Microsoft’s new Bing search engine has gained about 4 points of US market share since its launch last summer. This is impressive, and it’s better than we thought Bing would do.
Two things are important to keep in mind, however.
The first is how much money Microsoft is losing to achieve these gains. Microsoft’s online losses ballooned to nearly a $3 billion annual run-rate last quarter, and the division’s annual revenue run-rate is only $2.2 billion. (For comparison, the worst competitor in the industry, AOL, still makes a lot of money.)
The second, relatedly, is HOW Microsoft is achieving these search gains.
There’s a big difference between the value of organic search traffic (direct to bing.com) and search traffic gathered by paying other sites for search queries or doing browser-based toolbar deals. How much Microsoft is paying for the latter traffic, whether through revenue shares or flat-out distribution fees, can radically affect the economics of the resulting search queries.
(For the Yahoo deal, for example, Microsoft will be handing over 88% of the revenue. With its remaining 12% of revenue, it will then have to shoulder all of the costs of serving the search results and ads. Microsoft will gain a bunch of search share and gross revenue from that deal, but it won’t gain any profit).
In a meeting we had with Bing boss Yusuf Mehdi a month ago, Yusuf said that a significant portion of Microsoft’s share gains over the past 10 months had come from toolbar and other distribution deals. And the company’s Q1 financial performance certainly supports that.
In Q1, Microsoft’s ad revenue increased $81 million year over year, to $502 million. This increase was driven by BOTH display and search revenue. So let’s estimate that the year over year search revenue increase was in the neighbourhood of, say, $50 million.
During the same period, Microsoft’s cost of online revenue increased by $64 million, with the growth attributed primarily to traffic acquisition costs. We think it’s safe to assume that the vast majority of this increase came from search-related traffic deals.
So what do the search economics look like?
Microsoft’s Bing revenue increased an estimated $50 million or so year-over-year.
Microsoft’s Bing traffic-acquisition-cost increased an estimated $50 million or so year over year.
This suggests that Microsoft paid as much to get the new search queries as it received monetizing them (and that’s before all other costs).
That’s just not a business that will work over the long term.
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