"We've analyzed their attack pattern, sir, and there is a danger...."
Grand Moff Tarkin (incredulous and visibly agitated at the junior officer) (also soon to be space dust): "Evacuate? In out moment of triumph? I think you overestimate their chances!"
Microsoft vs. Google Food for Thought
Last week at eBay (NASDAQ:EBAY) Live, I met with a bazillion Wall St. analysts and tried to get this point across to several of them without success and thought maybe either a) I'm off my cracker or b) I wasn't making a good/clear argument. I found sometimes having to write the logic makes it clearer or, heck, you guys can at least use the comments to tell me I'm off my cracker. Here's what I'm thinking.
Role play with me for a minute...
Ok, pretend you and I are in a conference room in building 12 in Redmond, WA. We work for a software company called Microsoft (NASDAQ:MSFT). We have been tasked by this crazy jumping around dude named Steve with one simple goal and not a lot of constraints:
"I don't care what it takes, how many people you need or how much money it takes, how do we take share from Google in search?"
Ok, that's a pretty interesting question and given the lack of constraints (on money and people) you could dream up some big plans. Here's what I would contribute to the meeting:
Things I would poke holes in:
- Let's run $200m in TV ads about our search being awesome (heck we don't even know what to call it - which one do we promote?)
- Let's try and out innovate Google (NASDAQ:GOOG) on search and put 1000 devs on the problem and have a 'better' search engine. (How do you use the Microsoft 'embrace and extend' strategy when the winner is 'simple, quick and easy'?)
- Let's try and take all of google's advertisers by giving them free ads or something. (Google's magic is in the searcher, not in the advertiser.)
Things we would brainstorm (I refuse to use the word 'ideate' which is all the rage these days) that I think we'd bounce off Steve (cautiously):
- Let's buy Yahoo! (YHOO) and consolidate our confused search brands(live/msn/vista) all in there and then go at Google head on. We'd shutter Panama, replace with the better AdCenter and have mass to be a viable number 2 to Goog's #1. (cost: $40b+)
- Let's buy facebook, surely there's some social angles and they are a likely competitor to google from a 'help people connect' perspective so that's a good asset (cost: $5-10b)
- What if you paid consumers for searches? Today, consumers go to google, give them searches 'for free' and then google turns that into pots of money and great food for the employees. One way to disrupt the model would be to turn that around and 'pay' the consumer for searches. Heck even if you gave them 50% of the cpc, you'd still be wildly profitable and you'd take share from google.
- Challenge: fraud. When you pay someone .001 for a search, they will setup robot arms to press keyboards and all kinds of wacky stuff you can't even dream of, much less stop/manage.
- You could limit some of this with caps/verified user and using a USB thumbdrive thingy to have a physical key/tracker and what not, but it's never going to be easy/perfect. A cyber currency could help too. (xbox points!)
- When you peel the onion on Google's business, you see several interesting things that could give you more attack options:
- One trick pony: 95% of Google's revenue comes from Adwords. If you peel out Adsense, it's still mostly Adwords. Conclusion: If you could theoretically kill adwords, you would kill all of google. They are a one headed death star, I mean monster.
- Geo: They are 50% international, with europe being the biggest contributor next to US. Conclusion: If you could beat them in the US and then Europe, you'd have them on the ropes.
- Advertisers: As much as we all love to talk long tail/local, the bulk of Google's advertisers are larger brands and agencies. The dream of the mom and pop is there, but maybe that's 10% of their revenues. Conclusion: They don't have some defensible position around advertiser reach/scale. If we had a great ad system, advertisers would come.
- Verticals: Google's largest vertical is 'retail', representing 40% of their revenue (I'd guess even more margin), 'finance' is second (20%), then I'd guess you have Travel (15%) CPG (10%) Healthcare (5%), and then a long tail.
- Add the above together and you could see a strong/unique verticalized attack having some potential merit. The theory being if you could 'out google' google in the retail vertical let's say and if you got 10% of that vertical, it would be 4% share, and maybe even a bigger chunk of margin. That's a toe hold, which is way more than Microsoft's been able to get so far (or anyone by that matter).
Let's attack the retail vertical...
(Still roll playing - isn't this fun!?) We meet with Steve and he says:
"Great guys, thanks you've given me two things to work with here. I'll go buy Yahoo!, that's a good one and of course Facebook would be good. But this other thing, I need more there, I mean what do we do? Who do we buy? What will it cost?"
