Sunday, March 04, 2007

Live? Yes, but just barely...

Okay, so you already knew that MSFT wasn't doing well in Search and Advertising, despite repeated assurances by Ballmer, years invested, and $B's of shareholder's cash spent. But just how bad is it? Well, this article (courtesy of David Hunter's Microsoft News Tracker site) provides US market share detail through January 2007:

The news is not good for MSFT. Among their conclusions:

Looking at trends from the past year, a couple of things are apparent. First, Google continues to grow at a faster rate than its its competitors. All three metrics firms reported significant gains for the company since the beginning of 2006. Second, all the time and money that Microsoft has invested in growing MSN is not paying off.

Ballmer's fanciful view of MSFT's past track record on "investments" aside, that "not paying off" part could be said of MSN generally and since inception. However, in this case, they mean the massive extra transfusions of "time and money" pumped in more recently to bolster Search/Advertising. Here's their concern pictorially:

The prognosis is never rosy when flatlining would represent a dramatic improvement. Now, admittedly, that's the worst-case scenario - a 45.6% drop in market share in one-year. It might be a lot better - just, 20% loss (guess which one the VPs are going with for their own performance reviews?):

MSN started out 2006 with between 11 and 12.44 percent of the search market, according to the three metrics firms. Since that time MSN's search traffic has seen a steady downward trend. According to Net Applications, its search traffic has almost been cut in half, handling just 6.76 percent of all queries in January 2007. That's a 45.6 percent drop in a year. The picture painted by comScore and Nielsen/NetRatings is a bit better, but not by much: they show MSN search usage dropping by nearly 20 percent.

Hmm...this doesn't sound much like Ballmer's recent characterization of their efforts in this space:

And in a sense you could say it is impressive what a great job we've done coming so much later in the cycle in terms of the innovation, and frankly with the team today that is still smaller than the Google team, so we continue to ramp.

But maybe the "sense" he's referring to is "nonsense".

All of which perhaps explains the timing and tenor of Friday's statement by UBS analyst Heather Bellini, detailed here:

Analysts generally tend to mince their words, especially regarding stocks they have "buy" recommendations on (or where their firms hope to do/continue doing investment banking). Which makes Bellini's statement - that MSFT is "massively underperforming" against the competition - about as in-your-face as it gets. Sadly, it's also accurate.

Her firm adds the worldwide perspective:

According to UBS, Google's worldwide search query market share grew from 56 percent to 65 percent between August 2005 and December 2006. At the same time, Microsoft's declined from 11 percent to 8 percent, even though the company launched its rebranded and revamped Windows Live Search during this period. UBS cited research from comScore Networks Inc. for this data.

In dollars, that translates as follows:

Google continues to be number one in worldwide online search revenue, taking US$10.5 billion of the $24.5 billion online advertising market in 2006, according to UBS, citing figures from ZenithOptimedia and company reports. Yahoo came in second with $5.6 billion in revenue, while Microsoft was a distant third with $1.6 billion online advertising revenue in 2006.

Indeed, she's apparently so concerned that the patient may go into full cardiac arrest (along with her credibility), that she even wades in with some helpful CPR suggestions of her own:

Quoting research that only one in four people who purchase Windows also buy Microsoft's Office desktop application, she suggested Microsoft should offer an ad-supported online version of Office for free to customers who don't purchase Office to boost its ad revenues.

Microsoft also should leverage its strong position with large enterprise customers and strike deals to distribute its Windows Live Toolbar and Windows Live Search as the default in applications, Bellini said. She likened such a deal to one struck between Google and Dell Inc. to preload Google Desktop on Dell PCs and add Google Search in a side pane on Internet Explorer.

Another analyst offers this gem:

Additionally, Microsoft should "push the regulatory envelope" to see how far it can go with legally integrating its Windows Live Search and Toolbar with its own software products, Schachter said.

