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April 28, 2006

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Comments

mb

Microsoft is putting up big bucks to scale a non-performing business. Seems to me like they should either exit the online ad business if they can't win, or fix it before they scale it. I guess they don't think they have the time for that, so they'll write big checks to buy ship loads of servers.

The more interesting result, though, is how this arms race between Google and Microsoft could reshape the info industry. The smaller players like eBay, Amazon, even Yahoo can't afford this kind of R&D and capex, so they'll need to find dance partners to pool their investments to stay relevant and profitable.

With Microsoft and Google are spending billions on data centers, seems like the chip and networking companies will benefit.

And both Microsoft and Google have significant chinks in their armor that can be filled by acquisition -- both need ecommerce and social recommendation technology, so Amazon should be in play. And Microsoft needs to scale their content delivery capability, so perhaps Akamai would be a target.

While it doesn't look like Microsoft will be able to keep up with Google's rate of innovation, or match Google's big head start in building out its infrastructure, it should be interesting to watch the consolidation moves that seem inevitable.

Anders Kargaard Jensen

Aaaah - great reading and SO true! I have worked for both Yahoo! and MSN and confirm the picture of MSN not beeing effecient enough. MSFT is not effecient - they make tons of money due to their strategic advantage of the operating system - and they can only succeed - when they can force this on to a new product. Apparently this isn't working to well for MSN.

Vista might change some of that, but I doubt it.

Can anyone tell me why Google didn't report EBITDA in their Q1? Or if they did - where they hid it, and what it was? Thanks

http://investinsearch.blogspot.com/

EJ Passeos

Great post, Mr. Blodget and comments from posters.
I agree that Mr. Softie seems to be spinning its wheels online. That may have changed if they had acquired the part of AOL that Google bought, but the anti-MSFTies at AOL may have revolted.
Now, it seems just laughable the bluster and promises we get out of Redmond--and then the horrible results that follow.
Live is promising, bold, and may be a big thing in the future, but even that is diversion. We use a Hotmail account for my employer, yet I can't get in on the Beta for Live Mail. Where is the concern for existing users and their experience. The search race may be over, at least for a while. If Ask.com can make rapid gains, why can't Microsoft any?
Also, at this point, don't investors need to ask who is running the show? We hear Billy is just a big picture guy, but is he pulling the strings on all this spending? He hates to lose. Mr. Ballmer may be a great manager, but someone should be accountable for their continued struggles.
Again, great posts and comments.
Thanks!
EJ Passeos

Neal Lachman

I will repeat what I always said in my comments on this blog.

MSN has become 3rd without any major efforts. MNS now being organized as one of the major clusters at MS will only have one result and that is upwards. It will be positive.

The searchwar isn't over. Ask is also a contender that everyone's ignoring.

There are also at least one major challenger that I am aware of, but they need huge funding before they can take off. When funded, they could become the next Gooogle.

As for MS, the problematics are just a snapshot, it doesn't show you the whole picture and it doesn't show you the future.

bronxite

NL: who is the dark horse you refer to?

Neal Lachman

bronxite,

It is a company seeking funding from my firm. Once the deal is done it will may want to make it public. Another one is a company linked with them, bringing in a new advertising concept.

chris Bassett

Seems more likely that MS will use their new Live service as their portal/umbrella for search / ad revenue / everything MSN may have become...

Henry Blodget

Agreed. It's not about the MSN brand anymore. But I am skeptical that "Live" will change anything.

john

I have account with the new live hotmail. It sucks. There are flashing adverterising on top and side of the email. These ads are running full animation the whole time, which is very very distracting. The whole viewable space for email is shrunked down. I want to cancel the new live hotmail account; but, I don't know how to. I am stuck. I advice everybody not to get suckered into getting the account. Live will never take off because Microsoft has the interest of itself first and user second. This is why google will continue to dominate. Google has both user and itself on equal ground.

joe

Neal,

how in the world can u be so anti-google (as expressed in the past), yet so pro (or hopeful) toward MSN?

ur not following the numbers. ur not understanding the dynamic as to how google and yahoo are the real market.

if msn wants to succeed they have to take a lesson from all the small successful web 2.0 start ups that have popped up, and what has made them successful. Google and Yahoo understand this all too well.

And as far as search goes, the war is over. google won. (when goog's biggest competitor, yahoo, conceeds to defeat in search in the 4rth q CC the war ended... doesn't mean the companies will not continue to strive for better offerings.)

Walter

john,
I signed up for the beta Hotmail and cancelled it 2 minutes later. Needless to say, but I'll say it anyway; I didn't like it.
IMO, the beta wasn't an improvement but a degradation. Like you said, they shrunk the viewable space down to accommodate MSFT purposes, not the users!
It's appears MSFT (imo) is all about enhancing their products for the purposes of selling the consumer on using additional MSFT services; with the enhancement for the user being secondary.

bronxite

As part of some dd for a potential purchase of MSFT shares, I made a live.com page for myself. I like how I can arrange a bunch of feeds together (but usability certainly needs some work -- the feed search engine is pretty much worthless). The gadgets concept seems nice, but perhaps not as powerful as Greasemonkey. For the time being, you have to configure your own web server to develop these, which is kind of pathetic. Live does seem better than Bloglines, but it's obviously not very popular.

Microsoft overinvested in the internet at the height of the craze with junk like Biztalk and Web services. I get the sense that history is repeating itself with Google. This aside, I like the revenue potential of their other product lines, and think that Friday was a bit of an over-reaction. Perhaps it's just supply and demand, as most of their institutional ownership is growth oriented, and there isn't a big enough subscription to the value style to make up for the slack. Just my thoughts. They may not be worth anything, but the price drop does seem anomalous.

btpblog

I interviewed at MSN in February. What a bunch of chumps. Bottom line... that place is in turmoil, you could see it in their eyes and smell it in the air.

