CNBC was kind enough to have me on Squawk Box this morning to talk about the tech implosion.
One of the questions that came up was whether Microsoft’s ongoing investment in its search engine, Bing, made sense.
My answer was the same as it has always been:
Specifically, I said I thought Microsoft was just ‘throwing money down a rat hole.’
For those who would like some colour on what that means, here goes…
Microsoft’s commitment to Bing over the years has been impressive. When Microsoft announced ‘Bing’ with great fanfare three years ago, I figured the company would realise within a year or two that the initiative was futile and quietly give up. Instead, three years later, Microsoft is still pouring billions into Bing, and it has managed to gain and hold a few more points of U.S. search market share than I thought it would. The Bing product itself is also excellent (several Bing innovations forced Google to respond with similar innovations, which was great for Google users).
But the Bing product and the Bing business are different.
And the Bing business remains a horrorshow.
Bottom line, I don’t think Bing will ever be a good business for Microsoft. Instead of continuing to throw money down the online rat hole, therefore, I think Microsoft should call it a day, merge Bing with Yahoo, and focus on its core enterprise business, which is also under attack.
THE BING REALITY
As a quick glance at all the red ink in the chart above shows, Microsoft has burned about $10 billion on its search business in the past five years (for the first couple of years, it wasn’t called “Bing”).
What has the company gotten for that $10 billion investment?
Bing now processes 28% of US search queries–about 16% on Bing itself and the rest on Yahoo and all the other affiliates. Globally, Bing’s market share is much lower than in the US. And, importantly, including mobile, Bing’s search share is much lower still.
Google, in contrast, process about 70% of US search queries–about 67% on Google.com and some via AOL. Google completely dominates international search. And it completely dominates mobile search.
Just looking at PC-based US query market share, you might think that Microsoft has gotten something highly valuable for its $10 billion. But US PC-based query market share doesn’t even begin to tell the whole story.
Well, for one thing, because international and mobile are very important–especially mobile. Mobile is where all the growth is.
For two, because query market share can be bought. And Microsoft has been very aggressive about buying it.
(Bing processes the ~12% of US searches that are conducted on Yahoo, for example, but then Microsoft hands 90% of the revenue generated from those searches over to Yahoo. If Microsoft makes any profit on those searches after accounting for its costs, the profit is very small. Microsoft has also bought distribution deals with other sites and tools, including Facebook. These deals have not been economical.)
Second, search is a market-share game–more market share equates to more revenue per search–so Microsoft’s revenue per search is vastly lower than Google’s.
How much lower?
Using very rough estimates, Microsoft appears to be generating about half the revenue per search that Google is generating.
(How do we get there? Google booked about $11.5 billion of global revenue last quarter, with about half that in the US. Assuming all of that revenue was from search (it wasn’t), and using Comscore’s number of about 30 billion queries processed in the quarter (11 billion in September), Google generated about 20 cents per query. Microsoft, meanwhile, generated $735 million of online revenue last quarter, most of which came from the US. Assuming all this revenue was search (it wasn’t) and using Comscore’s number of about 7.5 billion queries processed in the quarter (2.6 billion in September), Microsoft generated about 10 cents of revenue per query.)
So, when you put that together, you get the following annualized revenue for each business (globally, assuming all the revenue for each is search, which we know it isn’t, but the percentage of non-search for each company is probably roughly similar):
GOOGLE: $46 billion (Q3 annualized)
MICROSOFT: $3 billion (Q3 annualized)
In other words, on a revenue basis, Google has about 90% market share.
Lastly, there are the costs.
Google generated $4 billion of operating profit in Q3, for an annualized profit run-rate of $16 billion.
Microsoft’s online business, meanwhile, lost $364 million, for an annualized loss run-rate of $1.4 billion.
In other words, in terms of its share of industry profits, Microsoft has less than zero per cent share. And Microsoft has been at this business for a long, long time. (Three years in this latest massive commitment to search, but 17 years in total.)
Let’s step back and look at those numbers again:
- In the past ~5 years, Microsoft has burned ~$10 billion in its online division to build a business that has tiny global market share and is losing $1.5 billion per year.
- All of Microsoft’s market share gains in US queries processed have come at the expense of players other than Google–Google itself has gained share over the past three years.
- Microsoft’s market share is tiny worldwide and tiny in mobile, which is where all of the growth is.
In short, Microsoft’s massive investment in search has been a disaster. And it has distracted the company and consumed precious resources during a period in which a business that is much more critical to Microsoft’s future–the core software business–has been under attack.
If Microsoft keeps pouring money into its online business, will it eventually be able to scratch and claw and buy its way into a position where the business makes a little bit of money?
But a little bit of money is not going to help Microsoft. And the cost, effort, and distraction required to finally get to this little bit of money will more than offset the benefit of whatever profit Microsoft ultimately makes.
In short, the billions that Microsoft continues to burn in its quest to slow the Google juggernaut would be better spent elsewhere. (Such as on slowing the Apple and enterprise cloud-app juggernauts, which are a much bigger threat to Microsoft than Google’s search business. Or on acquisitions of fast-growing, profitable companies with strong market positions. Or on stock buybacks. Or dividends. Anything…)
Instead of continuing to throw money down the online rat hole, therefore, I think Microsoft should call it a day and merge Bing with Yahoo–whose new CEO Marissa Mayer, it bears noting, is an expert in search.
Business Insider Emails & Alerts
Site highlights each day to your inbox.