Bing, Ballmer, Bets, and Blodget
June 19, 2009
I have been quite forthright about my enjoyment of Henry Blodget’s analyses. An MBA (once high flying) wanted to introduce me to him, but the meeting got postponed, then there was a financial meltdown, and the rest you know. Mr. Blodget’s “Steve Ballmer Is Making a Bad $10 Billion Bet” is one of those Web log write ups that the Murdoch crowd and the financially challenged New York Times’s staff should tape to their cubicle panel. The beat around the barn approach to Microsoft’s search challenge does no one any good. The excitement about early usage of Bing.com is equally unnerving because until there are several months of data, dipping in a clickstream provides snapshots not feature length movies.
Mr. Blodget runs down some of the history of Microsoft’s spending in the search sector. The historical estimates are hefty but the going forward numbers are big, even for a giant like Microsoft. Mr. Blodget wrote:
Steve has already been investing about 5%-10% of Microsoft’s operating income on the Internet for the past decade, and he has nothing to show for it.
Mr. Blodget inserts a chart with weird green bars instead of the bright red ones that the numbers warrant. Green or red, big bucks. Zero payoff. He continued:
In fact, maybe it would be more realistic (but not actually very realistic at all) to assume that Bing might make a lot less than $8 billion a year–say, $1-$2 billion a year, if it was very successful. Or that, more realistically, once Google saw that Bing was actually making some headway, it might decide to spend some or all of its own $8 billion of free cash flow a year to protect its franchise, given that Bing seemed intent on destroying it. And that, because Google already had 65% market share of the search market versus Bing’s 10% and had weathered all of Bing’s previous attacks, it might very well succeed in defending itself.
Several comments flapped through this addled goose brain of mine:
- Microsoft does not have one search problem. Microsoft has multiple search problems; for example, the desktop search, the enterprise search baked into the 100 million SharePoint installations, the SQL Server search, and the Fast Search & Transfer search system. Each of these costs time and resources. So, Mr. Blodget’s numbers probably understate the cash outflows. The police issue in Norway has a price tag, if not in money, in terms of credibility of the $1.2 billion paid for something that certainly seems dicey.
- Microsoft is constrained by its own technology. There’s lots of rah rah about Microsoft’s data centers and how sophisticated these are. The reality is that the Google has a cost advantage in this chunk of the business. My research suggests that when the Google spends $1.00, Microsoft has to spend as much as $4.00 or more to get similar performance. Another big cash outflow in my opinion.
- Google is in the leapfrog business. I have mentioned Programmable Search Engines, dataspaces, and other interesting Google technology. Even Yahoo with its problems has begun to respond to the Google leapfrog, but so far Microsoft has been focused on the incremental changes, and while helpful, these incremental changes will end up costing more money down the line because the plumbing at Microsoft won’t scale to handle the next challenge Google causes in the online ocean.
Exciting times for Microsoft shareholders because the shares will open in about an hour at $23.50. IBM which has been through the same terrain as Microsoft opens at $106.33. What’s that say?
Stephen Arnold, June 19, 2009
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Microsoft did a great job rebranding and relaunching Bing. From a marketing point of view, they’ve seamlessly integrated all components of a successful campaign. More: http://domusinc.blogspot.com/2009/06/bing-microsofts-case-study-in.html