
What Microsoft gets for $2 billion - loboman
http://www.scottberkun.com/blog/2010/what-microsoft-gets-for-2-billion/
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cletus
Isn't it simple? Microsoft is sinking a huge pile of money into improve Bing,
getting market share and making acquisitions (altough I guess these wouldn't
be expensed directly against income).

Whether or not that's a wise strategy is another matter but there really is no
mystery here.

~~~
davidu
They are not making acquisitions -- They acquired powerset over 2.5 years ago.
More than 10 quarters ago. I'm not aware of any other acquisition since then,
or anything in the online space besides that in the last, what, 4+ years?

Not that I disagree with that choice, acquisitions just because you have cash
is just as stupid as no acquisitions. Better for them to determine a strategy
first.

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iterationx
Steve Ballmer says he is willing to invest 5%-10% of Microsoft's operating
income over the next five years on search. Read more:
[http://www.businessinsider.com/henry-blodget-steve-
ballmer-h...](http://www.businessinsider.com/henry-blodget-steve-ballmer-has-
gone-bonkers-2009-6#ixzz19NFIfq1Z) Specifically, assuming Microsoft's
operating income stays constant (it will likely grow), it's $5.5-$11 billion.

endquote.

~~~
MarkMc
That was 18 months ago, which means there's 3.5 years left of this experiment.
If it's not making a profit by then, Ballmer will probably pull the plug on
the project. Unless someone pulls the plug on Ballmer first.

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natmaster
Disclaimer: I do not speak for Microsoft, I am simply an employee - these
opinions are mine and mine alone.

As someone working in the online services division I have to say that this
analysis is extremely simplistic. Would they be saying the same thing about
Facebook? It was in the red for many years before it became profitable. That
was the plan.

~~~
BarkMore
The comparison to Facebook is not fair. Facebook is now profitable and
Microsoft online services are not. Facebook was never in the red to the tune
of 2B a year. Microsoft online services had a multiple year head start on
Facebook.

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viggity
Facebook doesn't do 60B a year in revenue

~~~
BarkMore
The comparison is between Facebook and Microsoft's online services, not all of
Microsoft. Microsoft's online services didn't do 60B a year in revenue.

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apedley
This is such small thinking.

As one of the commenters on the page did: <http://i.imgur.com/jHLOX.png>

It shows a much more likely scenario. Although maybe a bit over the top with
the naming of the profit section as Google Kill Zone. Why can't big companies
play nice. :)

~~~
goalieca
do you project a turnaround right now? Looking at their current product base I
would say "hell no!". Microsoft has nothing up and coming to convince me they
will gain more search users. Each and every time they have unveiled a new
search or online tool they have failed to capture the market. I do not see
what will be different in the future once they come up with their next big
idea. Bing is clearly not going to take over even with it being the default in
internet explorer.

~~~
apedley
So what about the recent Facebook integration, still rolling out and the
overall switch to social search, something Google can't get right no matter
how many companies they buy.

What about the only very recent Yahoo integration, the Windows Phone
integration and the constant improvement with maps beyond what Google have
offered.

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nopinsight
It's not the absolute amount that matters most, especially for a company with
Microsoft's size and cash flow.

Google's 2009 revenue is over 23 billion dollars and its operating income is
over 8 billion. Considering the market size, two billion is not over the top.
Not to mention online is a growth market and its strategic value is paramount.
They're not a startup and they can invest really long-term to capture part of
a market this significant.

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anonsoftie
This is a challenging problem that doesn't fit nicely into comments or short
blog posts, but I'll try.

Search is a tremendously expensive game to try and win. It's economics are
such that the more search share you have, the more money you earn per search.
This is a critical point, so I'll spell it out a little further.

All search companies have more advertiser dollars than they have searches to
spend them on, Google, Yahoo and Bing included. It's a supply constrained
marketplace. The search ROI is so good for advertisers that they all want to
spend more money at their current CPCs, but there aren't enough searches. This
supply constraint leads to a problem for the smaller players. Search revenue
is driven by having lots of advertisers compete in every auction. The larger
the share, the more clicks each advertiser will get, and thus the more
advertisers you attract. The smaller scale players don't drive enough clicks
for some advertisers for it to be worth their time to set up and manage
campaigns on them, while the larger scale players it is worth their while (the
return they get exceeds the fixed cost of advertising in the marketplace). So
with fewer advertisers, there are fewer bidders in the 2nd price auction, and
the revenue per search is lower for the smaller scale players.

So how does this apply to Microsoft's online division? Well, if they want to
catch Google, they're going to have to do it at a scale disadvantage, meaning
that Google is going to make more off of the same searches than Microsoft will
simply because they have a bigger marketplace. To beat that, Microsoft has to
commit to spending lots of money to try and close that scale gap by buying
share through distribution deals and spending a ton on technology to
differentiate the search product while accepting that they don't monetize the
searches they do have as well. If they can eventually build a product that
will pull enough marketshare from Google to be roughly equal, then they should
start to see better monetization.

The valid questions are: 1\. Is it possible to catch Google? Or are the market
dynamics such that without a transformative difference in how the product
works that Google will never be caught.

2\. If it is possible to catch Google, how much money will you have to spend,
and what will your eventual ROI be when you get there.

