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Bing has a sixth of the market, but is losing loads of cash

It started off simple -- "beat Google".  We'll transform Microsoft into an "industry leading, Internet-wide advertising platform" pitched Kevin Johnson.

Today Mr. Johnson is no longer with Microsoft Corp. (MSFT).  He's CEO of Juniper Networks, Inc. (JNPR).  But his $6.2B USD gamble into display advertising firm aQuantive is back in the headlines after Microsoft took a $6.2B USD writeoff on the struggling pet project.

Microsoft spent the $6.2B USD to acquire aQuantive in 2007, a bold bid that greatly expanded its small stable of search-tied online ad-offerings.  Since the acquisition, though, the road has been nothing but rocky.

To be fair, Microsoft has grown Bing from an 8.4 percent market share to a 15.4 percent share, according to ComScore.  But the problem is that gain has been less of a grab and more of a resource transfer, as it came at the expense of Yahoo! Inc. (YHOO), the floundering search veteran who Microsoft paired with back in 2009.

The problem is that Microsoft needs to reach a "tipping point" in order to lure large advertising clients to its service.  Analysts have speculated that the magic number is around 25 to 30 percent of the market.  But that would likely require Microsoft to scoop double digits of market share away from Google Inc. (GOOG) which has hardly budged from its 60+ percent dominant position.

Bing search
Bing is still struggling to reach its "tipping point" and achieve profitability.

Search in theory works something like a toll road.  You pay a certain amount to route traffic to you -- expenses which range from the cost of server farms to the cost of advertising to build customer awareness of your brand name.  You're repaid when people visit your search homepage and click on ads -- text or graphics -- that are displayed amongst the search results.  Those clicks are compensated on a unit basis by advertising clients either directly (as in Microsoft's case) or through third parties.

The idea is to make your advertising dollars outweigh your "traffic acquisition" and hosting costs, generating a net profit.  Google is the master of that game.  Microsoft, is unfortunately on the wrong end of the equation.

Search is hurting Microsoft financially, burning away the windfall profits of its operating system division.  Losses hit $1B USD per quarter last year, but have slowed to a slower bleed of $2B USD in the last 12 months.  

The company glumly surmises, "While the aQuantive acquisition continues to provide tools for Microsoft's online advertising efforts, the acquisition did not accelerate growth to the degree anticipated."

Search is an expensive hobby, but Microsoft plans to stick with it for now, in hopes of reaching that ever elusive profit cloud.  But one has to wonder how profitable Microsoft might be, if it just swallowed its pride and dumped the search baggage.

Source: Microsoft

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By Tony Swash on 7/5/2012 8:47:28 AM , Rating: 2
By that logic Google will die a very slow death if they don't make an OS that can compete with Windows.

Or Toyota will die slowly if they cannot compete with Starbucks Coffee.

Your logic is impossible to agree with. Microsoft will never die a slow death because of Bing or any online service deficiency.

10 years ago the Internet was still the future, and Microsoft is still here today. Please, think about it. The Internet is reaching a plateau in capabilities, the only improvements to come will be in wireless access, speed, latency times, and ancillary benefits. We can already do practically EVERYTHING there is to be done online easily and cheaply (usually free). And Microsoft doesn't appear to be going anywhere just yet.

I sort of agree with you (gasp!). The idea the web and the browser could replace an operating system proved wildly premature and may never happen. However something else happened, which is the beginning of the replacement of the web/browser by the app. Hundreds of millions of people, soon over a billion, are using operating systems where they regularly access the internet, information and communicate not via the browser or email but via inexpensive, powerful but specialised apps.

The rise of the app poses problems for Microsoft because it will strongly push down prices and margins on software and Microsoft is a software company which has almost zero presence in the new app markets. Note the large price drop on Windows 8, the beginning of the serious erosion of it's software margins.

But the rise of the app also causes problems for Google. Mobile ads are a tiny market per user compared to desktop/browser ads. Mobile advertising will probably never be even remotely as lucrative as the desktop. And the rise of the app bypasses Google's ability to track and record user behaviour and thus undermines a key part of the product it offers it's customer (i.e. those who buy advertising).

Horace Dediu at Asymco estimated last year ( ) that each iOS customer is worth $150 per year to Apple, every year. That means when iOS hits a billion users in about a year Apple will be making $150 billion per year on its service and content stack on top of the money it makes selling it's devices and hardware . That's the power and the value of the new App economy. And unlike both Microsoft and Google the rise of the app economy and the app internet poses no threats to Apple's core product, it's hardware, in fact it enhances it's value.

By Pirks on 7/6/2012 1:57:06 AM , Rating: 2
Note the large price drop on Windows 8, the beginning of the serious erosion of it's software margins
OMG!!11! The temporary price drop until January 2013 and only only for upgrade versions is... <drumroll>A "SOFTWARE MARGIN EROSION"!</drumroll> ARGHHH SOO SCARYYY! hahahaaaa LOOL LOLOL :)))) hahaaa

By JPForums on 7/10/2012 10:56:54 AM , Rating: 2
OMG!!11! The temporary price drop until January 2013 and only only for upgrade versions is... <drumroll>A "SOFTWARE MARGIN EROSION"!</drumroll> ARGHHH SOO SCARYYY! hahahaaaa LOOL LOLOL :)))) hahaaa

Congratulations Tony. You broke Pirks.

There is a fine line between genius and insanity. Others may argue which side of the line you belong on. I'd like to think you just stomped it into the ground.

"A lot of people pay zero for the cellphone ... That's what it's worth." -- Apple Chief Operating Officer Timothy Cook

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