Yeah, pushing that "regulatory envelope" worked out real well for MSFT and its shareholders previously. UBS's suggestions also raise some concerns. For one, their "research" appears to overlook corporate "home-use" rights (which entitle many to run Office at home w/o buying it separately) and piracy. It also sounds dangerously close to investment genius Peter Lynch's final stages of "deworsification", whereby a company ends up giving away the very product that made it successful in the first place.

That said, I agree that MSFT needs to be more creative with Office (or Office-lite) in the consumer/small business space (GOOG isn't going to leave it any choice). I also agree that if MSFT could fix its advertising problems (huge "if" given the above), then ad-supported Office - and many other MSFT products - might not only be attractive to customers and useful competitively, but also lucrative. I mean, forget the list prices quoted at your local computer-retailer for a moment; The bulk of Windows and Office goes out heavily-discounted via OEM, the "don't ask, don't tell" Student/Teacher retail edition of Office, and corporate licensing programs. With upgrade cycles now routinely stretching to 5 years and beyond, how much do you have to generate in annual advertising per user to be ahead over say, a two-upgrade timeframe? And, of course, "free to me" likely results in much faster adoption cycles and lower marketing costs. Then again, so would more-compelling and better-marketed products :-) The risk inherent in such a strategy is obvious: any "free" consumer/small business could bleed over and/or otherwise pressure the current huge margins enjoyed in the Corporate space. But hey, either you start obsoleting yourself, or somebody else eventually will - and you might even discover a more lucrative market along the way (though given MSFT's current high margins, that will likely have to take the form of larger addressable market and/or faster growth rate).

Adding to this generally negative tone, we get word that VP Blake Irving - head of Windows Live Platform Group - is resigning after less than a year on the job (Ah, but what a year it was judging from the stats above):

Of course, maybe that's a good thing - I really don't know.

On a brighter note, I've mentioned before that I was impressed with the recent webcast delivered by Steve Berkowitz. Unlike the empty bravado, spin, and generally content-free nature of too many MSFT executive presentations, this one provides a humble, honest and detailed assessment of the market, including thoughts on where it's going, competitive landscape, opportunity areas, and - gasp - the potential in dollars. It also gives some insight into MSFT's resultant strategy which is customer-focused. How refreshing. Excerpt:

We're going to build the best software, we've always done that historically, but the challenge for us now is to realize that we have to build the best experience, and we have to earn it every single day, because the cost of switching, especially in search, is very low.

Of course, whether he and the rest of the team will be able to actually deliver is TBD. But at least he seems to have a solid understanding of what it's going to take. Also, echoing earlier comments from MSFT's Erik Selberg (kudos, btw, for being so boldly honest there) - and unlike Ballmer, he was candid that things would get worse before they got better (this was December):

And I hope you'll start to see that by the end of our fiscal year, and going into next year we'll start to see ourselves leveling off and gaining share, both in search and across other properties.

While I don't fully buy into the hype that currently surrounds web-advertising (have you ever clicked on an Internet ad? I never have), this is not a battle where MSFT can afford to be a distant also ran. Keep in mind that GOOG's various current ad-supported software offerings (and even much-rumored Linux-based cloud OS) don't have to win to hurt MSFT materially. The latter can be accomplished by simply taking away pricing power and growth - as Open Source has already done to some extent.

So what if Berkowitz ends up being wrong, and the envisioned turnaround isn't apparent by Fall? Then, imo, MSFT is likely in serious trouble and had better be prepared to consider drastic alternatives. The current pundit favorite is to buy YHOO, but that's far from a guaranteed panacea. First, while it would be accretive, it would be very expensive (especially given YHOO's recent, impressive stock recovery), take a long time, and be extremely disruptive (two very different technology platforms). Second, MSFT would likely screw it up - as they have many other previous acquisitions (and this would be their biggest ever). Meanwhile, GOOG would gain traffic during the initial uncertainty, and then again later as the scope of the resulting mess became evident. The only way I could see this working, is if MSFT bought YHOO but left them completely autonomous - and you know they never do that for long.

