How Microsoft Can Develop a Meaningful Presence in Online Search

Includes: AABA, GOOG, MSFT
by: TMT Analyst

Part 1 in a series of discussions on Microsoft’s Internet Business

The story as we all know is that Microsoft (NASDAQ:MSFT) is a distant third in terms of query market share compared to Google (NASDAQ:GOOG) and Yahoo (YHOO) and would like to close the gap and become more relevant in the online search space. More query market share (a.k.a. Volume) ultimately leads to more advertisers, which ultimately leads to more revenues and profits. The key question is whether Microsoft should throw more cash at the business by hiring talent, buy Yahoo! as a whole, or buy Yahoo’s search business, to accelerate the process of closing the gap with Google.

Here Are The Facts:

  • U.S. Search Market Share – 8.5% vs. 64% for GOOG and 21% for YHOO. According to December 2008 comScore data, Microsoft has an 8.5% share of the U.S. search query market compared to Google at 64%, and Yahoo at 21%. That share is down from 11% in January 2007, compared to Google’s which grew from 53% in January 2007. Yahoo’s share was down from 26% one year ago.
  • Globally, Microsoft has a 3% share of the search market, compared to 66% for Google and 14% for Yahoo. So adding international into the mix, the situation looks worse for MSFT.
  • Second In Terms of Unique Users. Surprisingly, Microsoft is second in terms of Unique users globally, with 650 million unique visitors to its sites, compared to Google at 775 million, and Yahoo at 565 million. Thus, MSFT only has 15% less unique visitors than Google, and Microsoft has 15% more unique visitors than Yahoo.

What Microsoft Should Do
Given that online search represents close to half of online advertising revenues and will likely become a larger percentage over the next three years, if MSFT is serious about having a presence in online advertising, it will need to develop a more meaningful presence in the search business. With a less than 10% share in the U.S. (3% globally) compared to the market leader Google, which has 64% share (66% globally), Microsoft will have to do something rather drastic to close that gap.

Microsoft has already redeveloped their search and advertising platform, dubbed adCenter, which has and continues to receive good reviews from search engine marketing firms and advertisers for its high ROI. The problem is that Microsoft is not getting the volume penetration that they need to make the business competitive and profitable even though they capture only 15% less unique visitors than Google. Advertisers with fewer resources will often go to Yahoo and Google to post ads and overlook Microsoft even though the returns are higher at Microsoft.

The rather simple solution of getting more users to search on Microsoft is a rather big question of how to achieve this. Clearly, investments and strategies in the past have not allowed MSFT to close the gap with Google. Since MSFT achieves 15% less traffic to its sites than does Google, MSFT should start by converting that traffic to search users. Strategies should be employed to keep the users on the MSFT sites to conduct searches (Yahoo! faces the same problem).

Offers like the cash back program and other couponing and discount strategies should help provide a lift but will not make a dent in closing the “3% to 65% gap.

So that brings us back to MSFT’s only major game changing alternative, and that is to acquire the second player in the space or acquire the second player’s search business (my view remains that MSFT should acquire all of Yahoo). Acquiring Yahoo or Yahoo’s search business would instantly bring MSFT’s share up to 30% in the U.S., about half of Google’s, and close to 20% globally, about a third of Google’s. That would then allow management to focus more on internal strategies (listed below) that can drive incremental share. They can start by trying to convert the existing traffic to both YHOO and MSFT to search users. That would go a long way to closing the gap. That alone would add another 10-15 percentage points to MSFT’s share over time, making them much more relevant in the space.

Organic Strategies to Grow Share
There are a few organic strategies Microsoft could employ that would help it grow share:

  1. Change the mindset about search. The focus has been too much on generating revenues when the goal should be on improving the user experience and providing a differentiated product. MSFT’s number one problem is volume. If they improve the user experience then users will come. If users come then advertisers will come. If both users and advertisers come then monetization improves and revenues and profits grow. It is that simple. Stated differently, to make headway in online advertising, then MSFT will need to significantly penetrate online search. To do so, they will need a steadfast commitment to online search from the CEO on down.
  2. More Effective Marketing Strategy Centered on Search. This should be done to convince users that the online search experience and relevance is on par with Google’s. No cute ads like which was ineffective and confusing. Just a plain ad that has the aim that search relevancy is on par with Google (provided the claim is true). Several ways to do this: a) through word of mouth – this can be filtered through the press by attending more search related industry trade functions; b) through a viral outlet like YouTube; c) through banner ads on Facebook and other web properties; d) go straight to MSFT users, which already has the number 2 web property in the world. The aim is to convince users that they do not need to jump off the MSFT pages to Google to conduct searches. In a nutshell, change user behavior through knowledge that their search engine is as relevant to Google and that the user experience is as compelling.
  3. Need To Focus On Search Innovation. For the past 4 quarters, Google released 100 search monetization improvements each quarter. Point is they are constantly improving the search product and is letting the world know that or shows it to the world. MSFT should do the same.
  4. Change the Brand. “Live” confuses everyone and is difficult to find. Plus the marketing effort behind Live Search was ineffective. Change the Live name to something else. Use either MSN or Microsoft Search as the brand. No need to deviate from the solid brands of those two.
  5. Develop More Relationships But Be Careful Not To Overspend. Agreements with Sun (JAVA), Dell (NASDAQ:DELL) and HP (NYSE:HPQ) to include the Live Search Toolbar on new PCs, and the much-ballyhooed Live Search Cashback, which gives Web users rebates for purchasing products from participating Microsoft vendor partners through the Live Search site, are good examples. Others like Verizon (NYSE:VZ) and Facebook are important in that they create brand recognition. Management should go after MySpace if Google drops it. But management must be careful not to overspend or enter into deals that are uneconomical.

In all, if Microsoft buys Yahoo and in addition follows the recommendations above to grow organically, they will develop meaningful share in online search and as consequence develop a meaningful presence in online advertising.

This is the first in a series of discussions on Microsoft’s Online Services Business (OSB). In subsequent posts, I will discuss strategies for the company in branded advertising/ad agency/ad networks or what they describe as their online advertising platform or the newly created PubCenter, portal and information content products, communications and social networking, and cloud computing efforts.

My reasoning for focusing on Microsoft is because I believe they do have a competitive presence in the Internet space and it needs to be documented, given that it is largely ignored by Wall Street analysts in favor of other parts of the business model.

Disclosure: I do not have a position in Microsoft.

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