Does Microsoft really have the stomach to pour another $10bn or more into the seemingly bottomless pit of internet search?
Steve Ballmer was certainly talking tough on Thursday, declaring that the company was prepared to commit 5-10 per cent of its annual operating income (2008 total: $22bn) to search for the next five years.
This is not really surprising. He has made similar comments in the past. And as Youssef Squali at Jefferies points out, based on the last few quarters Microsoft is already losing around $2bn a year in online services. So all Ballmer’s statement really adds up to is a declaration that he is prepared to stay the course.
However, coming nearly three weeks after the launch of Bing, it is the timing, rather than the content, of the message that is important.
Earlier this year, it looked as though the Microsoft CEO was counting on a quick deal with Yahoo to propel the company’s search business. Now, with Carol Bartz showing no urgency to enter talks, he appears to be digging in for the long haul.
But even with another $10bn behind it, will Bing get Microsoft to where it needs to be? The company’s executives generally view 20 per cent as the minimum market share they need for a sustainable search business, according to Sandeep Aggarwal at Collins Stewart. Before Bing, Microsoft was an also-ran with 9 per cent.
Bing’s early showing has been mildly encouraging, lifting Microsoft’s share of the US search market to 12 per cent in its second week, according to comScore. The coming weeks will show how lasting these gains are, but at least it has provided some badly needed momentum.
Even with the sort of spending Ballmer is promising, catching Google seems a stretch. Last year Google’s R&D and marketing expenses, together with data centre and other costs directly associated with delivering its services, added up to more than $8bn. Given that Google claims to focus 70 per cent of its effort on its core search business, that implies a far bigger financial commitment than Microsoft is planning to make.
However, a better comparison might be with Yahoo and Ask, which lack Google’s scale. The real import of the Ballmer message is that the table stakes for staying in the search business are likely to be high in the next few years, and hardly anyone will have deep enough pockets to stay in the game.
