Microsoft may be the only company in a position to provide "any real competition" for Google in the online search business, CEO Steve Ballmer said Thursday. But first it will need to figure out a way to do it.

"We need to do some work to fundamentally reinvent the search business model," Ballmer said during a dinner at the Churchill Club in Silicon Valley. "You don't brute-force your way into a market. You only make great strides when you redefine the category for the user."

And that will take some time. "It's a five-year task," Ballmer said. But Microsoft is ready to spend a lot of money trying. The company told its shareholders recently that it was prepared to lose "5 to 10 percent of total operating income for several years" to improve its position in search, Ballmer said.

The CEO offered little in the way of new insights during the evening, except that Microsoft will discuss "Project Red Dog," its secretive cloud computing initiative, at the Microsoft Professional Developer Conference next month.

Red Dog has been described as "EC2 for Windows," a comparison with Amazon's Elastic Compute Cloud, said Ann Winblad, the venture capitalist who posed the questions to Ballmer. She asked him to elaborate but he said she would have to wait for the conference in six weeks.

Asked about server virtualization, Ballmer said Microsoft aims to "democratize" the technology by offering lower prices, integrated management tools and better-quality software. "If you want to have virtualization on 80 percent of servers instead of 5 percent, you'd better not charge three times the price of the server for the software," he said, in a jab at market leader VMware, which has been criticized for high prices.

Asked about smartphones, Ballmer said Nokia, Research in Motion and Apple will all lose out as the market expands over the next five years, because they design their own proprietary hardware and tie it closely to their software.

Nokia leads the smartphone market today with about a 30 percent share, he said. "If you want to reach more than that, you have to separate the hardware and software in the platform," he said.

In other words, he thinks the same strategy that helped Microsoft become the leader on the desktop -- licensing its OS for use by other hardware makers -- will let it win out on smartphones. Long term, he said, the battle will be between the Symbian OS (which is now open source), mobile versions of Linux and Windows Mobile.