That leaves MSFT with seemingly two other options: partner, or throw in the towel and outsource to YHOO for a cut of the action. Partnership hasn't worked so far, and the nature of current market segmentation leaves only a few logical choices. But with others also losing share, maybe it's time to revisit that (or consider partnering with non-traditional players). Outsourcing, on the other hand, would catapult YHOO into serious contention against GOOG, could be done more quickly, and would be less disruptive. Moreover, YHOO has shown the ability to at least hold share against GOOG. For MSFT, it would obviously be a huge admission of defeat (or maybe pragmatism), and the company would lose direct control of its destiny in this area. But, it would save a ton of expenses, and sometimes a share of something is better than 100% of nothing. More importantly, YHOO hasn't shown GOOG's same desire for world-domination and/or determination to go head-to-head with MSFT by offering "free" (or low-cost) alternatives to the bulk of MS's core software stack.

Bottom line, MSFT needs to start showing success on the current strategy ASAP. At this point, that's our best scenario and there's still an outside chance it could happen. Failing that, it's time to acknowledge the wisdom of the adage "the enemy of my enemy is my friend"...


  • As an ex-MSFT, I could talk for hours about what is wrong with MSFT, its products, organization, processes and so on. However, the 3 things below – technical and business leadership and overall mission – seem (to me) to be at the root of every problem. Until all 3 are fixed, MSFT will continue to be a cash-generating giant that one day, like Colossus of Rhodes, may be shaken down, brought to its knees and never rise back.

    Ozzie. I doubt Ozzie will do Microsoft any good any time soon. We live in the era of interoperability and integration. Both products Ozzie designed – Notes and Groove – have the opposite philosophy. Each is a complete self-sufficient closed universe and you either need to live in it entirely or give up on it. Because of that, Ozzie does not seem a great candidate for re-building MSFT’s technical strategy.

    Ballmer. He’s a salesman. Steve Jobs is a product manager. If a company wants to create great products, a product manager needs to be in charge, not a salesman. Unfortunately, Ozzie does not look very convincing in that role (see above).

    Mission. Most importantly, though, Microsoft lacks ideology, mission or any kind of a central theme. In early 90s it was “Windows on every desktop”. The mission was very clear – $50 from every desktop. MSFT rewrote all apps to be Windows apps to support the platform and Microsoft was an unstoppable machine for 3 years or so.

    Then came COM. It was a piece of crap – poor implementation, bad developer tools, and practically non-existent guidelines. Nevertheless, the mission was crystal clear – all apps should be COM apps – and for 3-4 more years Microsoft repeated the same success. Too bad that COM pissed developers so much they fled to Java at the first chance.

    DOTNET was a misfire – it was marketed to be as universal as COM, but everyone learned – in a hard way – that it is not. Microsoft could not unite neither community nor itself to rewrite everything DOTNET. Well, they tried (in Vista) and we all know the results – 3-year slip and yet another rewrite back in C++.

    Microsoft needs a long-term mission that everybody, inside and outside, can understand and act upon. Don’t know about you, but to me “empowering people” sounds vague. It’s generic as solipsism – any software fits. “Better together” and “integrated innovation” turned out to be a disaster because developers translated it into an excuse to make tightly-coupled designs quickly turned to spaghetti code and inability to innovate. There was a great one – “information at your fingertips” – but for some reason it never became a central theme for the company and now Google has taken over it.

    Without a mission, it’s impossible to create a technical or marketing strategy. Without a mission/ideology, Microsoft will continue to be killed by internal entropy and organizational Brownian motion. However, a salesman cannot create a great mission statement, and his peer product person does not seem to be capable either (see above).

    By Anonymous Anonymous, at 8:42 PM  

  • I love the outsourcing idea. I'm not sure why we get such a big ego about the branding or look/feel of the MSN properties. There's good content there to be sure, so just skin it differently, and have YHOO do it. I think there is some good thinking there. And because there is...won't ever happen. Many execs would have to "die" (in a purely professional sense) if that were to happen (and after).

