Microsoft's online plan: Spend, spend, spend

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.)

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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 has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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22 comments
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  • MS understands that the days of their two cash cows are numbered.

    They understand that we are moving online and the only thing they can do online right now is lose more money.

    So, not unexpected that they are getting more desperate and throwing more money at this. They STILL have a lot of money.
    DonnieBoy
    • sales of 60 billion

      mostly from windows and office.

      Oh yes, the end day is upon them.

      /sarcasm
      rtk
      • It doesn't make it untrue.

        Office is under extreme price pressure, only to get worse with the introduction of ODF. Also, in these economic times, you know IT's around the world will use Open Source at least as a leverage point to drive prices down. We have seen many many examples of the threat of using Linux bringing in the big guns.

        The 80% margins are not going to last forever, meaning the extra revenue used to prop up the other losing propositions will be greatly reduced.

        This isn't bad for the consumer, and ultimately, it won't be bad for MS (shareholders yes) because it will enforce a focus on customers, quality, and useful features.

        TripleII
        TripleII-21189418044173169409978279405827
        • No they won't...

          You may live in your own world where this happens... but out in the rest of the world, the "move to open source" is NOT happening.

          Can you imagine a business like Boeing Corp moving to open source?? the cost of doing that would absolutely kill Boeing! They will stick with Microsoft - actually they are one of Microsoft's larger customers and they had a lot of say in Vista.

          There are NO resellers making 80% margins!! is more like 5% these days!! I'm sure they would LOVE to return to the 80s when that was possible tho!!

          Ultimately and even in the short term (5 years) it would be VERY BAD for Microsoft's shareholders!! It would very bad for any publicly listed business!!
          GTRoberts100
          • You missed the point

            The point is big business don't need to use
            Open Source, they only need to tell Microsoft
            that they are thinking about it.

            Your example. Boing needs to buy another 10
            million in Office licenses. So they take 100
            desktops, put Open Office on it and call it a
            pilot project. Then they tell Microsoft that
            Sun has some really good tools for mass
            migration of documents to ODF format.

            Then microsoft offers the next set of licenses
            for 2 million instead of 10 million. Yes it is
            still a profit for Microsoft. But instead of an
            80% profit, they pull 10% profit.

            Anyone with 1000 desktops or more can push
            microsoft around like this. The sky high Office
            profits are a thing of the past.
            fwarren
          • Your right MS and SAP work the same way

            we do the same here with both as well *1500 seats. But I have to agree the open source movement is not as "huge" as some think. Especially in the enterprise arena. Will it be ? maybe, but it has some hurdles to get over.
            ItsTheBottomLine
    • Moving on-line - enterprise especially -

      is way overrated at this point. The "experts" in these talk-backs can banter all they want too but until you have a solution for - "who unplugged the phone line"...with the backhoe and your down for the next 4 days - it's still just pie in the sky - or is that cloud. Oh there is a shift coming, but the companies that are solely based on cloud, could potentially just "clear up" Time will tell...
      ItsTheBottomLine
  • RE: Microsoft's online plan: Spend, spend, spend

    Microsoft will have to gera up and do something extraordinary if they are to make any meaningful presence online. From all indications, it seems the odds are stark against them, that's why they are so desperate to have yahoo: Microsoft's Online Future: Forecast Hazy(http://www.internetevolution.com/author.asp?section_id=466&doc_id=152918&F_src=flftwo)
    jamalystic
  • Search, design, and marketing

    Microsoft's Search service seems to have improved a bit. E.g. searching for people, particularly under the 'News' category, appears to yield better results than Google's service. Beyond that, its general search results remain subpar to Google's ??? mainly for the reasons I indicated [url=http://tinyurl.com/4xgqag]here[/url]. In [url=http://tinyurl.com/4fujgw]this interview[/url], the General Manager of Microsoft's Search Business Group said that research indicates that users believe that Google's, Yahoo's, and MS' search services are roughly on par with one another. I believe the General Manager suggested that MS basically has a presentation problem. I really don't think that is the case. I think people may articulate their belief that Google's and MS' search services are roughly on par, but their behavior says otherwise ??? and people's behaviors provide the most accurate picture available about the way they truly feel. Maybe all of the above is irrelevant, and MS should just wait until it integrates Powerset's technologies into its search system.

    As for the MS' other consumer interests, I think MS needs to continue focusing on design, design, design, (including design aesthetics for Windows 7) and also marketing.
    P. Douglas
  • Fine with me...

    ...but I fail to see how MS can fix their online businesses with mergers and acquisitions; probably the most expensive and least effective way to improve or grow any business.

    I see it (among other things MS has done over the past 7 years) as a sign of a company in decline.
    John L. Ries
  • Spending

    is not the problem.

    Any fool can spend.

    Getting a return on the spending is the trick and MSFT
    has shown itself incapable, apart from the monopolies,
    of attracting sufficient customers.

