Microsoft's Cashback: Changing the Internet Industry Forever

Cashback is definitely a catchy word. Now if only Microsoft (MSFT) can cash-in on the cash-back we could have a real winner here. The majority of articles written on the latest MSFT initiative have been negative. However, to be fair, the majority of articles we read were written by industry related people.

Whenever a company comes out with a novel marketing idea that entails lower profit margins for the sake of gaining market share, the entire industry takes up arms attempting to forestall or outright kill the concept. This is human nature and is to be expected. The same happened when the first horseless carriages were introduced. Where are the horse breeders today? Don't forget that at first horses were more reliable and faster as well. Not to mention that horses commanded more than 61% of the market (Google's (GOOG) search share) yet the concept was slowly accepted for one reason only - it made sense!

The Consumer

From the consumers' perspective, why not get back $5 on a $50 purchase that I was going to do anyway. Why not spend an extra minute or two on MSFT's frustrating inferior search portal to find what I'm looking for and make a few bucks? The obvious conclusion is that if MSFT makes it easy for me to get my cash back I will do it BECAUSE IT MAKES SENSE.

Think of it this way: Why should I use Google (GOOG) to buy a book from Amazon (AMZN) for $20 when I can buy the exact same book from the exact same Amazon for the exact same amount and get back $2. Show me an American or European or Australian that doesn't like using a free coupon especially when there is no clipping involved. All that is required is a one time sign up that takes less than three minutes and low and behold I get a never ending stream of clippings delivered directly to the cash register.

Now if only we could fill up the gas tank over the internet…

The MSFT Perspective

Obviously MSFT wants to build its internet business and do so for profit. Numerous articles claim that by offering 'rebates' or 'profit sharing' MSFT is effectively shooting itself in the leg for one of three reasons or all combined.

First, the coupon business is not that simple. If the coupon isn't large enough then people won't bother clipping, or is that clicking. If the coupon is too large then it erodes the entire profit margin. To this we say, MSFT has plenty of cash on hand and is not a new startup that has to watch every penny. If they get it wrong at first, they can always give the strategy a tune-up. Besides, all they need is a worthwhile gimmick to get people to sign up and the rest is history.

Second, once you start you can't stop because as soon as you do you will lose your customer base. In this case, many caution that MSFT will be giving away any potential profits forever. To this we say, currently MSFT isn't making money on search. Get the traffic and breakeven. In the odd chance that MSFT doesn't know how to monetize the traffic, without relying on ad income, we do. This, however, we are not giving away for free in this article as there are numerous applications that are applicable to many companies and industries.

Third, people are so accustomed to using Google (GOOG) that they won't switch for two reasons: 1) Google search is better. 2) Everyone has Google as their homepage (or toolbar) and like the 'clean look' of the Google homepage. To this we say, yes - Google search is better - for the time being. However, money talks and it will take less money once MSFT improves its search. As to the feel and look, well MSFT is just going to have to emulate Google by putting up a clean Cashback homepage. Getting people to install the homepage as the default is easy; simply offer an additional $5 Cashback on the first purchase…

Some pundits claim that MSFT has no intention of making money out of this and the sole reason they have embarked on the Cashback initiative is to strike back at Google. O.K., what's wrong with that? If MSFT needs some more time to fix their search then so be it. If in order to take the wind out of Google's sails they have to spend a little, it's still less than spending $47B (or $40B) on acquiring Yahoo! and then still have to fix the search.

No matter how you clip this, this is the right move for MSFT.

The Industry

The internet industry loathes this move. In effect, MSFT has embarked on reshaping the industry forever. Presently there are only two ways to make a dime on the internet, either sell goods or sell ads. There are millions of sites that can't breakeven without Google sharing their ad income with them. This created a clutter of small sites that barely cover their costs, yet can survive.

Now MSFT is turning the table around. Instead of ads supporting the millions of sites, goods will be king. Sites that don't sell goods will miss out on search revenue as they will not be included in the Cashback program.

In essence, MSFT is changing the hierarchy. Until now the pecking order was: Google -> site owner -> advertiser -> customer. The new order is: MSFT -> customer -> advertiser -> site owner. Since Microsoft is not going after the website Adwords business, MSFT doesn't have a problem with this. The internet industry has a major problem with this because very little revenue is derived directly from the end customer. Site owners and advertisers provide the bulk of direct revenue. By moving them further down the food chain, there will be less profits for these two groups, translating into lower industry sales.

Microsoft will be quick to point out that in reality while the end customer gains, only site owners lose out as advertisers are not affected by the hierarchy change. Well, maybe so at first but give it time and advertisers will probably be pinched as well in favor of the customer.

The bottom line is that MSFT is putting the public back in the internet's driver's seat. Once Joe six pack figures this out, the industry can yelp as much as they want but can only flutter with clipped wings.

