There's been a fair bit of positive press concerning Microsoft's Bing search engine lately. A number of observers noted Bing's market share gains – small, to be sure, but consistent over the last few months. Is this sustainable? Not at the price Microsoft is paying for it.
Microsoft's search engine gained only a small increase in market share. Bing's percent of the search market in the United States went from 13.9 to 14.1 between March and April of this year, according to comScore. Yahoo's percentage of the market went from 15.7 to 15.9 over the same period. That's worth noting because of the deal between Bing and Yahoo.
That four-tenths of a percent apparently came from Google and Ask. Over the same period of time, Google's share of the same market went from 65.7 percent to 65.4 percent, while Ask's share dropped from 3.1 percent to an even 3 percent. It would appear that Microsoft is finally beginning to chisel away at the search leader. Indeed, Christina Warren, writing for Mashable, predicted that if current trends continue, Bing will hold a greater share of the US search market that Google within a year.
I found that a little hard to believe, so in researching this story I tried to track down items that would explain this success. Granted, the increase so far is only small, but if it could lead to that kind of change, Microsoft must have started doing something right. I found an item reporting Microsoft's deal earlier this month with Research in Motion to make Bing the default search engine and map application on BlackBerry smartphones. It's too recent to affect the other figures, of course, but I thought that perhaps a number of similar deals to become the default search engine on other platforms might have boosted Bing's numbers.
At the end of the brief news item, however, I saw some figures that drew me up short. “The company's online services division, which offers Bing and MSN, had an operating loss of $726 million on $648 million of revenue in three months ended March 31, 2011.” Excuse me? Did I just read that the division in charge of Bing just LOST $78 million over three months? If that trend holds for a year, the division will lose $312 million. I may not be a math whiz, but even I know that is not a sustainable business practice.
Fortunately, we don't have to depend on my math skills. Henry Blodget at Business Insider spotted the insanity, and he's not afraid to say that the emperor is throwing gold after rags – and threadbare ones at that. In fact, he goes directly to the numbers. “In the March quarter, Microsoft's online revenue grew $84 million year over year. In the same March quarter,” Blodget continues, “Microsoft's online cost-of-revenue grew $292 million.” Microsoft attributed the cost increase to the Yahoo search agreement and increasingly expensive traffic acquisition – which Blodget noted was only two different ways of saying the same thing. It all falls at the door of the Yahoo deal.
Want some more math? Blodget notes that Microsoft is paying Yahoo about 90 cents for every dollar it generates from Yahoo's search queries. That is not a great return on investment. But it's actually worse than that. “Based on an analysis of Microsoft's financial statements,” Blodget revealed, “Bing is paying about 3X as much for every incremental search query as it generates in revenue from that query.” That definitely does not sound like a sustainable business model.
Blodget also blew Microsoft's argument concerning search scale out of the water. If you haven't heard it, the software giant claims that it's sending what appears to be good money after bad to buy search share because once they've gained a large enough number of queries, their keyword prices for their advertising will rise to profitable levels and they'll stop losing money. Fine. Let's recall that the deal between Bing and Yahoo means that Yahoo's search results are powered by Bing, and it's getting money from that. When you put Yahoo's and Bing's shares of the US search market together, you get 30 percent. How is this not enough of the market to start showing some benefits from the economics of scale?
I don't have an answer for that one, and neither does Blodget. Indeed, after taking another look at Bing's loss rate, and doing the math for a year, he observed that “Bing is spending $5.5 billion a year to generate $3 billion of revenue.” I've been wrong before, but I don't think even Microsoft can get away with that forever.
MSN Optimization 
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