As shown by yesterday's numbers, MSN’s financial performance continues to deteriorate. With each passing quarter, in my opinion, the chance that the division will ever mount a serious challenge to Google and Yahoo in search (or any web business) gets slimmer and slimmer.
- MSN advertising revenue rose only 7% y/y, a deceleration from December’s mediocre 12% and September’s 20%. This compares to Yahoo’s 34% and Google’s 79%.
- Search revenue actually declined y/y. Microsoft blames this on the transition to adCenter, but shrinking revenue in a market growing this fast is a terrible sign. All else being equal, shifting to adCenter modestly increases revenue-per-click because MSN goes from booking net revenue to gross revenue. This illustrates just how much revenue is being lost due to lower keyword prices on adCenter than Yahoo.
- Operating income also declined, from positive $102 million to negative $26 million. The division is now detracting from the performance of Microsoft as a whole.
- The plunge into the red resulted from declining revenue and a headcount increase of a whopping 35%. Whatever the new folks are doing, they aren’t selling ads.
MSN’s heavy investment in headcount and R&D, combined with a renewed willingness to run the division at a loss, shows how seriously Microsoft is taking MSN and the Google threat. Despite this, however, the division’s performance shows no signs of a turnaround (on the contrary, it just gets worse). Analysts and commentators conditioned by years of Microsoft’s come-from-behind victories in software continue to act as though MSN’s ascendancy is only a matter of time. The numbers (and general business history) suggest otherwise.
Microsoft has been at the web business for 11 years now--and it is still running a distant third. How long Microsoft will continue to believe that gaining real traction online is just a matter of hiring the right people, developing the right algorithms, or spending the right amount of money remains a mystery. Unless the MSN division soon shows signs of first stabilizing and then regaining share, however, even the Microsoft faithful may eventually have to throw in the towel.
The hirings of Steve Berkowitz, Ray Ozzie, etc. are positive, but, for MSN, they are probably too little too late. I continue to believe that the best solution to a tough problem is a spin-off. It worked for Expedia, Slate, and other Microsoft web businesses, and it still has a chance of working for MSN. Also, why any one company wants to have $50 billion in revenue and compete with IBM and Oracle on one end and Google, Time Warner, and Sony on the other is beyond me. With each successive re-org, however, it becomes clearer that Microsoft is deadset on doing just that.