No wonder they are losing ground. btw... How the hell can anyone manage a team of folks that, quite honestly, cant understand each other in meetings? In my experience, most foreign born workers are good at copying, following the rules and not talking back. IN MSNs business this is a recipe for disaster if you ask me. MSN try innovating, cause you wont win any other way.

Walter

Very good write-up on MSFT future in Fortune.

"Though he won't get very specific, Ozzie says that he is amazed at the amounts Microsoft is spending, and that the cost of building the physical infrastructure for Web services will be a major barrier limiting the number of players in this business.

"The people who could build a viable services infrastructure of scale," he says, "are companies that have both the will and the capacity to invest staggering amounts of money - staggering amounts." Think billions, many billions.

He goes on, "Who has the will and the capacity? Exxon could do it, but do they have the stuff to use it for?" Microsoft, says Ozzie, will have a very large number of applications to make the investments justifiable."
http://money.cnn.com/magazines/fortune/fortune_archive/2006/05/01/8375454/index.htm

Walter

http://money.cnn.com/magazines/fortune/fortune_archive/2006/05/01/8375454/index.htm

Neal Lachman

Joe,

I am not anti-google. I am just being relaistic. When google goofs up, you and I are refering to their goof-ups. When things like cooking the books, I don't say they are, I say "they might". But when they take off their eyes of search and venture into other business, they will lose, as simple as it is.

The search war is not evn going on heavily, there has been a few battles till date. I think 2007 will be the year of real all-out war. Not even this year. All we have seen till date is some puss-battles, compared to what is ahead of us.

Neal Lachman

MSFT's punishment last week is a great thing. This will show the management that the investors are still the boss.

However, MSFT's long-term shareholders are not going to be shocked by what happened last week. The punishment may force some fresh thinking in the incumbent mindset of MSFT.

John Walker

To the guys commenting on Windows Live Mail (Hotmail) beta,

Please remember it's a beta. They just made a decision (called $100 million decision) to eliminate the side ad. So, there will be only the banner ad giving a lot more screen realestate.

My gut tells me that this down-slide in MSN's performance is a lot about the transition to the Windows Live properties. They've got some interesting stuff coming out. See ideas.live.com, for example. A9 and Alexa just switched to Windows Live Search away from Google for their search results. Something's shifting MS's way.

Gen Kanai

Henry, when you next cover MSN, please consider researching the International markets for MSN- there are places, like China, where MSN has not-insignificant market share.

I would imagine that Redmond is betting the farm on the upcoming launch of IE 7 and Vista, wherein MSN will be the default home page and default search engine for all Windows Vista users (and everyone who upgrades to IE 7 from XP.)

Because search has become extremely important _since_ the debut of IE 6, 5 years ago no less, no one really knows how much of an impact the change in the defaults will be. Will users switch back to Yahoo! or Google? Will users stay with the default MSN? Defaults are a really, really, really powerful advantage. People who spend time in search know that most users do not adjust defaults. Thus Google and Yahoo! ought to be doing whatever they can to influence and educate search engine users. Google seems to be trying a number of different approaches. Yahoo! perhaps less so.

In Tokyo, I know for a fact that MSN Japan and Microsoft Japan have an army of recruiters looking for Internet engineering talent which is largely non-existent or is firmly encamped at the competition (Google Japan, Yahoo! Japan, etc.)

Gen Kanai

Also relevant is the recent Lohr/Markoff piece on IE7.

http://www.nytimes.com/2006/05/01/technology/01google.html?ei=5090&en=69417a0bdae611a3&ex=1304136000&partner=rssuserland&emc=rss&pagewanted=all

Gen Kanai

Sorry, that didn't work. This should:

http://tinyurl.com/hebze

MattyDread

Henry: MSN is, has been, and will continue to be defensive.

MSN doesn't have to win. All Microsoft wants is for Google to lose. The strategy is to suck competitors into a spending war while driving keyword prices down by adding a deep-pockted third to the market. Customers will see better absolute ROI at MSN, start to question things like click fraud and those fake search engine landing pages, and Google's keyword prices will plummet, earnings will plummet, stock will plummet. Another long-term threat to the desktop monopoly will be eliminated.

Lo and behold, when the Google threat is eliminated, we'll start hearing talk about how MSN is getting out of unprofitable businesses and cost-cutting with a mind toward profitability.

I do agree with you on one point: MSN's never shown any growth. But it helped turn AOL into a non-competitor to the consumer desktop, which was always goal #1. They've only just begun doing the same with Google. It'll all be over by 2008.

Neal Lachman

I agree with MattyDread. Very well put.

john

John Walker, you must own msft stocks. 100 million dollars for side banners ? Nobody would eliminate it if they generate 100 million dollars. Google wouldn't and Microsoft definitedly wouldn't.

Also, Alexa is own by Amazon who just lost the CEO of its search company A9 to google. So Amazon may switch because Google is its enemy.

TallTroll

>> Customers will see better absolute ROI at MSN, start to question things like click fraud and those fake search engine landing pages,

No, they won't. AdCenter is cheaper at the moment because the inventory is still thin, so average click prices are low. That means the online arbitrage boys are playing heavily there at the moment, buying cheap traffic to push back through an Overture / AdSense / whatever feed. Once the market fills up, and "real" advertisers move in, they will wander off.

The arbitrage types don't care about click fraud (they are doing a lot of it) or fake landing pages (they built most of them), and the real advertisers don't know enough about how the online marketplace to even work out what they *could* be looking at

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