Over the past month or so, there has been a lot of enthusiasm about how much market share Microsoft’s Bing search engine is gaining.
One writer even went so far as to suggest that Bing will pass Google in market share next year.
The implication of these reports is that Bing is doing surprisingly well. If the writers actually believe that, we’d love some of whatever they’re smoking.
As even a quick glimpse under the hood reveals, Bing is not doing well. It’s doing horribly.
Worse, Bing is burning attention and money that Microsoft could instead focus on a much more important battleground, one that–unlike search–could eventually destroy Microsoft’s core business.
We’ll come back to the latter point in a moment. But for now, here’s the truth about Bing.
THE TRUTH ABOUT BING
Microsoft’s Bing search engine is indeed gaining some share of search queries in the US market (globally, Bing is nowhere). But it is gaining this share at an absolutely mind-boggling cost. Specifically, Microsoft is gaining share for Bing by doing spectacularly expensive distribution deals, deals that don’t even come close to paying for themselves in additional revenue.
How much is Microsoft spending to buy market share for Bing?
Based on an analysis of Microsoft’s financial statements, Bing is paying about 3X as much for every incremental search query as it generates in revenue from that query.
What does that mean?
It means that for every $1 Microsoft generates from each new search query it buys, it spends $3 to get it.
(And that’s just direct costs–the costs of obtaining and processing the query. It doesn’t include sales and marketing, research and development, and general and administrative costs–all of which are subtracted from the -$2 Microsoft has already lost on every new query.)
Don’t believe it?
Let’s go to the numbers.
In the March quarter, Microsoft’s online revenue grew $84 million year over year. In the same March quarter, Microsoft’s online cost-of-revenue grew $292 million.
What drove that massive increase in cost of revenue?
According to Microsoft’s latest filing, “costs associated with the Yahoo! search agreement and increased traffic acquisition costs.”
The “costs associated with the Yahoo! search agreement,” of course, are the same as “traffic acquisition costs.” Microsoft is paying Yahoo about 90 cents of every $1.00 it generates from Yahoo’s search queries, and it is spending a lot of money supporting those queries. But Yahoo is no different than any other “traffic acquisition” deal Microsoft has for Bing–just bigger.So let’s say that again:
In the past year, Microsoft’s online revenue grew $84 million. And its cost to generate that revenue grew $292 million.
Does that sound like a promising business to you?
Now, Microsoft will tell you that the reason they are spending all this money to buy search share is that search is scale game: You need a huge number of queries in order to optimise your results and raise keyword prices to levels that make the business profitable. Once Bing achieves this scale, Microsoft will continue to tell you, Microsoft’s revenue per keyword will soar, and Bing will go from losing billions every year to coining money. (For more on this, see these details from Bing boss Yusuf Mehdi, who is a great guy with a very hard job).
Bing’s ongoing results suggest that this story is, at best, wishful thinking. At worst, it’s just a hallucination.
The combined share of the Bing and Yahoo platforms is now approaching 30% of the US market. That means that Bing already has significant scale. And yet Bing’s economics just continue to get worse.
At the loss rate in the past quarter, in fact, Bing is now losing a spectacular $3 billion a year. $3 billion! This loss is ~$500 million more than Bing’s run-rate revenue, which is about $2.5 billion.
Put differently, Bing is spending $5.5 billion a year to generate $3 billion of revenue.
That’s horrifying. And it is almost impossible to believe that, if Bing gains another 10 points of market share, the economics of its business are going to change so radically that it will double its revenue per query, which it will need to do to break even (even if it doesn’t spend another dime acquiring and processing the next 10 points of share, which it obviously will). In fact, because there are no more big distribution deals to do, acquiring another 10 points of share will likely cost Microsoft a lot more than acquiring the last 5 points of share. Which means that doubling revenue-per-query won’t be anywhere near enough to make this a viable business).
Fine, But Microsoft Has Come From Behind Before–And Won!
In the PC business, Microsoft’s tenacity and Windows monopoly allowed it to come from behind to dominate many spectacularly profitable markets, with the crowning example being Office. (Microsoft was not the first to introduce spreadsheets or word processors, but it stuck with the business and ultimately buried the early competitors). Microsoft has also managed to come from behind in another, unrelated business in which it had no expertise whatsoever: video-game consoles. So whenever anyone challenges Microsoft’s odds of success in the search business, Microsoft’s defenders always cite these precedents, promising that, once again, Microsoft will come from behind to win.
And, sure, there’s a chance that search will eventually be the same story all over again–that, eventually, Microsoft’s tenacity and vast pots of money will grind down Google and Bing will eventually go from losing billions a year to making some money.
But this chance seems, at best, small–not least because Google is a different order of competitor than WordPerfect and Lotus and even Sony. Like Microsoft, Google is unfathomably wealthy and can spend whatever it needs to beating back Microsoft’s threat. And especially with Larry Page back at the helm, there are still some signs of competitive life at “The Plex.”
And Remember–This Is Just A Sideshow (And A Distraction)There’s another, much-bigger problem here.
Two years ago, Steve Ballmer used to justify the billions Microsoft was burning on Bing by saying that Microsoft needed to find other huge markets to go into to keep its growth alive–and search was clearly a huge market.
But now it’s clear that Steve focused his obsession on the wrong market. And the wrong competitor.
While Steve has thrown chairs in rage and burned billions obsessing about killing Google in search, he has been utterly ambushed by a former zombie competitor known as Apple.
Unlike Google, which is competing in a market adjacent to Microsoft’s, Apple is competing directly with Microsoft. And as of this past quarter, Apple is now not only worth more than Microsoft and generates more revenue than Microsoft–it now makes more money than Microsoft.Apple invented the products that are now destroying Microsoft–the iPhone and the iPad–in the past 5 years. Microsoft, meanwhile, missed these markets completely.
In other words, Steve picked the wrong huge opportunity. By focusing all his energy on killing Google in search–and failing completely–Steve missed an even bigger opportunity that Apple invented out of thin air.
THE BOTTOM LINE
Based on Bing’s performance over the past decade, and especially over the past two years, we continue to think it’s unlikely that Microsoft’s online division will ever make money again.
We also have to believe that the $3 billion Microsoft is burning every year on Bing could be better spent trying to compete with Apple and Google’s Android on tablets and phones (not to mention Macs and Chrome).
Because the stakes in the latter battle are very high.
If Microsoft loses the Bing war, Microsoft will just lose a boatload of money. If Microsoft loses the Apple-Android-Mac-Chrome war, meanwhile, Microsoft’s core business will be destroyed.
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