Disclosure: none

Comments

[PIGS IN SPACE:]

As usual - another great initiative that is only available in the USA. Why is Europe always overlooked by MSFT?? - is it because they have less search traffic than Netscape!! Come on MSFT - the world exists outside the US....

Merchants will flock in *packs* and help drive Live.com to be a genuine competitor to the all consuming Googmonster, Europe is pretty well advanced on the internet you know, we no longer throw sticks at the moon and sleep in our wellies....we even have electricity and running water

2008 May 23 08:33 AM

[Tom B:]

"The same happened when the first horseless carriages were introduced. Where are the horse breeders today? Don't forget that at first horses were more reliable and faster as well."

Interesting metaphor, but not for the reason you think. We live in a world, actually, where over 90% of people are still poking along on horses because it is required by their companies. That is to say, 10 years after MSFT vs the DoJ, MSFT still has a Darth Vader mind grip on Enterprise IT. It is because IT realizes that if people used GOOD computers-- Macs, or to a lesser extent, certain LINUX distros-- there would be far less NEED for IT services.

This may seem irrelevant to your topic, but it IS relevant. With this cashback thing, they are again using the same bully tactics and may very well end up be hauled back into antitrust court. Taking losses for the sole purpose of hurting a competitor is on the illegal side of "gray area".

And, again, it shows how utterly incapable MSFT is of achieving any kind of actual innovation; they are all about brute force.

2008 May 23 09:07 AM

[Devil's Adv...:]

How is this different from sites like eBates, Upromise, FatWallet, MyPoints, and dozens of other loyalty sites that have existed and established strong consumer bases for years already? And how is it different from sites like Coupon Mountain, Coupon Cabin and others that have been helping price-savvy consumers for years? This offering by MSFT is nothing new, and will require not only a change of behavior in terms of consumers' Google usage, but also those who are already deeply entrenched in the sites that have existed for a long time.

2008 May 23 09:13 AM

[nk001:]

Why is everyone assuming the MSFT is shelling out the big bucks? What really is the model here? If MSFT is picking up the cashback discount amouny what criteria is being used to differentiate between say, 2 retailers selling the same thing. MSFT wants to reward loyal customers to use Cashback, but the dynamics of the transaction would sure be interesting to understand.

2008 May 23 10:41 AM

[nk001:]

Continuing the thought above. Found the below on the Cashback for Advertises page.

Live Search cashback offers:
Direct customer rewards on selected items, with cash back on every transaction. You can establish the amount of cash back you want to reward customers. Additionally, you have direct control on how your products are listed compared to the competition.

2008 May 23 10:44 AM

[teriyaki:]

Microsoft bought Jellyfish.com awhile ago and are now integrating it into search. They will do the same with Farecast. Where have you been?

2008 May 23 11:39 AM

[jcrash:]

I've been getting cashback on the internet for years through FatWallet.com (over $600 back so far). Microsoft is just copying (as usual).

2008 May 23 12:36 PM

[Jonathan Scott:]

I better understand the situation after this article. MSFT decided it could not beat GOOG at its own game so it changed the game. It moved the battlefield out of GOOG's cannon field of fire. That is innovative. Soon GOOG will be viewed as Netscape, WordPerfect, Lotus, and DbaseIII+

2008 May 23 12:38 PM

[SingHash:]

MSFT appears intent on turning the internet into a virtual strip mall. In the process, it will degrade the quality of the shopping experience and reduce customer service -- but only for those who are willing to suffer the misery of shopping on the seedy side of town for the sake of a few bucks.

The GOOD news is that this will hasten the demise of the common internet. I foresee cash-back retailers flocking to a their own TLD (top-level domain), while leaving the rest of the net less encumbered by their dreck. Think of the difference between a developing-world bazaar ("You buy Rolex, very good yes?") vs. high-end boutique ("Would sir like this Rolex? It's very good, isn't it?").

Eventually, cash-back will come out of the retailers' pockets, which means that they'll have to cut all the corners they can in order to survive. It'll be a race to the bottom for every vendor who chooses to participate. The boutiques, on the other hand, will do quite nicely, providing a pleasant experience and great customer service to those who are willing to pay a few extra dollars.

It's nothing more than a re-zoning of the internet, with MSFT paving the parking lots -- soon to be complete with potholes, derelicts, hoodlums, needles on the ground, and urine on the wall. Thanks, guys.

2008 May 23 01:06 PM

[carlivar:]

SingHash, what Internet do you use? The Internet I've used for the last 10 years already has all those potholes, derelects, hoodlums, etc. that you describe.

2008 May 23 07:07 PM

[jcrash:]

"Eventually, cash-back will come out of the retailers' pockets"

Um, that's how this works (already). The retailers are paying Microsoft, just like they pay Fatwallet, and Slickdeals.net, etc.

2008 May 26 11:42 AM