As we now brainstorm the retail vertical, here's some ideas:
- Cash back - Hey this becomes a lot easier if we think about it in terms of the retail vertical. What if we do it in the form of $ back on product purchases vs. a $/search? That works much better because you can't create a robot to sit there buying things that you get a discount on and beat the system.
- Affiliate programs - We could plug into all of them, pass the $ on to consumers and augment with our own $
- Cost. US ecommerce will be $150b in 2008. 40% of that is driven by search ($60b). Most expensive case, if Microsoft gave 10% cash back on all that, it would be $6b. If it was 5% that woudl be $3b. This turns out to be much cheaper than Yahoo!. Admittedly, you would never get to $6-$3b, but even still, it's not nearly as expensive and you could really take some share from google if it works.
- Comparison Shopping - MSN shopping has lots of traffic, but lacks several key features to be the cornerstone of a cash back strategy. Thus, we'll have to acquire something like Jellyfish.com.
We get kind of excited and run this by Steve and he gives us the green light.
The Microsoft rebate program
Yes, the Microsoft rebate/cashback program is born! The blogosphere is full of negativity on the program, but I'm going to be contrarian and say it is working. Retailers are talking about it. Consumers are definitely talking about it.
We recently covered the 10-35% off that eBay is offering in the program that has definitely attracted consumer's attention.
Personally, I'm anxiously awaiting the June search data from comscore. I think we'll see Microsoft Live search take a little share. If that happens, watch out world, Microsoft will be off to the races.
Another interesting thing about this program is I've asked several Googlers about it and many don't even know about it, or they dismiss it as 'that affiliate program' or 'that cpa' thing that microsoft is doing.
If the Microsoft rebate program works (takes share from goog), what's next?
Now if you're at Microsoft and this program starts to work, you think about how you would accelerate it. Here's some brainstorming on that:
- Create a PayPal competitor - Having a checkout/payment system can be very helpful here. If you give payments away free that's essentially another 2% you can pump through and it gives you the best possible tracking system and rebate flow engine (they use Paypal today and that will get expensive)
- Buy eBay - (Cost: $37b) If you want to be the best product search, eBay has 25% of ecommerce and the best closed-loop data on the internet. Imagine you passed half the take rate to consumers to fuel search - you'd still have a profitable eBay, and you'd take share from Google like crazy. You get Paypal with the deal so no need to build a competitor. Finally, you get Skype. You could put that in Windows and potentially leverage to take search share from Google internationally.
- Buy Amazon - (cost: $33b) Ok, this is more of a stretch, but Amazon (NASDAQ:AMZN) has the 3P licked. Prime - imagine you got free prime by using microsoft search
- Buy affiliate programs - You could buy Valueclick all out (and get some CSEs) on the cheap ($1.5b) and get CJ. There are rumors that Rakuten is considering selling LinkShare. If you had both of those, you could give them away to retailers free and pass the savings on to consumers in your cash rebate program.
- Buy CSEs - 15% of ecommerce is driven by CSEs and they influence a larger %. If you buy eBay you get shopping.com. There are rumors that Shopzilla and Pricegrabber are on the market. Valueclick gets you smarter+pricerunner.
- Buy/partner with other ecommerce infrastructure players - Heck, you could buy GSI Commerce for <$1b and have some really interesting b+m retailers locked into your plans. There are lots of ecommerce platform, channel management systems (!!!) and other ecommerce players that would give Microsoft leverage to keep increasing the share of commercial searches at Live and also improve the buyer experience and finally recruit+support retailer's/advertisers.
Put all this together and you could have not only some MAJOR product search volume massed up, but you'd be able to augment your pure 10% cash back and if you played it right, I think you could add another 8-10% in there by providing payment, affiliate, platform, channel pieces. Now you have a sustainable 20% cashback program. That's material and sure to get consumers attention. On the eBay part, you could probably even go 30%. The cool thing is nobody could match this because, well, you're microsoft, and by consolidating the payment/affiliate/channel/platform pieces you can charge fees for NON-microsoft traffic, you build a nice moat around your cashback program (google couldn't replicate easily).
Would half the consumers that use Google to shop online switch to your system for 20-30% off? I don't know, but I do know that in my experience, consumers will crawl through glass naked for a $10 off coupon. My sense is they will do cartwheels for 20-30% off.
What do you think?
None of this is the equivalent of Luke in his X-wing heading down the trench with that one deadly shot, but as the poor Imperial dude said: "there is a danger....".
Disclosure: Author is long Google.