Can Microsoft Save Itself from Google?
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This past Thursday, July 19th 2012 Microsoft (NASDAQ: MSFT) reported its first loss in over 26 years as a public company. Revenue for the software giant rose 4 percent to over 18 billion dollars and earnings per share were up to over 73 cents a share (versus 69 cents a share in Summer 2011). When reporting the loss, Microsoft cited it's 6 billion dollar purchase of aQuantive in 2007, its most expensive purchase until it's 2011 acquisition of Skype, the video calling service. aQuantive was the parent company of three businesses and a large internet advertiser. At the time, Google (NASDAQ: GOOG) had most of the internet ad business pie and Microsoft tried to increase it's presence (and profits) with aQuantive, but aQuantive's advertising division has continued to post losses totalling more than 9 billion dollars since the acquisition. While aQuantive was certainly a problem, there are other issues at play. Microsoft's search engine, Bing, continues to be one of Microsoft's lacklustre divisions that loses billions of dollars annually.
As the chart above shows, Google controls 44.1 percent market share of the Internet marketing business world wide as of December 6th 2011, while Microsoft (in partnership with Yahoo (NASDAQ: YHOO), which has used its search technology for years) takes 12 percent of the multi-billion dollar industry. In the United States, Google's share of the search advertising market is 77.9 percent and is expected to continue its growth. Bing's market share has risen in some of the previous months but over half of the market share gain is from Microsoft's search partner, Yahoo, so Microsoft is, in effect cannibalising itself.
More importantly than market share however, is the fact that Google continues to deliver strong profits from its search advertising business, despite falling PPC rates while, as mentioned earlier, Microsoft's search advertising division has never delivered a profit since 2007. Google has exactly what advertisers want. With 66.4 percent of the search market, advertisers have access to the largest internet ad market and nearly all monetized websites use Google AdSense, including giants like YouTube and BlogSpot. Ads presented to Google users are highly personalized and Google uses your information from searches, emails, comments, and even chats to match users with the ads that are most relevant to them.
Microsoft doesn't have the same information about it's users, but has recently teamed up with Facebook (NASDAQ: FB) to give Facebook users quick access to it's Bing search engine and has socialized Bing. Bingers can now search for a topic and find what their Facebook friends and Likes have said about it and discuss it with them. For example, if you searched for "where to go in New York City" Bing would show you the friends of yours that have checked into New York City or posted about it and might be able to help you.
While the new Bing is certainly an improvement, it's unlikely to take back the turf from Google, which has an ecosystem of products that continue to be adopted by new corporations by the day. Gartner reported that one third to half of new corporate users in the market for Internet based productivity (word processors, spreadsheet) software were choosing Google Apps over Microsoft. This doesn't account for the percent of consumers, who are more likely to use Google's services like Gmail, Calendars, Android and YouTube. Google's ecosystem allows its users to have all their Internet services in one place and continues to dominate. A recent poll of 1000 randomly selected adults by Poll Position found that Gmail was the most preferred email service in the United States and is ahead of Yahoo's Ymail, AOL Mail, and Microsoft's own Hotmail and Outlook. Google's Android smartphone market also continues to grow with 56 percent market share up from 36 percent last year.
All of these facts suggest that Google will continue to dominate the Internet services market in the future although Microsoft may be able to win back its old users and keep existing ones with the upcoming 2012 release of its Windows 8 operating system.
athorburn has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and Microsoft. Motley Fool newsletter services recommend Google, Microsoft, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.