What Microsoft gets for $2 billion
scottberkun.com
scottberkun.com
Whether or not that's a wise strategy is another matter but there really is no mystery here.
Not that I disagree with that choice, acquisitions just because you have cash is just as stupid as no acquisitions. Better for them to determine a strategy first.
endquote.
As someone working in the online services division I have to say that this analysis is extremely simplistic. Would they be saying the same thing about Facebook? It was in the red for many years before it became profitable. That was the plan.
If anything, I wish they had the same force behind online services as they have with the Xbox division. They really got Xbox Live right!
Or are we hand waving and saying that Microsoft has technically lost more money than grains of sand on the beach, but has executed a brilliant strategic plan to keep Sony from taking the lead in the market for set top boxes?
Regardless, what's more interesting to me is that ten years ago I would have said "what the hell does MS want to make a game console for?" Now that things have shaken out, XBOX has given them a strong foothold not only in gaming, but in home media in general. That's the more compelling ROI to me.
[1] http://www.businessweek.com/news/2010-07-07/microsoft-xbox-l...
However, if you look over in Cupertino, you see a company with a foothold in home media that made money while grabbing their foothold. Therefore, I wonder if what we have is mediocre execution of a bad plan to grab a good market?
That sounds spot on to me. But that's the game MS plays - they throw money at problems for years until they get it right. I'm not saying its the best strategy, and certainly not the most efficient, but in this case I think they're achieving what they set out to do.
Further, I'd question whether "option C" (the Apple strategy of making money while establishing the foothold) is available to Microsoft. They're not known for that kind of innovation and precision, they're more like a wrecking ball that sometimes gets aimed in the right direction.
qualitatively, I don't see much difference between investing VC cash vs investing parent company cash.
Besides, the whole independent division comparison to a whole entity is a little ridiculous. Every company, including Facebook, spends a certain amount of cash flow on R&D, it's a competitive necessity. The fact that Microsoft structures a large part of their R&D into a division shouldn't necessarily be the fault of the division when they don't immediately turn a profit.
As long as they are meeting their internal (revenue/profit/growth) goals, I don't see the problem with giving out bonuses and rewarding the players involved.
It's hard for me to believe that amount of loss comes just from datacenter/development costs of Bing and Msn.
As one of the commenters on the page did: http://i.imgur.com/jHLOX.png
It shows a much more likely scenario. Although maybe a bit over the top with the naming of the profit section as Google Kill Zone. Why can't big companies play nice. :)
What about the only very recent Yahoo integration, the Windows Phone integration and the constant improvement with maps beyond what Google have offered.
Fans are true believers. They will bend reality if needed.
Google's 2009 revenue is over 23 billion dollars and its operating income is over 8 billion. Considering the market size, two billion is not over the top. Not to mention online is a growth market and its strategic value is paramount. They're not a startup and they can invest really long-term to capture part of a market this significant.
Search is a tremendously expensive game to try and win. It's economics are such that the more search share you have, the more money you earn per search. This is a critical point, so I'll spell it out a little further.
All search companies have more advertiser dollars than they have searches to spend them on, Google, Yahoo and Bing included. It's a supply constrained marketplace. The search ROI is so good for advertisers that they all want to spend more money at their current CPCs, but there aren't enough searches. This supply constraint leads to a problem for the smaller players. Search revenue is driven by having lots of advertisers compete in every auction. The larger the share, the more clicks each advertiser will get, and thus the more advertisers you attract. The smaller scale players don't drive enough clicks for some advertisers for it to be worth their time to set up and manage campaigns on them, while the larger scale players it is worth their while (the return they get exceeds the fixed cost of advertising in the marketplace). So with fewer advertisers, there are fewer bidders in the 2nd price auction, and the revenue per search is lower for the smaller scale players.
So how does this apply to Microsoft's online division? Well, if they want to catch Google, they're going to have to do it at a scale disadvantage, meaning that Google is going to make more off of the same searches than Microsoft will simply because they have a bigger marketplace. To beat that, Microsoft has to commit to spending lots of money to try and close that scale gap by buying share through distribution deals and spending a ton on technology to differentiate the search product while accepting that they don't monetize the searches they do have as well. If they can eventually build a product that will pull enough marketshare from Google to be roughly equal, then they should start to see better monetization.
