Microsoft's Bing Is No Longer A Money Pit

| About: Microsoft Corporation (MSFT)
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Microsoft's Bing search engine is expected to be profitable in fiscal 2016.

Bing has lost billions since it was first launched, but has been gaining market share over the years.

Profit growth from Bing could accelerate from the combination of higher market share and higher ad prices.

Microsoft's (NASDAQ:MSFT) recent earnings report contained plenty for investors to chew on, but one part of Microsoft's business that isn't talked about too much is Bing. Microsoft's search engine is a distant second to Google (NASDAQ:GOOG) (NASDAQ:GOOGL) in the United States, and while Bing has been gaining market share, it has been a money pit for Microsoft ever since it was first launched. But profitability for Bing is apparently right around the corner, and that could have significant implications for both Microsoft and Google.

A slow trudge toward profitability

Before Microsoft's recent restructuring, Bing represented the bulk of the Online Services division. From fiscal 2011 through fiscal 2013, this division proved to be a huge drain on Microsoft's profits:

Fiscal Year


Operating Loss










*Excluding $6.2 billion goodwill impairment charge. Source: 10-K

While the trend has certainly been positive, Bing was still a long ways from profitability in fiscal 2013, and some analysts have been calling for Microsoft to sell Bing for quite some time. But during Microsoft's recent earnings conference call, a single sentence about Bing from CEO Satya Nadella put to bed any chance that Microsoft might sell the business:

We expect Bing to be profitable on a standalone basis in FY16.

With Microsoft now beginning fiscal 2015, Bing is expected to be profitable for the first time within two years. That's quite a turnaround, and the elimination of $1 billion or so in operating losses will give a nice boost to Microsoft's bottom line.

Bing's share of the U.S. search market grew to 19.2% during Microsoft's most recent quarter, and search advertising revenue jumped 40% year-over-year. This is still well below Google's market share, which is somewhere around 68%, but Microsoft is positioning itself to be a solid No. 2 player.

Bing's opportunity

Because search advertising works on an auction system, where advertisers bid based on specific keywords, the greater the number of advertisers, the more the search provider can charge. Since Google has an overwhelming market share of search queries, advertisers flock to Google Adwords, and this pushes up the price that Google ultimately extracts from each click.

According to AdGooroo, during the first quarter of 2014 Google was able to charge significantly more than Bing per click in various high-value categories:

Ad Category

Google Cost Per Click

Bing Cost Per Click













Source: AdGooroo

This vast difference in pricing, along with Google's higher volume of searches, allows Google to enjoy lucrative margins. Almost all of Google's revenue is from advertising, despite all of the other activities the company is engaged in, and in the most recent quarter Google managed a 27% operating margin.

That huge margin represents an opportunity for Microsoft. Bing's U.S. market share has grown steadily over the past few years, rising from 11.5% in October of 2010 to 19.2% today. During that time, Google's share also rose slightly, so Bing's gain has been at the expense of other search engines like Yahoo (YHOO). Microsoft actually has a partnership with Yahoo, where Bing powers Yahoo search and Microsoft receives a portion of the revenue, so Bing is now responsible for nearly 30% of U.S. search queries, either directly or indirectly.

The effect of both rising market share, leading to more search queries and clicks, and rising ad prices, caused by more advertisers being drawn to Bing due to its larger market share, could lead to Bing eventually contributing meaningfully to Microsoft's bottom line. Profits can grow much faster than revenue thanks to the potential for rising ad prices, and if Microsoft hits its target by fiscal 2016, a $1 billion drain on the company will be eliminated.

Going forward, Microsoft has the opportunity to further monetize Bing through deals to use the search engine as a back-end. The next version of Mac OS X and iOS from Apple will replace Google with Bing for its revamped Spotlight search feature, and last year Apple's Siri switched to Bing as well. Microsoft seems to be benefiting from simply not being Google, as Apple tries to lower its dependence on the search giant.


As Bing continues to gain market share, the combined effect of more search traffic and higher ad prices could eventually lead Bing to contribute meaningfully to Microsoft's bottom line. While Google has been unscathed by the rise of Bing so far, Microsoft's deals with Apple are a blow to the company nonetheless. Bing still has a long way to go to catch up with Google, but if the service keeps growing, Google's lush margins could eventually come under threat.

Disclosure: The author is long MSFT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.