Microsoft’s distribution deal with Yahoo to make Bing the default search engine looks like a bad deal for Microsoft so far.
Here’s what Microsoft said in its 10-Q statement for the last quarter of 2010 (Microsoft’s Q2’11), which the company released this afternoon. During the quarter, compared with one year ago:
Online advertising revenue grew $117 million or 23% to $632 million, reflecting continued growth in Bing, offset in part by decreased third party advertising revenue….Cost of revenue grew $110 million driven by costs associated with the Yahoo! search agreement.
Research and development — including salaries of Bing staffers — isn’t included in cost of revenue.
So in other words, for every extra dollar Microsoft spent on customer acquisition, it got about $1.06 in new advertising revenue.
Cost of revenue includes other deals as well, and the Yahoo deal didn’t really kick in until the end of October — almost a month into the quarter. But then again, Microsoft has a lot of other sources of online advertising revenue, and none of them are growing fast enough to offset the traffic acquisition costs.
In the long run, Microsoft hopes that the combined market share of Bing and Yahoo will get more advertisers into the system, increasing cost-per-click. The extra data for all those new Yahoo users should also help Microsoft target its ads more effectively.
Then again, Microsoft may not care how much Bing costs now, as long as it keeps the pressure on Google.