Moving forward, about half of the Live Labs group will remain but will focus solely on search, while the other half will join product groups within Microsoft, including Windows Mobile and the company’s online services division, says McCredy. Splitting up the group is an about-face for Microsoft, which had argued that it made sense to have a separate internet-specific applied research group that worked outside of its online product teams.

“Economic conditions are imposing constraints that challenge the original Live Labs model by diminishing the group’s ability to transfer innovations to business groups who’re understandably giving priority to “needs” vs. “opportunities,’” she said. “The move is also part of an effort to ensure innovation investments aren’t spread too thin, increasing the likelihood that those investments will achieve critical mass and have a positive impact on the company.”

Live Labs’ best-known success has been Photosynth, a 3-D photo stitching application, which was launched last summer, and has since been folded into Microsoft’s MSN business.