Microsoft committed itself almost three years ago to catching up to Google and Yahoo! in search. But the company’s third-quarter financial results, reported late Thursday, showed that the company has not been any more successful at closing the distance between its search ad revenue and theirs than it has been at matching their share of search usage.
Ad revenue at MSN Search was $357 million, a 7% increase over the same quarter in 2005. But that growth looked anemic compared to the 80% year-to-year jump in quarterly ad revenue reported two weeks ago by Google; Yahoo! also reported a 36% increase in ad revenue for its most recent quarter.
Since last fall, Microsoft has been rolling out its own performance ad platform, adCenter, in the U.S. market, with the aim of totally replacing pay-per-click ads from Yahoo! The company said that 70% of its U.S. sponsored listings are now sold through adCenter, up from 18% at the end of Q2.
Overall, revenue at MSN, including subscriber fees for Internet service, was down 3% for the quarter to $561 million. The company posted a $13 million loss, compared to a net profit of $102 million in third-quarter 2005.
Projections for the fourth quarter at MSN and for fiscal 2006 were equally downbeat. The company said it forecasts a further revenue falloff of 4% to 5% compared to the same period last year, as more subscribers abandon MSN’s Internet access business and as MSN continues to replace Yahoo! pay-per-click ads with those sold by adCenter. For the full year, MSN revenue should decline by 2%.
Microsoft’s operating expenses rose 11% during the quarter, largely from a scramble to get Xbox gaming consoles into stores, and those cost increases will continue. But chief financial officer Chris Liddell said the company would also increase its investment in its search platform, both to enhance the relevance of general search and to develop new products in local and mobile search.
Liddell did not give further details about this accelerated investment in the MSN Web unit but said that the total investment in a range of areas, including both MSN and the Xbox console, would be $2 billion to $2.5 billion.
It was widely assumed that much of the increased investment in MSN would be deployed to help it close the gap with Google and Yahoo! Recent metrics from comScore networks found that Google had about 45% of the U.S. market for search usage in March and Yahoo! has 28%. By contrast, MSN Search holds about 13% of the market. Those figures represent declining market shares for both Yahoo! and MSN.
He stressed that the investments were being planned not in response to any one competitor. But Liddell also went out of his way to note the recent hiring of Steve Berkowitz away from his post as CEO at Ask.com to be senior vice president of Microsoft’s online business group. Ask.com was the only major search engine other than Google to post a market share increase in March, with about 5.9% of U.S. users—an increase of about half a percentage point.
After the Microsoft announcement, Piper Jaffray analysts Safa Rashtchy and Aaron Kessler pointed out in an analyst’s note that with the advertising and search market combined growing at around 40% a year, “MSN is significantly lagging behind the market.”
Investors promptly punished the company for its downgraded projections for both the coming fourth quarter and fiscal 2006 by sending Microsoft’s shares down 11% on Friday, erasing $31.6 billion in market valuation in the heaviest trading volume in the company’s history.