    By Anonymous Anonymous, at 9:04 PM  

  • "Moreover, YHOO has shown the ability to at least hold share against GOOG."

    I see many problems with Google search, especially since their implementation of "big daddy". The results returned are 25% to perhaps 50% on large result sets comprised of wiki clones, blogs, and link farms. The information quality of Google result sets has degraded considerably. I've noted numerous times in the last few months when the implicit boolean AND logic was treated as OR; e.g. "Apples Bananas" would return more hits than "Apples" alone.

    Yahoo's is much better, but their 'universe' of scanned websites seem much smaller as I often find Google includes websites I'd like to review whereas Yahoo doesn't seem to know of them. But once a search criteria is well refined and produces a narrow result of a few hundred hits, Google & Yahoo return comparable sets, except as noted Google invariably includes more 'fluff' and duplicates.

    I believe Yahoo could quickly surpass Google by a) expanding their universe of sites they crawl and b) weighting the result sets with the user criteria such as the order of keywords, and offering alternate rankings such as reversed, w/wo duplicates, w/wo blogs and wikis, size of content, as well as link-weighted.

    MSN Live could just as well do the same thing, but amazingly they seem tone deaf.

    (Yahoo! .... hope you guys are lurking and take a hint)

    BTW, I like your analyses.

    By Anonymous Charles, at 4:40 PM  

  • One thing that greatly concerns me is the explosion of SKUs MSFT offers. It seems every release of Windows now adds one or two SKUs (Vista Ultimate? I get Home and Business, but Ultimate? What, for frisbee players?). I'm completely lost trying to figure out what Visual Studio SKU to buy, and Office seems to come in several randomly agglutinated varieties.

    When I see companies doing this, it tells me they're desperately trying to goose a little more cash out of a product on the back-end of the adoption curve. The product is no longer attractive in its basic form, either too expensive as a full package or too limited as an economy package. So the company is forced to support a gerjillion different SKUs (which drives up COGS and siphons brainpower away from improving the basic product) to keep up revenue. It's marketing taking precedence over product development, which indicates a commoditized product is on the way.

    So long as SKUs for Windows and Office continue to multiply, the company is heading south. The turnaround will be signalled by a drastic reduction in product SKUs, representing a focus on product development and differentiation from the competition rather than differentiation from the other SKUs in the portfolio.

    By Anonymous Anonymous, at 10:40 PM  

  • Hey, any comment on the recent departures of the Microsoft VPs in charge of Windows Live and Search? Will this help? Do you think it's at least a slight positive step?

    By Anonymous Anonymous, at 10:26 AM  

  • Accountability arrives?

    Blake Irving leaving.
    Now Chrisopher Payne leaving.

    Nice to see that the VP's who were not able to make progress catching up with Google have been let go.

    Very encouraging to see this kind of clear accountability for this kind of mediocrity.

    By Anonymous Anonymous, at 2:50 PM  

  • "Hey, any comment on the recent departures of the Microsoft VPs in charge of Windows Live and Search? Will this help? Do you think it's at least a slight positive step?"

    Strikes me as bolting the barn door after the horse has not only escaped, but come up lame and shown up on the roster for the glue factory. The messaging surrounding it has also emphatically denied that it's due to performance, although I would much rather believe that's the case - and do. I'm at least heartened that Berkowitz appears to be getting more control as a net result. Net net, we'll have to see.

    By Blogger MSFTextrememakeover, at 6:35 PM  

  • Passion is overrated. Passion is what the high-fiving white guys had. Is that what you want at the core of the business? I'll take a stone-cold rain maker any day over some dork with lotsa passion.

    By Blogger JMBalaya, at 12:01 PM  

  • You say "That leaves MSFT with seemingly two other options: partner, or throw in the towel and outsource to YHOO for a cut of the action."

    What exactly do you want to outsource? All of MSN? Or the advertising part?

    Cause the search advertising part was outsourced to Yahoo (via Overture) until it was brought in house via AdCenter.

    By Anonymous Anonymous, at 1:42 PM  

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