We chatted with Microsoft (MSFT) about the economics of Live Search cashback, its new commerce search system. More on that soon, but first an overview of Microsoft’s latest macro plan to kill Google (GOOG), about which we were also educated.
(And in fairness to Microsoft, we should begin by saying the company didn’t present it as a “secret plan to kill Google.” Microsoft pitched it as its plan to build a big, successful search business.)
The plan is based on three premises:
- Today’s search is klugy, and it will change.
- Microsoft has unique assets that will allow it to capitalise on this change
- Microsoft will lead the innovation of the next-gen search product and business models
- We disagree that today’s search is klugy. Crappy search, of course, is the premise upon which dozens of next-gen Google-killing search products and companies are based, but we think today’s search is far better than these companies think. For example, we don’t think people actually want to type natural language questions, except in very specific circumstances. When people are searching for “Paris Hilton,” moreover, we think they are smart enough to understand that they’ll get better results if they type “Paris Hilton” instead of just “Paris,” in which case they might get travel offers (though they’d still get plenty of Paris Hilton). The “today’s search sucks” crowd loves to invoke the stat that “40% of searches are subsequently refined.” The corollary to this is that, remarkably, 60% of searches don’t need to be refined. Can search be improved? Of course. But Google continues to make incremental improvements, and we just don’t see them suddenly getting leapfrogged.
- We don’t think Microsoft has unique assets to capitalise on search changes–at least not relative to Google, Yahoo, and others. Microsoft has exceptional technologists, but we don’t think they make Microsoft more able to innovate in search than Google. We also don’t think the other assets Microsoft views as unique–data centres, infrastructure, etc.–give it an advantage over Google. Microsoft’s greatest strength is PC and enterprise computing, and it unquestionably has “unique assets” in this business. In search and cloud computing, however, Microsoft is at a distinct disadvantage–in part because it has so much riding on the PC business.
- Microsoft may be able to lead some of the innovation of the next-gen search products and business models, but we doubt they’ll lead all of it. Unless Microsoft makes a quantum leap, moreover–which, again, we think is unlikely–we think Google will quickly be able to match whatever it comes up with that works. Remember how good Microsoft used to be at incorporating software improvements thought of by others? Today, in search, the positions are reverse. Similarly, Microsoft can afford to play around with business models because it has very little to lose, but if it stumbles upon one that works, Google will rapidly adopt it (If it’s a lower-margin model, this will hit Google’s stock, but it won’t hurt its market position.
Next, execution. Here’s how Microsoft plans to capitalise on the above trends:
- Deliver great search results.
- Simplify key common search tasks (Entertainment, Commerce, Reference, Navigation)
- Change the business model
- Good search results are necessary, but even if Microsoft’s results are widely agreed to be better than Google’s–which today’s certainly aren’t–this won’t help. Why not? Because most consumers won’t notice or care. Google works, and Google is synonymous with search. And of course “great results” are an advantage only if the great results are better than Google’s, and we’ll believe that when we see it.
- Simplifying key common search tasks sounds like a sustaining innovation, not a disruptive one. Google simplifies common tasks continuously (that’s what Universal Search is all about). In Google’s model, moreover, it’s a single step: Just type keyword and all kinds of results will appear on one page. If you try to specialize in “Entertainment” or “Navigation”, you’ll just slow the user down.
- Changing the business model sounds good, and we like the cashback concept…but it won’t work. Three reasons why: 1) For most searchers, the savings on each transaction are small; 2) cashback only works with participating retailers and products, and at least in the early going, Google usually unearths retailers that sell for less even with no cash back; and 3) Again, if necessary, Google can always respond. Google is already working on cost-per-action pricing, for example, which is a key feature of Microsoft’s cashback.
In short: Microsoft is right that advertisers are rooting for it to succeed–no one likes being beholden to a monopoly. What makes Google so powerful, however, is its vast share of search queries, and this is a function of both quality and consumer habit. We think cashback is certainly worth trying, and it will probably produce a small bump in Microsoft’s query share. But we see nothing in Microsoft’s plan that makes us think it will be able to change the Google = search dynamic over the long term, let along claw back major market share.
Microsoft’s Cashback Google Killer: Great Idea, Won’t Work
Taking Microsoft’s Cashback for a Test Drive: Slick! (But Still Won’t Kill Google)
Whoa: Microsoft Not Taking Any Revenue from Cashback