers from handling almost two-thirds of people’s queries give it deep insight into how they react to various search alternatives. “Microsoft is making some nice changes, but [there are] no game changers,” says Danny Sullivan, editor in chief of the blog Search Engine Land who has been briefed on Microsoft’s new site. “I still don’t think Microsoft fully realizes how far behind Google they are.”

Lu and other Microsoft executives argue they have an opening few experts see. The company’s extensive research has turned up a surprising vulnerability at Google: While Web surfers may say they’re happy with search technology, the data show they don’t find what they’re after almost half the time. Microsoft has designed the new search offering to remove the roadblocks. One example: Microsoft researchers found that 25% of clicks on search pages involve going back to the previous page, suggesting a frustrated search. So Microsoft developed a feature to avoid the wasted effort: When users hover over a Web link without clicking, Microsoft’s computers generate a pop-up summary of the link.

Lu and his team have also designed a pane on the left third of the search page that generates a “table of contents” for each search. Entering “U2″ brings up categories such as “songs,” “tickets,” and “biography,” while a search for “Honda Accord” offers to lead you to “used,” “reviews,” and “specs.” “For anything beyond finding a Web site—say, finding a person, buying a product, finding a relationship—today’s search experience is not compelling,” says Lu.

The marketing blitz will hit a similar note. In one TV spot, Microsoft will poke fun at Google by comparing its search to a bad relationship where your significant other takes too long to respond to questions and then gives the wrong answers three out of four times. Microsoft has also spent hundreds of millions on distribution deals that will make Bing the default search engine on Hewlett-Packard (HPQ) and Dell (DELL) PCs and Verizon phones.

LOVING THE 19-HOUR DAY

Google is certainly paying attention. The company has been adding a number of new features to its own search engine in recent months. And at a press event on May 12, Google unveiled an option to open a new left-pane feature that resembles Microsoft’s technology. Marissa Mayer, vice-president for search products and user experience, declined to comment on Microsoft specifically, but says, “Search is really in its infancy. We’re just really getting started.”

Lu, 47, has been as involved as anyone in the technology’s history. After a brief stint at IBM, he helped meld three Yahoo acquisitions to launch its first search offering in the late 1990s and later oversaw development of the technology that lets Yahoo make money by placing ads alongside search results. Along the way, he earned a reputation for having both technical chops and relentless work habits. He wakes at 3:00 a.m. most days, takes a five-mile run, and often works until 10:00 p.m. “It doesn’t feel long because I love every day,” says Lu, who is married with two children.

These qualities made him something of an institution at Yahoo, where he constantly pressed for management to pour more dollars into building the technology infrastructure necessary to keep pace in search. In the end, sources say he lost faith in the company’s ability to do so, and left. Former Yahoo engineer Amit Kumar says Lu was “universally well liked” and at his going-away party T-shirts were handed out that read: “I worked with Qi. Did you?”

A FATEFUL ENCOUNTER

Lu has faced tough challenges since he was a boy. Facing persecution during China’s Cultural Revolution, his parents sent him from their Shanghai home to live with his grandfather in a tiny town in Jiangsu province, five hours away. Lu lived without electricity or plumbing, and was so poor that meat was a once-a-year luxury. His first two choices to escape poverty were closed off: His slight build left him short of government weight mandates for coveted ship-building jobs, and his eyesight was too poor to pass requirements for becoming a physicist.

That left computer science, which he hoped might help him land a job in a radio factory. Instead, after earning his master’s degree, he was assigned to a $10 a month teaching job at Fudan University in Shanghai. One weekend a rainstorm prevented his weekly bike ride home to see his parents, so he was in his dorm room when a student knocked and pleaded with him to attend a talk by Carnegie Mellon professor Edmund M. Clark since only a few students had showed up. Impressed with Lu’s questions, Clark asked to see his research papers and then offered him a scholarship to earn his PhD—even waiving the $45 application fee that Lu says he could never have come up with.

Even fans question whether he has the business acumen to be Microsoft’s savior. One former Yahoo executive thinks Lu’s main allure to Microsoft is that he’d be the perfect person to integrate Yahoo’s search operation if Ballmer ever manages to gain control of the business, which Microsoft bid for last year. Ballmer disputes this. “Qi is here because he’s absolutely the best guy on the planet to run a search business.”

