Microsoft: Bing is not a bottomless money pit (any more)

Microsoft: Bing is not a bottomless money pit (any more)

Summary: Microsoft's Chief Financial Officer for its Applications and Services group tells investors now is the time for Microsoft to put its foot on the gas with Bing, not sell it off.

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Like clockwork, every time Microsoft has released its quarterly earnings for the past few years, the stories about Bing being an endless money pit have appeared. (We've written more than a few of these on ZDNet ourselves.)

bingbreakeven

But Microsoft's massive investments in building Bing's datacenter infrastructure are now behind the company, said Dave O'Hara, the Chief Financial Officer for Microsoft's Applications and Services Group. O'Hara answered questions about Microsoft's online services strategy on a December 19 an investor call organized by UBS analyst Brent Thill.

Starting about six years ago, O'Hara said, Microsoft began making substantial investments in building out its datacenters, infrastructure and in writing its underlying search algorithm. Those investments were reflected in constant operating losses reported by Microsoft's Online Services Division.

But now Microsoft has built the foundation required for Bing. Infrastructure investments for it will now be "incremental," O'Hara said, as Microsoft now has adquate capacity to run and maintain its search service. Microsoft will continue to make substantial investments in building out Office 365's and Windows Azure datacenter backends now, he said.

O'Hara noted that under Microsoft's new reporting structure, the company isn't breaking out its Online Services profits and losses. (Online Services was comprised of Bing, MSN and online advertising in the old reporting structure.) In some ways, he said he wished Microsoft still did because the company is now "on course or ahead of course" at breaking even.

Microsoft execs have said previously that the company would break even when it reached 20 to 25 percent share. O'Hara said he had no comment on when Microsoft will cross that line, but it will likely happen closer to the lower end of that share metric.

In its most recent quarter (Q1 FY14) -- using the old reporting category breakouts provided by Microsoft for convenience -- online services lost $321 million on revenues of $872 million.

In keeping with Microsoft management's claims that Bing isn't an asset it would make sense to sell at this point, O'Hara stressed that Bing is no longer "just" a Web search engine and that Microsoft has integrated it into an increasing number of its products, such as Windows and Xbox. He said Bing also has given Microsoft a leg up in creating "one of the best data sets in the industry," which Microsoft will leverage increasingly in future products and services.

Though O'Hara didn't cite any of these products specifically, a couple of examples of areas where Microsoft's big-data prowess will come into play are offerings like its cloud-based business intelligence service bundle, Power BI, and the coming "Cortana" personal assistant technology expected to debut first in Windows Phone 8.1 next year.

O'Hara did say that Microsoft is planning to have search take on a "bigger and more visible role than in the past" on devices. He also said that Microsoft is aware that "we can do a better job of making the Bing search box the first thing you see" on more sites.

In response to questions about the Microsoft and Yahoo search relationship, O'Hara maintained that the partnership is "working pretty well" and that "friction has been removed" around revenue-per-share issues. (It's not clear that Yahoo execs share the same view, given the company's seeming reticence to share updated information on how much their Microsoft search relationship is contributing to overall revenues.)

After all the years of investment in Bing, Microsoft isn't at the point where it should be looking to shed its search business, O'Hara argued.

"We are finally at the point where we can drive operating leverage," he said. "We should be putting our foot on the gas" at this point.

Topics: Cloud, Big Data, Microsoft

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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76 comments
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  • "on course or ahead of course" at breaking even

    Well that sounds promising
    The phrase "Damning with faint praise" comes to mind
    FrankInKy
    • And what do they mean?

      Do the mean breaking even on their annual budget or breaking even since the inception of its services?
      Michael Kelly
      • I'm pretty sure it's "breaking even" quarter to quarter

        The past losses have been paid for, so they don't really count. Then need to break even and then start making money before they can eventually say "Ok, over the last 5 years our profit is such that we've made as much money as we lost in the previous 5 years". It will be a while before they get to that stage.
        Flydog57
        • Of course they, Microsoft, will never actually say that.

          Because, first of all, it would have to be true. Second, computing it wouldn't be particularly easy, nor especially flattering. While someone may in Redmond may know exactly how much Bing has cost the company, making that number public would not make anyone look good.
          matthew_maurice
          • Why would it have to be true?

