What Microsoft gets for $2 billion

http://www.scottberkun.com/blog/2010/what-microsoft-gets-for-2-billion/

by loboman • 16 years ago

126 63 16 years ago

natmaster• 16 years ago

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.

dotcoma8• 16 years ago

yes, but it was NOT in the red at the tune of 2 billion USD a year...

samratjp• 16 years ago

But facebook is an independent entity - it's not quite the same comparison. Regardless, Microsoft's online strategy from day one hasn't been on par with the rest of the 600 pound gorillas.

If anything, I wish they had the same force behind online services as they have with the Xbox division. They really got Xbox Live right!

qeorge3• 16 years ago

It also took them 10 years of hemorrhaging money to get Xbox/XBL right. Many people also thought they were stupid for doing so, but now it seems prescient.

jbellis• 16 years ago

> facebook is an independent entity - it's not quite the same comparison

qualitatively, I don't see much difference between investing VC cash vs investing parent company cash.

BarkMore3• 16 years ago

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.

viggity• 16 years ago

Facebook doesn't do 60B a year in revenue

c2• 16 years ago

Is Facebook profitable? I heard they were cash flow positive but that doesn't mean they are profitable (see GoDaddy). Besides, all we can do is speculate about Facebook revenue at this point - they aren't public and don't publish legally binding financial reports.

Besides, the whole independent division comparison to a whole entity is a little ridiculous. Every company, including Facebook, spends a certain amount of cash flow on R&D, it's a competitive necessity. The fact that Microsoft structures a large part of their R&D into a division shouldn't necessarily be the fault of the division when they don't immediately turn a profit.

As long as they are meeting their internal (revenue/profit/growth) goals, I don't see the problem with giving out bonuses and rewarding the players involved.

checoivan• 16 years ago

I wonder how much of this money is spent on advertisement,probably most of it. I keep seeing tons and tons of TV ads.

It's hard for me to believe that amount of loss comes just from datacenter/development costs of Bing and Msn.

dstein• 16 years ago

According to http://www.crunchbase.com/company/facebook Facebook has only even had $836M invested in TOTAL. And they have a lot more to show for it.

gscott2• 16 years ago

Friendster and MySpace were hot once too. Microsoft is trying to do something different be the place where you search the world wide web for information.

calbear81• 16 years ago

The problem with this view is that yes, Facebook didn't have a strong monetization strategy for many years but they didn't need to when they were growing at such a breakneck pace. This is very different for MS which has lost share for many years until the launch of Bing.

aaronbrethorst• 16 years ago

"They" is an ex-Microsoftie who spent (I think) 9 years at the company, including a long stint in IE. Food for thought.

cletus• 16 years ago

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• 16 years ago

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.

iterationx• 16 years ago

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... Specifically, assuming Microsoft's operating income stays constant (it will likely grow), it's $5.5-$11 billion.

endquote.

MarkMc• 16 years ago

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.

presty• 16 years ago

February 2010..

nhebb• 16 years ago

Here's a link to their latest financials: http://www.microsoft.com/investor/EarningsAndFinancials/Fina...

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

mwerty• 16 years ago

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.

brudgers• 16 years ago

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.

BarkMore3• 16 years ago

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.

rbanffy2• 16 years ago

On the rare occasion I have to look something up on MSDN, I use the search box on Firefox and that uses Google. I gave up on MSDN's (and Microsoft site) search a long time ago in favor of Google's because they seem to be better at finding relevant contents on Microsoft properties.

nopinsight• 16 years ago

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.

anonsoftie• 16 years ago

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.

yurylifshits• 16 years ago

Your analysis is very good. I just want to add that dynamics of "more searches -> more revenue per search" also holds for every individual niche. In order to make good money, one can build substantial market share either in certain geographies (e.g. Indonesia, India, China, Russia...) or verticals (shoppings, deals, travel, cars...).

rlmw• 16 years ago

Are Microsoft actually seeking to obtain market dominance in a particular vertical or region? I'd have thought this would go against their grain. I haven't seen any particular evidence of this, but I'd be interested to know if I've missed something.

Also dominance in verticals/regions won't necessarily net them the £10bn/year that they'd like - of course it might be a good stepping stone to broader dominance.

Umalu• 16 years ago

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• 16 years ago

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.

dotcoma8• 16 years ago

So, they lose 4 cents every time a search is performed (2 B USD in loss, 4 B searches per month, or 50 B per year) but they will make up on the volume? Not to mention: they still use Overture to monetize search...

kenjackson4• 16 years ago

First, the original comment is spot on with his/her analysis.

I don't think you get how search and advertising works. Clicks lead to revenue, but you need clicks first. In order to get clicks you need to be competitive. With Google just a URL away they need to be nearly as good, if not better (due to name recognition) than Google to get a large share of the pie.

So the problem is that they must effectively spend (or outspend) Google on search (data centers, employees, etc...) pretty much all the way to the point where they reach parity and beyond. All the while they bring in a lot less money than Google.

If Bing can continue at its current pace and couple it with some real marketing strength, I think they have a real chance of flipping quarterly income from a $500M loss to $500M in earnings.

The two wildcards in this space are social (Facebook) and mobile. I feel like mobile is a bigger deal than social. IMO advertising is the current and future business model of computing. I think MS gets this and realizes that this is the one fight they have to continue to fight.

grandalf2• 16 years ago

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).

gscott2• 16 years ago

And how much of that spending goes into supporting online efforts of other divisions. I imagine the "online" division handles everything most everything that goes online even if it is supporting offline products.

contextfree• 16 years ago

My understanding is that the Online division is only responsible for standalone consumer-oriented services, specifically Bing plus MSN. Online services that are tied to other products, such as Windows Live or Xbox Live or Office 365 are part of the respective divisions for those products, and more platform/infrastructure-oriented services like Azure are part of Server & Tools.

dotcoma8• 16 years ago

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...

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

grandalf2• 16 years ago

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.

bl4k• 16 years ago

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

apedley3• 16 years ago

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• 16 years ago

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.

apedley3• 16 years ago

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.

rbanffy2• 16 years ago

> do you project a turnaround right now?

Fans are true believers. They will bend reality if needed.

rorrr2• 16 years ago

No way in the world. MS has nothing to counter Google's search. Users will not switch to Bing, there's no reason to.

arethuza• 16 years ago

I switched to using Bing Maps about 70% of the time fairly recently - largely because here in the UK they have full Ordnance Survey 1:25000 coverage.

apedley3• 16 years ago

read my reply above ;)

known• 16 years ago

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

disruptivetech• 16 years ago

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.

forgotAgain• 16 years ago

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.

moonhorse• 16 years ago

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.

What Microsoft gets for $2 billion

Related Stories