Where Is Bing Amongst Its Competitors?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As a major player in the search engine market, Google (NASDAQ: GOOG) has earned 85 percent of the global market share. Competitor, Microsoft (NASDAQ: MSFT), which owns Bing, holds just 4 percent of the global market share. Microsoft really wants to dominate this market but remains unsuccessful since its launch in 2009. But pushing Google from the top won't be easy - and it's something that Microsoft won't be able to accomplish any time soon.
Search Engine Market
Over time, the search engine market has evolved to include mobile search and local search. These segments generated estimated profits of $1.6 billion in 2011. Microsoft only controls 2 percent of mobile search and 4.75 percent of local search globally, while Google controls 90 percent of both mobile and local search globally.
To increase its popularity, Microsoft has tried a variety of tactics including television and online ads to promote Bing. Unfortunately, these efforts have not yielded much in additional revenue. Microsoft even hired former Hilary Clinton campaign advisor Mark Penn to oversee marketing for Microsoft products including Bing. Maintaining a strong presence in the search engine market is tough - and the competition is growing. In addition to Yahoo! (YHOO), which controls 8 percent of the global market, both Amazon (NASDAQ: AMZN) and Facebook (NASDAQ: FB) provide alternative means to search the Internet. As reported by The New York Times, Amazon has surpassed Google as a popular way to find products online. And Facebook recently announced the company is serious about enhancing its internal search engine to include external search options.
Competition from other established, trusted names in e-commerce will certainly not help Microsoft claw its way to the top. If anything, added competition may only cause Bing to fall even further down on the list.
What Does This Mean for Microsoft?
Thankfully, Microsoft doesn't rely on earnings from Bing alone to maintain its operations. In addition to Bing, Microsoft earns revenue from Windows OS, Azure (cloud computing platform), Hotmail, Windows phone, and its new tablet computer, Surface, just to name a few. Companies like Martin Teppor's DataClub, which sells virtual and physical servers, are popping up in large numbers. Mr. Teppor recently stated, "Our main business (hosting service) is performing well. We are increasing our global customer count. We recently sold our 700th server." For Microsoft, becoming the number one search engine would certainly add to the company's bottom line, but it's more about bragging rights than earnings.
Much like its peers Google and Apple (NASDAQ: AAPL), Microsoft must continue to innovate in order to remain competitive. This means spending in areas like research and development as well as sales and marketing. Last year, the company spent $26.87 billion in SG&A expenses, which include R&D projects. In comparison, Google spent $12.48 billion, while Apple spent $7.6 billion. With spending usually comes debt, however. In 2011, Microsoft had $11.92 billion in long-term debt and no reported short-term debt. Google had $2.99 billion in long-term debt and $1.22 billion in short-term debt, and Apple reported no short or long-term debt. But to make money, companies must spend money, so this debt in comparison to net income - Microsoft had a net income of $23.15 billion, Google had a net income of $9.74 billion, and Apple had a net income of $25.92 billion - isn't as shocking as it seems.
Overall, Microsoft is a healthy company - investors should continue to invest as profits should remain high.
One sticking point investors should consider when reviewing Microsoft is its backlash against the competition - particularly to Google and Apple. It's no secret that competition is stiff and oftentimes ugly amongst IT companies. In an effort to increase its market share, Microsoft recently accused Google of providing biased search results on its new Google Shopping index by giving placement preference to top paying merchants (Google has made no effort to hide the fact that merchants pay for placement on Google Shopping).
Here's where I think Microsoft took a wrong turn. Instead of consistently building the Bing brand through traditional advertising and word-of-mouth, the company has chosen to smear a competitor with information that may or may not matter to most visitors. I think Microsoft should spend its time and marketing budget to come up with new and innovative ways to advertise Bing - with only 4 percent of the search engine market share, the company must also realize it will need lots of time to build the brand, which requires patience and a professional attitude.
In the End
Microsoft remains a valuable stock to have in an investor's portfolio - even if it will never reign supreme in the search engine market. Microsoft may never dominate the tablet computer market either, but this shouldn't deter investors from continuing to support the company. As long as Microsoft remains one of the top performers in these and other IT areas, the company will remain healthy and strong for many years to come. With a trailing price-to-earnings ratio of 14.38 and forward P/E of 8.21 (the application software industry average is 17.50), diluted EPS of 1.85, and free cash flow of $24.45 billion, investors should feel confident going into next year.
In the end, I think Microsoft should accept where it stands, particularly in the search engine market, and focus on perfecting current products and services while developing new products instead of engaging competitors like a stubborn child on the playground that feels defeated because he/she can't get their way all the time.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Facebook, Google, and Microsoft and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Amazon.com, Facebook, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!