Satya Nadella

As the executive in charge of Microsoft Live Search engineering, Satya Nadella has the unenviable task of leading the Redmond company's efforts to challenge Google in the search king's core business. And with Microsoft's share of the overall U.S. search market mired below 10 percent, it wouldn't be unreasonable to expect him to be moping around the office.

Instead, he's touting what Microsoft sees as evidence that its focus on shopping-related searches is paying off: The company said this week that queries on Live Search were the source of 12 percent of online commercial transactions in the U.S. in the second quarter, and 13 percent of total U.S. online spending in selected retail categories.

Does it really matter? We quizzed Nadella this week on that topic and others -- including the renewed possibility of a Microsoft-Yahoo search combination. Read on for excerpts.

Q: Given the traction you've seen with (commercial queries), I would expect your overall query share to have risen. Why hasn't it?

Nadella: I think there is going to be a lag. But overall, just in terms of our own marker for progress, I'm more interested in growing that 13 (percent) to 14, 15, 20, versus, quite frankly, worrying about whether my 8 percent goes to even 7 percent. Because you've got to remember -- there are two sources of that 8 percent. There's (Internet Explorer) traffic and MSN traffic. And until more stuff like the H-P and Sun (deals) kick in, those are the two sources. And a lot of the IE traffic is mostly navigational traffic. It's not as much about commercial intent.

So I would say we are getting a lot more focused on that portion of the traffic that really drives the economics of search for us, and growing it. Would we definitely have been better off if we were at 13 points of organic, all-up share, plus even better share numbers for commercial search? Absolutely, no question. You're asking us if we should feel bad about not having made enough progress on that front, and absolutely I feel terrible about it. But the one thing I would also say is, I feel a lot more hopeful because of the fact that, at least in the areas that we have picked to hold our own, we are holding our own.

Q: Are you at all preparing for the possibility of integrating Yahoo's search technology into Live Search, internally?

Nadella: I am not. I am focused on all the things I've talked to you about. Steve (Ballmer) talked a lot last week about where his head is at in terms of where Yahoo fits in. We definitely think about a search deal with Yahoo giving us more share, but ... even with all of the Yahoo share, I have exactly the same challenges that I have today. Better position for sure, but how are you differentiated in search, what is your business-model differentiation, how are you going to grow share? Because it's not as if Yahoo has kept their share position, as well. So I think that the strategy doesn't change. Clearly we would like to be able to get the Yahoo share and serve that, but for now I'm focused on my organic Plan A.

Q: Obviously Google has a strong brand, to the extent that it's a verb in the English language. How are you going to overcome that?

Nadella: It is definitely a core challenge for us. The one thing I would say is that, at least in the last year, we have made progress internally just in terms of sheer R&D clarity of what it is we're doing across three fronts: MSN, Live Search and Windows Live. If you now go to Windows Live, it becomes very, very clear about how they're evolving that communications engagement to even include broader social-networking types of capabilities, and the core capabilities of extending your Windows experience. ... We've obviously put the stake in the ground in terms of what Live Search stands for, and how we think about that experience as a destination search experience. MSN ... is about content experiences and rich content and personalized experiences. So now the point is, how do we take the fact that we have these three services that have a rich relationship but also are distinct, consumer-facing things, and give them real consumer brands and clarity around them? That is definitely the challenge.

Nadella: One of the things recently is that Yusuf (Mehdi) has come back into the marketing role for our audience and that's his Job No. 1 generally. I think Live Search suffers perhaps the most, given what you just mentioned. Google has got the most predominant destination search brand. So how do we compete? We want to be able to say, hey, look, there's MSN and there's Live Search and Windows Live, and I think we're a lot more clear on what it is we're doing in terms of the R&D side of it, or the product side of it. We can go clarify that more broadly in the marketplace and that's something that Yusuf and team are very much working on.

Q: Do you expect a name change or a branding change?

Nadella: I don't have any comments at this point.