Rethinking the Microsoft Corp Search Cost Burden

July 31, 2009

I am waiting to give a talk. I have been flipping through hard copy newspapers and clicking around to see what is happening as I cool my heels. Three items caught may attention. Both the New York Times and the Wall Street Journal reported that the Yahoo deal is good for Yahoo. Maybe? What I think is that Microsoft assumed the cost burden of Yahoo’s search operation. Since my analysis of Yahoo’s search costs in 2006, I have gently reminded folks that Yahoo had a growing cost problem and its various management teams could not do much about these costs. So Yahoo focused on other matters and few people  brought the focus back on infrastructure, staff, and duplicative search systems.

Now Microsoft has assumed this burden.

I scanned John Gruber’s “Microsoft’s Long, Slow Decline”, and I noted this comment:

Microsoft remains a very profitable company. However, they have never before reported year-over-year declines like this, nor fallen so short of projected earnings. Something is awry.

Dead on. What is missing is thinking about the challenge Microsoft has in search. My thoughts are:

First, Microsoft has to make headway with its $1.2 billion investment in enterprise search. I think the uptake of SharePoint will produce some slam dunk sales. But competitors in the enterprise search sector know that SharePoint is big and fuzzy, and many Microsoft centric companies have here and now problems. I think there is a real possibility for Microsoft to cut the price of Fast ESP or just give it away if the client buys enough CALs for other Microsoft products. What I wonder is, “How will Microsoft deal with the punishing engineering costs a complex content processing and search system imposes during its first six to 18 months in a licensee’s organization. Microsoft partners may know SharePoint but I don’t think many know Fast ESP. Then there is the R&D cost to keep pace with competitors in search, content processing, and the broader field of findability. Toss in business intelligence and you have a heck of a cost anchor.

Second, may get access to Yahoo’s Ford F 150 filled with software. But integrating Yahoo technology with Microsoft technology is going to be expensive. There are other costs as well; for example, Microsoft bought Powerset and some legacy technology from Xerox Parc. Layer on the need for backward compatibility and you have another series of cost black holes.

Finally, there are the many different search technologies that Microsoft has deployed and must presumably rationalize. Fast ESP has a better SQL query method than SQL Server. Will customers get both SQL and Fast ESP or will there be more product variants. Regardless of the path forward, there are increased costs.

Now back to Mr. Gruber’s point: a long, slow decline requires innovation and marketing of the highest order. I think the cost burden imposed by search will be difficult for Microsoft to control. Furthermore, I hypothesize:

  • Google will become more aggressive in the enterprise sector. Inflicting several dozen wounds may be enough to addle Microsoft and erode its profitability in one or two core product lines
  • Google’s share of the Web search market may erode but not overnight’. The Googlers won’t stand still and the deal with Yahoo strikes me as chasing the Google of 2006, not the Google of 2009.
  • Of the more than 200 competitors in enterprise search and content processing, I am confident that a half dozen or more will find ways to suck cash from Microsoft’s key accounts because increasingly people want solutions, not erector sets.

In short, Microsoft’s cost burdens come at a difficult time for the company. Microsoft and Yahoo managers have their work cut out for them.

Stephen Arnold, July 31, 2009


One Response to “Rethinking the Microsoft Corp Search Cost Burden”

  1. sperky undernet on July 31st, 2009 8:58 am

    Bing seems to be using the single silo method that Google had way back when. Might be simpler than the 13 or so silos a person can choose to search Google in these days. Maybe they should all be connected like they used to (appear to) be. Just a thought but simplicity may be more relevant to Google plumbing than to its public facing user interface. The upshot is not what Google wants, something like Dialog’s first 13 databases on the way to 400. Making it free does not make it usable.