The valid questions are: 1. Is it possible to catch Google? Or are the market dynamics such that without a transformative difference in how the product works that Google will never be caught.
2. If it is possible to catch Google, how much money will you have to spend, and what will your eventual ROI be when you get there.
Since Microsoft is a company that does 60B in revenue, it has to look at big businesses to drive a 10% growth in that revenue. Your hot little startup that does $100MM doesn't make a dent. Even Facebook only does 1-2B, depending on which report you believe. Search is a 10B going to 20B market, and if Microsoft can spend 5B over 5 years to get half of that market and earn 10B every year it's worth it.
Of course, the division has been horribly mismanaged for years. Qi Lu now runs it, and he's a different breed from most Microsoft execs. So time will tell if it's a good bet or not for Microsoft.
Also dominance in verticals/regions won't necessarily net them the £10bn/year that they'd like - of course it might be a good stepping stone to broader dominance.
It's an abysmal performance by anyone's standard BUT they could probably sell that business for considerably more than the book value.
Even if the book value is fair and they lost $2b, they got the only viable (albeit still money-losing) alternative to Google, which was a strategic imperative if they want to link Office and Windows to the cloud.
I don't think you get how search and advertising works. Clicks lead to revenue, but you need clicks first. In order to get clicks you need to be competitive. With Google just a URL away they need to be nearly as good, if not better (due to name recognition) than Google to get a large share of the pie.
So the problem is that they must effectively spend (or outspend) Google on search (data centers, employees, etc...) pretty much all the way to the point where they reach parity and beyond. All the while they bring in a lot less money than Google.
If Bing can continue at its current pace and couple it with some real marketing strength, I think they have a real chance of flipping quarterly income from a $500M loss to $500M in earnings.
The two wildcards in this space are social (Facebook) and mobile. I feel like mobile is a bigger deal than social. IMO advertising is the current and future business model of computing. I think MS gets this and realizes that this is the one fight they have to continue to fight.
At that point I speculate they'll be close to $500M in earnings. And at that point, every percentage point they get it should increase earnings by $100+M.
http://www.mcintoshmarketing.com/ppc/yahoo-starting-migratio...
This is from Aug 31. Not sure what the state of it is now. Whenever this transition is complete.. .I'd add a quarter or two before we start seeing some respectable (relatively) earnings from Bing.
"Google is beating Microsoft because Microsoft DOESNT EVEN HAVE A MAPPING PRODUCT OR SEARCH ENGINE.. they do not see the FUTURE IS ONLINE.. blah blah blah.. "
This is Microsoft playing defense - and cheap relative to the profit machine they are defending
If you want to search MSDN, Google doesn't get to sell advertising or skew the search results to fit their business model or for that matter track what you're searching. Likewise, searches from MicroSoft IP addresses using Bing aren't tracked by Google either.
For a long time, Google's search results for MSDN were superior to Microsoft's. Perhaps that's changed with Bing. In any case, it seems to Google's advantage to provide the best search for MSDN.
In other words they've become reactionary instead of being innovative.
There is always the hope to tough it out in the hop of eventually gaining more market share as your competitors run out of steam and cash.
The Online Services Division for 2010 had an operating loss of $2.355B.
1. If the shareholders held a gun to my head, can I make this profitable? Answer is probably yes but for some tiny profit.
2. Do I see any other big prizes I can spend money on given I'm running a company with this skillset? Ans: Yes, but I still have lots left so what the heck.
Plus, if they return money to shareholders in dividends, its waaaay less fun.
How a company shows gains and losses is also very subjective. The numbers could turn around and show strong profits around the time that bing reaches 45% market share (which will be soon).
Bing's market share is only up 4% since launch http://www.microsoft.com/investor/EarningsAndFinancials/Earn...
and most of those gains must have come at the expense of Yahoo!
It's a business that takes lots of investment in scale. I think Google is one misstep away from Bing grabbing lots more share.
Google instant was a near-miss. Even on my new macbook wtih google chrome it's annoyingly jittery and hinders the user experience.
http://gs.statcounter.com/?PHPSESSID=nv37oj3f3ovned6v8hr2mlp...