Friday, April 23, 2010

What's red and red and red all over?

Silicon Alley Insider has been digging into Microsoft's earnings report, and what they found about Bing and Microsoft's online business isn't encouraging in the least. The good news is that the market share of Bing, Microsoft's search engine, went up by four percent in the last quarter. The downside is that the company's online losses brought the projected annual loss to $3 billion from a business that only has $2.2 billion in annual revenues. More importantly, Bing's traffic increases are coming from a combination of buying traffic from other sources and moving traffic from Live Search to Bing during the quarter.

For example, Microsoft is paying Yahoo 88% of the gross sales revenue from traffic sent to Bing from Yahoo. That means that Microsoft has to pay operating costs, including sales commissions, out of its 12% of gross revenue. Further, Silicon Valley Insider estimates that 100% of Bing's revenue increases in the quarter were paid right back out in traffic acquisition costs.

The bottom line is that Microsoft has lost money on its online businesses for every quarter since March of 2006, and it lost $713 million in the most recent quarter. So why is Microsoft doing this? Surely the company no longer entertains the notion that online is going to be a big profit generator. I think that Microsoft is now more interested in restraining Google's growth than it is in making money in online. Whatever traffic it can divert to Bing, even if it's unprofitable to Microsoft, is traffic that Google can't sell any advertising against.

So, people who are wondering why Microsoft is continuing to bleed money in online are looking at the wrong metric. Microsoft is trying to slow Google down in order to keep Google from having the resources necessary to ravage its Windows and Office businesses.
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