Since Microsoft is a company that does 60B in revenue, it has to look at big
businesses to drive a 10% growth in that revenue. Your hot little startup that
does $100MM doesn't make a dent. Even Facebook only does 1-2B, depending on
which report you believe. Search is a 10B going to 20B market, and if
Microsoft can spend 5B over 5 years to get half of that market and earn 10B
every year it's worth it.

Of course, the division has been horribly mismanaged for years. Qi Lu now runs
it, and he's a different breed from most Microsoft execs. So time will tell if
it's a good bet or not for Microsoft.

~~~
Umalu
This analysis seems right to me. MSFT's annual cash flow from operations is in
the $24 billion+ range. MSFT has $44 billion of cash in the bank. What is MSFT
going to do with all that cash? Watch Google slowly eat its business? I'm
surprised MSFT hasn't invested more in web services -- $2 billion seems small
given its resources. Could it be a shortage of opportunities?

~~~
RockyMcNuts
The $2b is what they spent IN EXCESS of the value they currently carry on the
books for the business - they invested far more.

It's an abysmal performance by anyone's standard BUT they could probably sell
that business for considerably more than the book value.

Even if the book value is fair and they lost $2b, they got the only viable
(albeit still money-losing) alternative to Google, which was a strategic
imperative if they want to link Office and Windows to the cloud.

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bl4k
And if they canned online - all the pundits will be saying:

 _"Google is beating Microsoft because Microsoft DOESNT EVEN HAVE A MAPPING
PRODUCT OR SEARCH ENGINE.. they do not see the FUTURE IS ONLINE.. blah blah
blah.. "_

This is Microsoft playing defense - and cheap relative to the profit machine
they are defending

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brudgers
The chart doesn't account for the operational value of Bing for Microsoft.

If you want to search MSDN, Google doesn't get to sell advertising or skew the
search results to fit their business model or for that matter track what
you're searching. Likewise, searches from MicroSoft IP addresses using Bing
aren't tracked by Google either.

~~~
BarkMore
If Microsoft is really concerned about Google gaining a competitive advantage
by looking at search query traffic from Microsoft IP addresses, it would be
much less expensive for Microsoft to hide the traffic through proxies than it
is to build their own search engine.

For a long time, Google's search results for MSDN were superior to
Microsoft's. Perhaps that's changed with Bing. In any case, it seems to
Google's advantage to provide the best search for MSDN.

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forgotAgain
I think the greater damage is what Microsoft lost by being fixated on search
for so long. They went to where the puck is not to where it was going. Because
of that, they now face the same situation in mobile.

In other words they've become reactionary instead of being innovative.

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disruptivetech
Many see online as a "loss-leader", consider it setting out your stall. MS
makes plenty of cash from selling product, but you could argue without the
online presence their sales would be diminished - so where they are on the
balance is what really needs to be considered i.e. if they shut up shop
online, what the cost to the OS/Office division would be now and in the
future?

There is always the hope to tough it out in the hop of eventually gaining more
market share as your competitors run out of steam and cash.

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presty
February 2010..

~~~
nhebb
Here's a link to their latest financials:
[http://www.microsoft.com/investor/EarningsAndFinancials/Fina...](http://www.microsoft.com/investor/EarningsAndFinancials/Financials/FY10/Q4/SegmentRevenues.aspx)

The Online Services Division for 2010 had an operating loss of $2.355B.

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mwerty
I think the infuriating logic goes something like this:

1\. If the shareholders held a gun to my head, can I make this profitable?
Answer is probably yes but for some tiny profit.

2\. Do I see any other big prizes I can spend money on given I'm running a
company with this skillset? Ans: Yes, but I still have lots left so what the
heck.

Plus, if they return money to shareholders in dividends, its waaaay less fun.

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grandalf
To make the claim that this is a bad thing, one must argue that Microsoft's
stock would be worth more today if Microsoft had not been aggressive about
search.

How a company shows gains and losses is also very subjective. The numbers
could turn around and show strong profits around the time that bing reaches
45% market share (which will be soon).

~~~
dotcoma
45%? Not even in Ballmer's wet dreams.

Bing's market share is only up 4% since launch
[http://www.microsoft.com/investor/EarningsAndFinancials/Earn...](http://www.microsoft.com/investor/EarningsAndFinancials/Earnings/SegmentResults/OnlineServicesDivision/FY10/Q4/Performance.aspx)

and most of those gains must have come at the expense of Yahoo!

~~~
grandalf
What is your projection for search market share in 5 years?

It's a business that takes lots of investment in scale. I think Google is one
misstep away from Bing grabbing lots more share.

Google instant was a near-miss. Even on my new macbook wtih google chrome it's
annoyingly jittery and hinders the user experience.

~~~
junkbit
You can see how much they have moved in the past 12 months in this graph.
Project this forward 5 years [flash warning]

[http://gs.statcounter.com/?PHPSESSID=nv37oj3f3ovned6v8hr2mlp...](http://gs.statcounter.com/?PHPSESSID=nv37oj3f3ovned6v8hr2mlp4v0#search_engine-
ww-monthly-200911-201011)

~~~
dotcoma
so: not much. Or not?

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moonhorse
I am a fan of Scott, but the last paragraph on Sinofsky is laughable. Online
business and software are different beasts. With all his advocation of the
dogmatic triad model, Sinofsky would for sure slow down online service
division and sink the business even more.

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known
Sometime back I read MS _marketing_ budget is more than $2 billion.