            They have lied about other things - "total rewrite", "secure"...

            Bundling Bing losses into something that actually makes a little money is of itself a lie.
            jessepollard
      • Does is really matter...

        If your about to turn the corner it does not make any sense to sell off the service. Past losses have been paid for already. You should look at the massive assets that Microsoft has acquired in the process as well.
        ronald@...
        • assets?

          "in software the only assets are programmers" to quote the great Joel On Software.

          Obviously an overstatement. The great Bing server build-up counts as an asset, certainly, but to what end?

          I think MS is trying to communicate that they're done growing their Bing servers in a big way, but since those servers were purchased unorganically - i.e. not with their own profits or based on their own needs - how do they know they're done for a while? They can't be.

          It's an oddly defensive statement. Clearly they either chase the search business and it's integration with mobile/cloud or contract it out/sell it off to Yahoo!. Losses don't matter (to an extent), because either it's a part of the strategy or it isn't.
          solomonrex
          • What?

            Microsoft strategy for Windows has always been continuous improvement. Bing until now has been in a build from ground up phase. Now Bing will be in a continuous improvement mode making it less labor intensive and cheaper to continually improve.
            groberts116
          • Continuous improvement??

            Only for odd numbered versions.
            james.vandamme
        • Bing is doing quite well...

          When you consider that Bing is at about 20% market share (in the US) in just four years...

          Microsoft just needs to duplicate that success around the world.
          cybersaurusrex
    • I seem to recall bing was going to "break even" years ago.

      But that is old news, change the target date release a new press release and viola it is new news and we are back on target.
      YaBaby
    • So what?

      Seriously, it's their service, if they are turning the corner into profitability, does it matter what kind of praise they give it today?

      Apple was guilty of "Damning with faint praise" in reference to AppleTV, now it's likely starting to make a profit. It's how companies operate, and not sure why what kind of praise a company gives a product early on is of any concern, as long as they reach that corner to turn.
      William.Farrel
      • I just wish M$ had something really good going on right now

        Seems everything they've done in the last few of years ranges from awful to mediocre.
        Even you can't argue some things weren't absolutely awful, such as -
        Vista, Kin, Surface RT, the dancing commercials for the Surface

        Dancing commercials for the Surface? Really? What idiot thought of that??
        Have you seen the new Apple iPhone commercial?
        http://www.tomshardware.com/news/apple-christmas-commercial,25445.html
        Why can't M$ do something that good?
        FrankInKy
        • Actually

          while the dancing Surface commercial wasn't that great, this Apple commercial simply showed something that ANY SMARTPHONE can do, to me the message is almost like "doing something basic is an awesome feat for this phone and it'll make you look socially awkward while doing it". It'd be cool if he was like "Siri, make a video!" and siri does all the editing, but of course that's not possible.
          xelsm
          • Sure almost any phone can record video

            But that's not the point, the commercial itself was just good. Low key, sentimental but not maudlin, showed the product in a positive way.
            And the Surface dancing commercials truly were awful beyond belief.
            FrankInKy
          • here it is

            https://www.youtube.com/watch?v=yEX0dC2iYGI

            really, really beyond pathetic...
            theo_durcan
        • And your examples,

          "Vista, Kin, Surface RT, the dancing commercials for the Surface".

          Vista is 2 generations behind, marketshare even less than 8/8.1. Kin doesn't exist anymore. Surface RT and commercial is last year, and tbh Surface's only down fall is in the number of apps, for everything else it really great.

          Anything current you wanna try?
          xelsm
          • My original comment

            did say "done in the last few of years", right?
            FrankInKy
          • Well, Apple had plenty of failures these past years

            so I guess that means you think their products suck, right?

            Notice, I did say "these past years" so it makes it all relevant.
            William.Farrel
          • sure.

            But Apple is profitable in mobile, MS isn't. They had to purchase Nokia. I'm sure Surface is a great device for a few MS fans, but it isn't a commercial or critical hit, and it's become obsolete now that they have a new hardware team coming on board.

            They need to iterate faster to catch up. That means Nokia instead of Surface, growing stores faster, making more devices like laptops and 7" tablets and such. Chasing Google/Apple/Amazon is the right idea, they're just not executing because of all their (profitable) legacy baggage.
            solomonrex