When Lu arrived in December as president of Microsoft’s Online Services Division, he inherited a division that began planning its search offensive in mid-2007. That’s when Ballmer asked Susan Athey, a young Harvard economist who studies auctions, to help rethink the search effort. In an initial session in Redmond, Athey quelled fears that there may not be room for a second player in the business, but only if Microsoft got much larger and learned to innovate much faster. Just buying Yahoo, as Ballmer was trying to do, wouldn’t be enough. Later hired as Microsoft’s chief economist, Athey led the research effort that uncovered consumers’ frequent troubles with search. “There’s no reason Microsoft couldn’t catch Google,” she says.

Since acccepting, Lu’s priorities are to set long-term strategy while tightening up operations. One of his mantras: “Have your head above the clouds but your feet on the ground.” He arrives at meetings with stacks of documents, many with notes jotted down in the margins, and requires that a summary be written up afterwards. He is also pushing through changes so that the search group can forecast revenues on a daily rather than monthly basis, to react more quickly to what’s working.

Still, he thinks Microsoft’s real strength is its willingness to lay out a multi-year plan to gain on Google. Lu’s group is working more closely with Microsoft Research so new technologies can be integrated into search. Soon, people with mobile phones will be able to speak search terms, rather than type them. Eventually, Lu says those looking for answers will be able to push beyond the limits of typing a few words in a rectangular box. “This is just the first step in a long journey,” he says.

Slowly but surely, the impact of the federal stimulus package on small businesses and lenders is unfolding.

And the net effect so far has been a significantly increased interest in U.S. Small Business Administration-backed loans by borrowers and lenders.

Calls to the SBA’s Wichita district office have increased about 50 percent, to 100 a week, since the Recovery Act became law Feb. 17, district director Wayne Bell said Friday.

Nationally, loan volume for SBA’s two most popular loans is up 25 percent since mid-March. Local bankers and SBA officials don’t have specific figures, but they say SBA business is on the upswing.

“We’re seeing a lot more interest and getting more outside inquires,” said Doug Neff, executive vice president for commercial banking at Commerce Bank.

More than half of the $730 million in the Recovery Act funding has been targeted to make it easier for small businesses to borrow.

In addition, all SBA fees that borrowers have had to pay have been eliminated through Dec. 31. Typically, those fees amount to 2 to 3 ½ percent of the loan, Bell said.

Banks have also had a renewed interest in making SBA loans after two key incentives out of the Recovery Act were announced in March:

• The SBA increased its guarantee to 90 percent from 75 percent on most loans up to $2 million.

• Maximum guarantee on surety bonds for small businesses competing for public construction and service contracts more than doubled to $5 million from $2 million.

Karen Mills, the SBA’s new director, said 1,200 banks across the country have recently returned to making SBA loans and others are participating for the first time. Most of those banks are on the coasts, where there have been greater lending woes.

Local bankers and SBA officials said the Midwest and Kansas in particular didn’t experience those kinds of extremes, so the swing in banks jumping on board in this area isn’t nearly as great.

But Brenda Murray, a business development specialist with the SBA’s Wichita office, said, “I am hearing from bankers I haven’t talked to in a long time. Between the 90 percent guarantee and the surety increase, banks are motivated to look at things they wouldn’t normally do.”

None of the new programs has caught the attention of small business owners more than the announcement earlier this week that SBA will start guaranteeing interest-free, payment-deferred catch-up loans of up to $35,000.

Applications for those loans won’t be taken until June 15, but lenders and the SBA office have already been getting a rush of calls from potential borrowers.

Unfortunately both lenders and local SBA officials won’t receive all the final details of the program until June 8.

“Everyone is trying to figure this out right now,” Neff said.

They are known as America’s Recovery Capital loans, or ARC loans. As suggested by the name, they are designed to help small businesses recover and not invest in expansion.

Bell said the loans are specifically designed for business having a cash flow problem. In fact, the loans can only be used for existing business debt, such as loan payments, account payables, mortgages and a company credit card.

Repayment doesn’t begin until 12 months after the final loan disbursement and borrowers have up to five years to pay it off.

The SBA will pay the lenders the interest on the loans. Bell said the interest will probably be a point or two above the prime rate.

“It’ll be something reasonable,” Bell said.”… Right now, we don’t know all the details.”

Applications for the ARC loans are made directly to the lenders.

“The SBA has decided the economy is a disaster nationally,” said Scott Soderstrom, the small-business lending officer at Intrust Bank. “They figure lenders can critique the applicants faster than they can, which is true.”

