When the latest Microsoft results came out one of the biggest drags on it was losses made by the company’s online services business; specifically the search product Bing.
Google has had an immense head start in building the best search engine (at least for Roman-based languages), it has built up an unrivaled search index, crawling mechanism and a search algorithm that goes through a complete iteration every three years or so according to Steven Levy’s In The Plex. The technical and audience experience challenge that Bing faces is akin to American car companies who woke up to Toyota and Volkswagen having changed the rules of motor manufacture and struggled to catch up as their German and Japanese rivals continued to further improve.
That isn’t to say that Google is unbeatable: Russian company Yandex, Korean company Naver and China’s Baidu have all managed to build search engines that better match the needs of their markets, but no one company has managed to challenge Google across markets.
When I was at Yahoo! we managed to build a search engine that provided a search experience that was as good in terms of relevance of the queries as what Google had to offer. But being just as good is not enough. Google isn’t just a search engine, its a habit, people look there automatically as routine and this is hard to break.
I find it hard to remember a time searching before Google, I remember that I used to use Excite, HotBot and AltaVista depending on what I was looking for and would ‘work’ the search engines to dig up what I wanted. Some time in 1998/9 I was reading a website (I think it may have been Wired or WebMonkey) came across Google and never went back. It was that good. Bob Cringely wrote that in order for us to make that change we have to perceive something to be 10 times better. Bing has never got anywhere close.
Many of the ‘innovations that Bing brought to the table were ‘borrowed’ from Ask.com, like its trade dress. Lycos Europe’s IQ service and Yahoo! both did really interesting stuff with social search; which is exceptionally prescient of Google’s more recent efforts (and involves some of the same people like Bradley Horowitz) but due to user experience and the brands not having ‘permission’ from consumers to be truly innovative; didn’t gain the level of acceptance they should have deserved. Ask had a really hot algorithmic search engine in Teoma (which I still use occasionally), but again it never got the audience it deserved.
So Bing has to work harder and pay more money to gain the traffic that it has:
- Working with mobile carriers like Verizon to be the default search engine on the company’s mobile phones, paying media sites to have Bing as their search box
- Arranging for a PC manufacturer to set Bing up as the default search engine on the internet browser that they supply as part of the software on PCs that they sell
- Arranging for a Bing toolbar to be bundled with free-to-download software (like Adobe Acrobat reader)
The second problem that Microsoft seems to have (looking at both the online services division and the financial performance of Yahoo!) is that it is failing to monetise those audiences it has effectively. There are still too many searches happening with no relevant advertisements displayed alongside the organic results.
From a financial perspective, just how bad is it?
Well according to a Business Insider analysis piece written at the end of April:
Bing is paying about 3X as much for every incremental search query as it generates in revenue from that query.
What does that mean?
It means that for every $1 Microsoft generates from each new search query it buys, it spends $3 to get it.
(And that’s just direct costs–the costs of obtaining and processing the query. It doesn’t include sales and marketing, research and development, and general and administrative costs–all of which are subtracted from the -$2 Microsoft has already lost on every new query.)
And Microsoft is in a rather unique position to distribute Bing as the default search engine on Internet Explorer with many Windows PCs, otherwise gaining access to search audiences could come at an even higher cost.
If Microsoft was to sell Bing, who could buy it?
Hypothetically speaking, if Microsoft decided to sell Bing, there aren’t that many people that have the deep pockets, chutzpah or knowhow to take advantage of it, but here is a list of some of the more likely candidates:
- Alibaba: whilst Jack Ma is a super-smart business man; he has enough problems extracting Yahoo! Inc. from his current business rather than acquiring Bing
- Aol: is in a similar position to Yahoo! in many respects with not enough cash on hand to do the deal and too many things that they need to address internally to even consider a Bing purchase
- Apple: has the money, but there isn’t the incentive or the expertise to take on the integration of the business into Apple and the leviathan of a challenge that whipping Bing into a product that Apple could be proud of
- Baidu: Robin Li and the team at Baidu certainly have the smarts to take on Bing, the finance could be made available via various sources in China. Baidu has smarts in search; particularly non-roman languages which happens to be where the market growth is likely to be. In addition, Bing would be an ideal platform to bring Baidu’s concepts of box computing to western consumer markets. Microsoft would have the problem that it wasn’t selling its search arm but empowering the next competitor to challenge it in the mobile and desktop operating system space with a Baidu acquisition. The biggest issue is would this pass muster with US politicians? As you would have a nexus of wounded US pride, high technology and the politicised issue of censorship. Throw in a couple of Google lobbyists for good measure, stand back and watch it burn
- Facebook: could buy Bing and it could be attractive to Microsoft; particularly if the purchase was made with some Facebook equity included. But they don’t need to do it and the shifting of the focus could adversely affect investor sentiment towards the great satan of social
- Google: wouldn’t be able to buy Bing because it would set off antitrust alarms throughout the western world
- Naspers: the South African media company has a reputation for making smart investments in online properties and could add its brand to a larger consortium, but it would face the problem of finding winning tech rock stars and a management team that could do the job
- NHN: The Korean owners of Naver understand search and could bring a new fresh approach to non-Roman language search but they just don’t have the revenue to do it on their own. They could still be a wildcard in a private equity-based bid
- SK Group: South Korea’s largest conglomerate has a number of successful online services that search would dovetail into, however they are already committed to investments in developing markets like Vietnam and have been burned by US-based investments in the past like the Helio and lost out on a recent bid for Blockbuster Inc. to Dish Networks. Given their heritage in US-based investments Bing is probably not that attractive
- Tencent Holdings Limited: As a major online property in China, Bing maybe desirable as a way to help combat the march of Baidu. However, it is uncertain that Tencent would have the relevant deep technical knowledge to turn Bing from costly millstone to world-beating search engine. Like Baidu Tencent would also come under US political scrutiny. One thing in their favour would be having Naspers as a major shareholder – so taking some of the sting out of the anti-Chinese rhetoric likely to fly around
- Yahoo!: couldn’t afford it, is struggling to grow the existing business that it had and has dissipated its search talent around Silicon Valley thanks to Bartz & Icahn. It would be a strategic pivot too many and would likely get killed in a shareholder revolt if they could find someone to bank roll the deal
- Softbank / Yahoo! Japan: Masayoshi Son is an exceptionally savvy business man. Bing would have to be about more than business: self actualisation. Yahoo! Japan snubbed Bing in favour of Google recently, a purchase of Bing could be awkward
- Yandex: it is doubtful that the Russian search business could raise enough capital to take over Bing; if it did it would have its work cut out to turn Bing around in terms of market share. But they would have the smarts to increase profitability of what they already have
- Private equity: in theory a company like KKR could make the relevant phone calls and round up funding to buy Bing at the right price. They would have to find a management team, a path to cut costs and find a clear marketing proposition to keep audiences. Finally private equity would want to have an exit; there wouldn’t be that many acquisitive buyers, so they would have to look at some sort of public offering
Why keep Bing?
One of the reasons that I was so surprised that Yahoo! gave up on search was that it is not only a business providing a potentially great contextual advertising point of view. It is also the glue or the mortar that holds online services together. Given that there are so many screens are now part of the internet experience: mobile, television and desktop – the mortar is going to be even more critical in the coming years as the binding agent for a larger eco-system.
With productivity suites moving into the cloud, search becomes the new file system (like Spotlight on the Mac desktop) and Office (or its future cloud sibling) is the core of Microsoft.
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