    PlaysforSure, SPoT, Zune, Xbox, etc. are all products
    that were homegrown (not acquisitions) that have not
    ever shown a real profit after cost of capital. Likely
    WinMobile is in the same category if cross subsidies
    were correctly computed.

    Spending is easy; getting a profit on the spending is
    tough. Ballmer and his crew have been incapable of
    doing that away from the monopolies.
    Jeremy W
  • RE: Microsoft's online plan: Spend, spend, spend

    Ask me how much of my computer time is spent online. Ask me if it has increased markedly year over year. Ask anyone else the same questions. Then ask yourself again whether Microsoft should continue this investment!

    If your answer is that they should discontinue, then I think you are missing the massive movement of peoples time and effort away from software, and towards software and online services, or just online services when feasible and financially practical.
    Super2online
  • Live Search is crap

    I'm sorry, but when I have to go to page 3 to get results which would appear page one with Google - I'm not going to stuff around putting up with half baked, good enough solutions when I can use the best (Google) for the job.

    Clue to Microsoft: Stop spending the money and fix up your damn services; they are crappy.
    Kaiwai
    • funny...

      my ROI is better from Live then Google..

      Yes I get more visibility from google...
      But I get more actionable results from Live or MSN..
      uri.lederman
  • I could make them billions...with one simple move...

    It's ok for them to spend - they're just spending it on the wrong things. They could make billions and stab Google in the throat with one easy focus.

    Let me explain...

    I don't think people stick with a particular search engine for anything more than getting the best results. Does anyone remember when AltaVista used to be the best search engine? Then, Google came along, had better results, and OVERNIGHT, everyone I knew was using Google.

    Why is Google the best? It's simple; they put the most effort into it. They make a massive effort to scour, scan and log the internet. Simple. Microsoft on the other hand, makes a half-ass-pretend effort like a kid pretending to clean up his toys and then run off and play the moment mom's not looking. Their current efforts do NOT make for an Olympic champion.

    Microsoft needs to stop playing around in a thousand puddles hoping to find gold. They need to massively focus on getting in the same gladiator pit with Google. They can't just throw a little hardware and a little effort at it. They need to (at least) match Google?s hardware, algorithms and scouring efforts. Take the billions they were going to spend on Yahoo and throw it DIRECTLY at search.

    If Microsoft could show (prove) better search results, I would bet you serious money that people would switch overnight ? people just want the best search results ? and will go with the search engine that gives it to them. Microsoft could simultaneously make billions more in ad revenue, AND starve Google of its main food source. But right now, Microsoft?s search is in grade 4 while Google?s is getting its PHD.

    Although Microsoft has an uphill battle ahead, at least ?search? is one place where you CAN throw a lot of money at it and be successful. It doesn?t take a rocket-scientist to scour the internet, you just have to do a LOT of it and have the infrastructure behind you to support it.
    Smarty_Pantz
    • Yes MS needs to improve search

      Good example is a search I ran last week. I was
      on someone elses computer, IE was up so I did a
      search for "open disc". I could not find a link
      to the Open Disc project in the first 10 hits.

      So I bail on that and go to google. The first
      hit is for the Open Disc project. Google even
      gets it right if you use Open Disk.

      Microsoft is not even in the ballpark on
      search. Google already has it down and they
      continue to fine tune it. Microsoft is the same
      place with search as it is with the Zune. In
      music players they are trying to create the
      iPod of 2006. In search they are trying to
      create the google of 2004.

      I don't know how they are going to beat google
      when they can't even get close to matching them
      in the quality of search results.
      fwarren
      • And don't get me started on Live Maps

        We were trying to integrate Live Maps into an Outlook add on. While the code worked fine, it was useless to us since Live Maps couldn't find our easy address in Vancouver Canada!

        I mean, c'mon Microsoft...North America? It's not like we're in some small village outside of Istanbul. C'mon Microsoft...lift a pinky and try harder.

        You haven't even gotten off the couch yet...and Fat-Camp is starting tomorrow!
        Smarty_Pantz
        • I find I'm using live maps more than Google

          lately. For onethere information - at least for my purpose - is more up-to-date than Googles has been of late. And the Sat and Birdseye Live view are much better resolution than Google - again at this point. Googles street view is cool - but that's it, I think they are putting too much time into it. And they way streets and business change - it's a waste. Example, we used to track something down while we were on vacation - and the business changed their store front - it was useless. Birdseye has the same issue as well.
          ItsTheBottomLine
    • Interesting post,

      if that was the case then "Pay Per Keyword" search engines would be the bomb...

      think about it...

      why NOT pay for a keyword that no one else can own... then the visitor ranks the site with a YES or NO for results...

      It would be that simple don't you think..

      check out..

      www.oneclicksearchengine.com
      uri.lederman
  • RE: Microsoft's online plan: Spend, spend, spend

    very nice picture.i like it.thanks microsoft.
    regencyholidays