Microsoft’s Internet business (MSFT) got some good press this summer, when MSN’s share of search queries briefly jumped (before dropping again), and the division’s ad revenue continued to accelerate. The latter trend is truly good news. But don’t confuse this and other headlines with online success. Microsoft is still running a distant No. 4 in the online wars–the same position it has held for the last 12 years–and there is no real sign that this will ever change.
Why shouldn’t we view MSN’s recent ad acceleration as a sign that Microsoft is finally beginning to do what it did to Lotus, Apple (round one), WordPerfect, et al–(steamroll them)? Because, over the past year, MSN’s expense growth has vastly exceeded its revenue growth, even when you look only at advertising revenue.
Did you know that MSN is currently losing about $1 billion a year (run-rate)? That’s right, $1 billion. On about $2.2 billion of advertising revenue. (See this page for details). Unless Microsoft’s disappearing access business is losing a lot of money–which we doubt–all of the division’s losses are attributable to the advertising and media business. That means that MSN is losing nearly $0.50 for every $1.00 of advertising it sells.
How does this compare to MSN’s online rivals? Terribly. Google’s profit run-rate is $4.4 billion on $16 billion of revenue. Yahoo’s run-rate is $750 million, on $7 billion in revenue. Even fellow-cellar-dweller AOL is printing cash: $1 billion profit pace, on about $2.1 billion of revenue. All those companies are making money hand over first. Microsoft is shoveling it down a rat hole… (More)
Last quarter, for the first time in years, MSN’s advertising revenue growth did finally exceed expense growth: +33% for revenue and +21% for expenses. If this trend continues, the division will eventually be profitable again, but not for several years. In the meantime, a close reading of the latest SEC filing reveals just how much Microsoft is having to invest just to keep pace:
Headcount-related costs increased 30%, driven by a 12% increase in headcount and an increase in salaries and benefits for existing headcount.
Translation: We only grew headcount 12%, but we have to pay so much to retain and recruit people that our overall headcount expenses increased more than twice as fast.
The upshot? Microsoft’s recent acquisitions may finally begin to get its online business headed in the right direction, but there is no reason observers should take this as a given. Don’t forget that, in round one of the Microsoft’s-going-to-rule-the-Internet wars, Microsoft accelerated dial-up subscription revenue and expenses in an attempt to catch AOL. That effort failed, as did several that followed. In the past 12 years, in fact, Microsoft’s online story has had any number or re-orgs, restarts, and revampings, but the reality has never changed.
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