Microsoft's online plan: Spend, spend, spend

Summary:If you think Microsoft's been spending like crazy in the online space, you ain't seen nothing yet. (And that's not counting when or if Microsoft's multi-billion-dollar bid for Yahoo's search business is ever consummated.)

If you think Microsoft's been spending like crazy in the online space, you ain't seen nothing yet. (And that's not counting when or if Microsoft's multi-billion-dollar bid for Yahoo's search business is ever consummated.)

Microsoft missed earnings projections when it announced its Q4 FY 2008 numbers on July 17. To some company watchers' surprise, it wasn't Windows Vista -- which Microsoft claims to have sold 180 million licenses now -- that was to blame. Instead, yet again, it was Microsoft's Online Systems Business (OSB), more than anything else, that dragged down the numbers.

However, Microsoft officials told Wall Street analysts not to expect Microsoft to change its OSB investing-for-the-longhaul strategy any time soon. Microsoft is planning to step up its online spending around driving usage of Live Search and growing its advertiser base for its adCenter online-ad platform.

Chief Financial Officer Chris Lidell told Wall Streeters that "the additional investments of several hundreds of millions of dollars is worth the short-term cost, given the opportunity to participate in a market where the opportunity is measured in the tens of billions of dollars."

Once it became clear that Microsoft wasn't going to be buying Yahoo or -- at least for the time being, even just its search unit -- and that Yahoo would do a search-outsourcing deal with Google instead, Microsoft decided to "accelerate our online services’ organic growth strategy," Liddell said. Specifically, according to a transcript of Microsoft's earnings call:

"(A)bout two-thirds of the incremental spend that we are planning is related to investments to drive usage of our search offering. We’re dialing up our search distribution initiatives with targeted OEM toolbar [alt] search deals, scaling search globally with investments in localized engineering and data centers, pursuing acquisitions and partnerships to build vertical content to support our commercial strategy, accelerating the rollout of our Cashback program, and increasing marketing in the business to grow awareness and drive traffic.

"Second, we are upping the investments in our ad platform and increasing the number of advertisers and high quality inventory on that platform. Specifically, these investments are in the area of accelerating the integration of our ad platform assets, expanding our sales and service capabilities, small acquisitions to enhance the platform technology, and investments in strategic partnerships to increase third-party inventory available to advertisers on our ad platform."

To be fair, it wasn't just OSB that impacted Microsoft's earnings per share. Microsoft claims to have sold more Xbox 360s than its guidance had reflected (resulting in greater cost of goods sold), as well as to have grown consulting and support revenues (both of which "carries higher associated costs than does software revenue") more quickly in the quarter than planned.

General Manager of Investor Relations Colleen Healy also told analysts yesterday that the lower profits also could be traced to being "able to bring servers in our data centers online faster than expected and we invested in premium online content, which is [higher creative and agency fees associated with it]." And then there were high headcount-growth, product development and new marketing campaigns also playing in, she claimed.

Do you think Microsoft has no choice but to keep pouring money into OSB? Is there some point at which the Redmondians could/should give up trying to compete in consumer Web search and simply focus on other channels (like paid subscriptions for enterprise software/services) in the online space?

Topics: Banking, Data Centers, Hardware, Microsoft, Storage

About

Mary Jo Foley has covered the tech industry for 30 years for a variety of publications, including ZDNet, eWeek and Baseline. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008). She also is the cohost of the "Windows Weekly" podcast on the TWiT network. Got a tip? Se... Full Bio

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