As we’ve noted, Microsoft (MSFT) is threatening to use its gigantic cash pile to steal the Verizon search deal away from Google. Google is reportedly fighting back, and it will be telling to see whether it does something stupid just to avoid losing to Microsoft.
Meanwhile, whoever wins will likely lose money, says Citi’s Mark Mahaney, who has run some numbers. Google already dominates mobile search, and we very much doubt that a “default” position on Verizon handsets will stop searchers from using Google (presumably the deal doesn’t allow Verizon to block Internet access to Google). So regardless of what happens, Microsoft will almost certainly blow MORE money than Google on this deal, but perhaps that’s better than just giving up.
# GOOG & MSFT Are Competing To Be The Default VZ Mobile Search Provider – Microsoft has reportedly offered guaranteed payments to the carrier of approximately $550-$650MM over five years or roughly twice what Google has offered. We have attempted to test the economics behind such a deal. We label this a Beta Take because underlying Mobile Search usage metrics and revenue drivers are extremely uncertain at this time.
# We Believe That Break-Even Economics On A $100MM Annual Guarantee Would Be Challenging At Best – Based on proprietary analysis and discussions with industry participants, we believe that Mobile Search Usage is still very limited in the U.S. And we believe that Mobile Search Monetization is likely materially lower than PC Search Monetization. While GOOG’s U.S. PC RPS (Revenue Per Search) may be $0.05, its near-term potential Mobile RPS may be $0.02 and for MSFT more like $0.01. Accordingly, a $100MM revenue guarantee could require VZ Data Sub Monthly Searches of approximately 10X for GOOG and 17X for MSN – which could be very aggressive numbers near-term.
# Recent Nielsen Mobile Research Suggests… – While growing, Mobile Search usage is still very small – only approximately 20% of U.S. mobile phone users today use their devices for Mobile Search. However, per Nielsen, we note that GOOG’s share of Mobile searches is inline with its share of PC searches – GOOG has about 61% share of Mobile Search queries.
# We Continue To Be Positive About The L-T Mobile Opportunity For Google – Per our 11/29/07 report, “Why Mobile Matters to Google”, we believe the Mobile Search market could reach $2.3B+ by 2010. We believe this could potentially translate into material new revenue to GOOG, if the company can maintain 50% market share of the Mobile Search market. The size of this opportunity suggests that while near-term economics may not justify a $100MM Mobile Search revenue guarantee, strategic considerations might.
# Mobile Search and Advertising Likely a Key Priority For ’09 – As voice subscription growth slows and the economy adds a risk to the level of mobile data spending, we believe the development of a revenue model for Mobile Search and Advertising will be a key priority for the national wireless carriers in ’09, although materiality on a revenue and cash flow basis could take significant time.
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