Update on MSN: Still Going Nowhere Fast

It's ancient history by now--and certainly not news--but it's worth noting that Microsoft still hasn't made any headway in the search-and-portal game and, in fact, is falling farther and farther behind.  As a result, it is not surprising that Steve Ballmer is now warning media companies that Google is the Evil Empire--because no other competitive tactic has worked.  Microsoft is at least no longer embarrassing itself by suggesting that Google and Internet domination are only a matter of time.  Instead, perhaps, it is marshalling its energies to fight a far more critical battle: protecting its crown jewels from Google-hosted web apps that threaten to pick off low-end users of Outlook, Word, Office, etc. one by one.

How badly is MSN/Windows Live doing these days?  In Q3, advertising revenue rose only 5%, once again the slowest rate of growth of the big four (even lagging Yahoo's pathetic quarter).  Display advertising on portals, email, etc., was up, but search revenue was down again, despite AdCenter having been rolled out to the entire U.S. market. 

Just as bad, the division's operating income/loss fell from a gain of $68 million last year to a loss of $130 million this year--despite a change in accounting for search revenue from net to gross (MSN used to record its net revenue after sharing a portion with Yahoo, et al).  Microsoft is cranking up the R&D and marketing spending to try to compete with Google, but thanks to Google's now 4X revenue advantage (ex TAC), this is a losing battle.  Google spent more than $300 million on R&D in the quarter, about half of MSN/Live's total expenses for the period, and it still generated a massive profit.  As Google continues to grow, this disparity (or MSN/Live's losses) is only going to become greater.

Comments

[guest]

they are steadily improving

[Siggyboss]

Amazing how dubious anti-trust laws are thrown about to obviously stifle competition. When MSFT was killing the competition with lower prices or added features, its competitors ran to the government. When MSFT introduced a new browser, GOOG threatened MSFT regarding the default search engine. Now MSFT is threatening GOOG with the charge of having a monopoly on Internet searches. Back and forth.

[fCh]

Henry, you are looking at MSN vs. Google from a purely numbers driven perspective. I, as an end user and small business owner, I also look at them from the perspective of healty competition. I host some my applications and website free of charge with Google, and plan to do so soon with (MSN) Live Office as well. In the long run, we are all going to benefit, and the pie may be larger than search and/or advertising alone. Cheers, fCh

[Anders Kargaard Jensen]

Henry - are you finally starting to believe in Google? Did you also finally sell your Yahoo! interests? Or was that solely through mutual funds?

Could it be time for you to stock up on Google? :)

[Bruce Hamm]

Henry, if you were Ballmer what would you do, what needs to be done? Is gaining query share and advertiser scale (to drive PPC and ultimately RPS) the priority?

[Victor]

Google is about to crash through $500

[Ron]

Victor, Google will crash someday. I know you are google fan. But you have google shares you better sell soon.

[Anders Kargaard Jensen]

Ron - why would Google Crash? Do you have any arguments?

Google will not crash.. their growth will slowly fall to maybe around 40%-50% yearly.. but here it can stay for at least 5-7 years.. Internet is still young.. and Google is already the prime advertising network that most sites make a lot more cash from than if they signed up for pathetic Yahoo! or one of the others..

Video ads will be big.. and Google just got an edge in inventory from YouTube.. So they stand a good chance to also be the prime advertising network in video as well. Currently they are on text/banner (same space).

[Arul Sundaram]

Henry -

Your comment re: MSN recognizing now gross search revenue v. net seems misplaced. That change should qualify their revenue growth.

Assuming that Yahoo! had a 15% share of the gross revenue before, MSN now gets to record that amount and should thus show a bump in their revenue (assuming AdCenter is monetizing at the same rate as Y! - big assumption). On the other hand, fact that MSN had minimal / no operating costs to accompany that search revenue in the past - outside of the rev share - meant that the search revenue was likely extremely high margin. In this new world, it's likely that the search revenue is much lower margin, if not negative, as MSN does all the required work to get AdCenter up and running properly. Thus, revenue and margin decline are what we should have expected.

Did MSN have terrible quarter - sure seems like it. Are they losing relevance? Again, it does seem like it. But, it's the level of revenue growth and the magnitude of the margin erosion that are the issues here, not the simple fact that revenues grew and margins fell.