A $50 million vote of confidence by the German giant
could give a jolt to Tesla’s plan for an electric sedan
Story from Business Week

Electric car startup Tesla Motors has a new partner: German giant Daimler (DAI). On May 19, at the fashionable Hay-Adams Hotel in Washington, Daimler announced it has taken a 10% stake, worth about $50 million, in the San Carlos (Calif.) auto pioneer.

The two companies had already been working together. Daimler was planning to build 1,000 all-electric versions of its small Smartcar using Tesla’s battery technology. But Daimler wanted more than just a simple supplier-customer relationship, explains Dieter Zetsche, chairman of the board of management of Daimler and head of Mercedes-Benz Cars. “We are in a time of change,” he says. “This industry is going through a kind of paradigm shift, and has to reinvent itself ultimately to be independent of petroleum and without CO2 emissions. We need fast technology change.”

Making changes fast is hard for big companies. So more than just looking to Tesla for new technology, Daimler wants an infusion of entrepreneurial spirit. “We want to think out of the box,” says Zetsche. “We want to go down new paths, and we believe the combination of such a young, very ingenious company and a very experienced, longtime successful company is a good one in order to find new approaches fast.”

Selling New Shares to Daimler

The deal brings credibility as well as money to five-year-old Tesla, which has garnered headlines for both its speedy Roadster as well as for its recent stumbles. “It validates the effort Tesla has made in pushing the electric vehicle,” says Jeff Schuster, executive director for forecasting for J.D. Power & Associates (which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP)). “It certainly is a boost to that company to have a company like Daimler investing.”

Indeed, Tesla CEO Elon Musk says Daimler’s prestige and technology were major factors in the deal, which involves selling new shares to Daimler. “We actually could have gotten a higher price from another investor, but we would have done so without the strategic advantages,” Musk says. “It gives everyone a higher confidence in our plan.”

That confidence has been shaken a bit recently. The Roadster had cost overruns and delays, and the company has suffered through layoffs and the firing of its first CEO. Now, Tesla has a plan to offer a less expensive but still speedy electric sedan, the Model S, for $49,900. But Musk needs $400 million more to put the car into production. He hopes to get much of that from two federal Energy Dept. programs to support green technologies. But he hasn’t snared the funding yet, and some auto experts and ex-Tesla employees doubt the company can pull it all off. “There are lot more steps to go before Tesla is a viable car company,” says George Peterson, president of automotive consulting firm AutoPacific.

Tapping Daimler’s Expertise

Musk hopes that the deal with Daimler will help put some of the doubts to rest. “It’s important to recognize Daimler is very meticulous,” he says. “A huge part of their commitment is due to the Model S. They’ve gone through the Model S development costs line by line.”

As part of the deal, Daimler will help Tesla with the new car’s engineering. “Tesla is interested in some components, some knowhow, and some technology to add to their vibrant, very energetic startup approach,” says Zetsche. In particular, Musk anticipates tapping into Daimler’s expertise in areas like noise and vibration reduction, plus safety and quality. “They are very interested in helping us. They see us an important test case for market acceptance of electric cars,” says Musk.

Tesla launched the Model S on Mar. 26. It claims to have more than 1,000 reservations for the all-electric sedan, which can carry seven people and travel 300 miles on a single charge. Tesla is asking for $5,000 deposits (or $40,000 for a special collectors’ edition). The car won’t be delivered until late 2011 at the earliest. “If they can get that thing on the road, they’ll have a winner on their hands,” says AutoPacific’s Peterson. “The challenge will be to make an aluminum body at that price.”

Daimler Investing in Batteries

There are questions as well for the whole auto industry as to which technologies will win out as it tries to respond to the demand for more efficient cars. Daimler is expecting that diesel-powered cars will be a major component of its strategy for meeting President Obama’s tough new fuel economy standards. The company is working on hybrid gas-electric vehicles as well. But electric vehicles offer the potential for the greatest reduction in emissions. That’s why Daimler has already invested in German battery maker Li-Tec, and has founded a joint venture with Evonik Industries to make its own batteries.

Zetsche says that Tesla’s battery approach was “the fast one,” but that he expects Li-Tec’s version of the same basic lithium-ion technology to be more efficient. In the long-term, he expects, Tesla might consider using the Li-Tec batteries as well.

So Teslas may pick up a bit of a German accent. But don’t expect the cars to be sold at Mercedes dealerships anytime soon. “In major markets, I want to control that customer experience,” says Musk.