We’re going to get a full download on the economics of Microsoft (MSFT) Live Search cashback tomorrow, but in the meantime, here’s why Google (GOOG) was down 5% today (in part).
Cashback merchant partners–the advertisers–set the cashback percentage. This is their cost-per-action (CPA) price. Microsoft then passes this entire amount through to the consumer.
What does that mean? It means Microsoft generates no revenue from cashback. (For perspective, consider the $20 billion of revenue Google currently generates from the other CPC search model, in which merchants pay Google per click and the consumer gets nothing.)
Is Microsoft planning to run this product at a loss forever just to try to fire a torpedo into Google’s hold? (In response to the torpedo Google is firing into its own hold, in the form of Google Apps.) According to a spokesperson, no. The theory is that cashback CPA advertising will co-exist with regular Google-like CPC advertising and that the CPC advertising revenue will subsidise cashback.
The success of the cashback endeavour, of course, depends primarily on query volume, and convincing consumers to stop using Google and start using cashback by offering modest savings is going to be a tough sell. But even Google fans and Microsoft haters have got to admit–it’s a pretty cool model. It’s YOUR attention, after all. Why should Google make $20 billion off of it?