After the latest search share numbers came out, Microsoft’s pugnacious spokesperson Frank X Shaw encouraged us to eat some more crow about Bing’s performance:chomp chomp henry blodgett. Time to eat those words re: re: bing in search! SAI’s own weasel words can’t help you. http://chilp.it/e04f70
And, on one point, Frank’s right: Bing’s share gains have been more sustained than we thought they would be when Microsoft launched Bing a year ago.
So hats off to Yusuf Mehdi and the rest of Microsoft’s Bing team for their impressive share gains over the past year. And well done to Frank for pointing them out.
And now for the bad news…
We’re sticking to our guns about our outlook for Bing.
Namely, we continue to think that Microsoft’s dream of building a large, profitable business in search is a hallucination. We continue to think that by trying to compete with Google in search, Steve Ballmer is shoveling billions of dollars of Microsoft shareholder capital down a bottomless rat hole.
Futher, we see no sign that the search gains Microsoft is crowing about are coming from anything other than overpriced toolbar and other distribution deals that no one else in the industry is dumb enough to pay up for. We think Microsoft will never get anywhere near the DIRECT search share that it needs to build a big profitable search business, and we expect that Microsoft or its shareholders will eventually realise that and exit the business–either by spinning Bing off or by just shutting it down.
How can we say such a thing when Bing’s share of the US search market has increased from ~8% to ~12% in a year?
First, because Microsoft is clearly buying these search share gains through uneconomic distribution deals that negate the benefit of the growth.
How do we know that?
Because Microsoft’s financial disclosures suggests that Microsoft is paying as much to gain every point of share as it is generating in revenue from each point of share. Put differently, it appears Microsoft has a 0% gross margin on its search market growth of the past year: For every $1 of new revenue it generates, it spends $1 in traffic acquisition costs. That’s just not a sustainable business.
The reason Microsoft can buy that share, meanwhile, is twofold: First, unlike a normal company, Microsoft has a tremendous pile of cash that it is willing to shovel down a rat hole. Second, no one else in the industry is stupid enough willing to spend $1 on search traffic to make $1 of revenue (before all other costs).
Microsoft’s theory here is that, eventually, it will gain enough share to get economies of scale and its revenue per search will go up. And the revenue per search may, in fact, go up. But Microsoft’s revenue per search will have to SKYROCKET for the company to start breaking even in this business, let alone start making money.
The second reason we’re just not that impressed with Microsoft’s search share gains over the past year is that, given the huge amount of money Microsoft has spent, they’re just not that impressive. Over the past year, despite losing more than $2 billion in its Internet business, Microsoft has gained about 4 search share points. Each point of growth, therefore, has cost Microsoft about $500 million.
Analysts have estimated that, based on the total size of the US search market, each point of search share is worth about $150 million per year. Per that analysis, Microsoft is flushing away $350 million for every point of search share it gains.
Importantly, because Microsoft is buying its Bing share gains through distribution deals, the share gains are not recurring. If Microsoft wants to keep those share points, it will have to keep paying for the distribution. That means flushing a lot more money down the toilet.
Lastly, judged by any normal measure, Microsoft’s Internet business (including Bing) has been–and still is–a complete disaster. Take a look at the chart below: Microsoft is now burning nearly $3 billion per year in a business in which every other competitor (including the hapless AOL) is wildly profitable.
If this business weren’t hidden inside a massive global cash-spewing software behemoth, shareholders would long since have revolted at the amount of money that is being burned with so little to show for it. Eventually, we expect shareholders WILL revolt. Or they certainly should, anyway.
See Also: Bing Revisited: Still Toast