For the Puget Sound region, Microsoft's decision to spend billions on a quest to become the dominant company on the Internet is great news. Most of the money will be spent hiring people, mostly to work in the 14 buildings Microsoft is adding to its Redmond campus.

But Microsoft investors are reeling from the company's abrupt announcement Thursday that its war chest will be funded with profits from the upcoming versions of Windows and Office. On the other hand, they'll do fine if Microsoft spends wisely, repositions itself as a growth company and emerges from the current re-formation of the tech industry stronger than before.

The downside, from this perspective, is that newspapers may be the war's collateral damage. Not the yellowing papers in the library, or that gosh-darn mainstream media, but the independent press that informs our democracy, serves as the watchdog of government and business interests and helps bind local communities.

In the new online world that Microsoft and Google are racing to build, people may get snippets of news chosen by algorithms, produced and delivered by "partner companies." Microsoft and Google will monitor every story you read, picture you view and message you send, so they'll know your interests, your desires and your friends.

It's not about mind control or Big Brother — though they have been known to share this information at times with governments. It's all about selling billions and billions worth of targeted advertising.

Think I'm paranoid? Here's what Microsoft Chief Executive Steve Ballmer told advertisers at the Avenue A | Razorfish Client Summit last month in New York:

"If you are known to us, you're known to us," he said. "You have your contacts with us, you have your buddy list with us, you have a group of friends with us. We know who you trust, we know who you believe in. We know something about you based upon what you've looked at, what you've searched, what you've done."

At other conferences, Ballmer has been saying advertising will soon be his company's fastest-growing consumer business.

Search engines are the tip of the iceberg. Microsoft is building an infrastructure — a network that provides services, tracks users and connects advertisers — in Redmond; Quincy, Grant County; and data centers worldwide.

Google's been doing the same thing for years. Soon both companies will be encouraging people to register for cool new services that will make life easier. If you give them your credit-card number, it will take only a click to buy stuff from advertisers or upgrade to premium services.

Microsoft seems to like newspapers. It's providing software to help them build better Web sites and applications that improve the experience of reading newspapers on computers.

The problem is that when people turn to the computer or the Web for news, the ads they'll see first may end up being the ones sold by Microsoft and Google, not the ones sold by newspapers to fund their news-gathering efforts.

Techies may think newspapers have already lost out, but papers still have the broadest reach in their communities and, aside from direct mail, they get the biggest share of U.S. advertising — $49.4 billion last year, compared with $11.4 billion spent on Internet advertising, according to Merrill Lynch estimates.

The reason you hear more about Internet advertising is because it's growing fast — perhaps 28 percent this year, compared with 2 percent growth in newspaper ad sales, according to the same estimates.

Newspapers are hoping to maintain their position as more of their product moves online. But that's where they're in the path of Microsoft and Google.

You'd think everyone would do fine, since nearly $300 billion will be spent on ads in the U.S. alone this year.

But I wasn't so sure after seeing Google and Microsoft address the newspaper industry's top leaders last week at the American Society of Newspaper Editors conference in Seattle. It was like watching the Incas greet the Spanish conquistadors in 1528 — the leaders of a proud, ancient civilization were dazzled by the technology of newcomers, who were coming to haul off their gold and silver.

The galleons are coming for advertising that Internet companies are using to build their empires.

Google News product manager Nathan Stoll and Bill Gates played the part of priests who came along to enlighten the savages. "We're trying to be technologists who help publishing online be a better business model," Stoll said.

Display tools that Gates demonstrated may be key to newspapers' future success. He also told editors that Microsoft technology can protect their content from unauthorized copying and distribution.

Not mentioned were Microsoft's plans to scoop up a huge piece of the advertising pie. One floor down at the Seattle Westin, planning was under way for a far bigger conference this week, when Microsoft is bringing major advertisers to town to learn about its new advertising platform.

Newspaper baron Dean Singleton played the role of optimistic Incan nobleman, saying it will all work out if his people can get their hands on a musket. Or maybe cut a deal with the invaders.

"I see our industry coming together ... and putting together a national search engine that we own and dominate and run, or partnering with Yahoo! or Microsoft or even Google and letting them monetize our news and split the revenue with us," he said.

Actually, Singleton sounded more like one of those IBM executives who, back in 1980, asked some youngsters named Gates, Allen and Ballmer to provide software for the company's new personal computer.

Brier Dudley's column appears Mondays. He also writes a blog at seattletimes.com/brierdudleysblog. Reach him at 206-515-5687 or bdudley@seattletimes.com.

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