First Yahoo invests in Right Media. Next, Google buys Doubleclick. Then, Yahoo scoops up the remainder of Right Media. And now, Microsoft could buy 24/7 Real Media?? Before we even begin to fathom why they might do that, let’s look at the big M as they compare financially to the company to which they always get compared, Google. For 2006 Microsoft earned 44bn in revenue and 12bn in profit. Google, in only their seventh or eight year in business posted an enviable 10.6bn in revenue and 3bn in profit for 2006. For Q1 2007, Microsoft didn’t disappoint, pulling in north of $14bn in revenue and just under $5bn in profit. Google continued their growth with $3.6bn in revenue and $1bn in profit. Their stock prices tell an interesting story as well. Microsoft’s stock gained almost 27% in the past 12 months, 13% for calendar year 2006, and 20% over a 24 month period. In the past 12 months, an investment in Google would have yielded 11% in the past 12 months, 11% for calendar year 2006, and 100% in the past 24 months.
Judging from Microsoft’s seemingly missing, or at the very least publicly undefined, unique Internet advertising strategy, you probably wouldn’t have guessed that an investment in Microsoft would have earned you more than an equivalent investment in Google from last May until this May (or even for all of 2006). Their stock price matches in some way their Internet advertising revenue growth. Microsoft earned $623 million in revenue last quarter from online ads, a growth of 11% over the previous quarter and 23% from the same period last year. In our space, earning $100 million puts you on the map. Imagine making $200 million each month? The problem of course for Microsoft is that while they out-earn Google by a factor of five in company level sales, Google can claim the same margin in Internet ad sales. They make not $200 million per month but in excess of $1 billion.
Everyone expects Microsoft to have an Internet ad play, but should that play involve competing with Yahoo, Google, and soon Fox Interactive in search and/or display? It would seem they have no choice, but that’s the question sideline pundits like ourselves have the luxury of pondering. Instead of beginning with the recent news of their potential interest in 24/7 Real Media, let’s look back at perhaps the first time another beat Microsoft at something big with respect to the Internet – the browser. If you surfed the net circa 1998, you didn’t use Internet Explorer. You used Netscape. And, when Internet Explorer came out, you had no reason to switch to it, because compared to Netscape it stunk. By continually improving the product and playing as dirty as it needed, Microsoft ultimately trounced Netscape, much like it did Apple in the operating system.
Ten years later, Microsoft finds itself growing but continuing to lose ground to Google. Would buying 24/7 Real Media help them catch up? I honestly don’t know enough about the latter’s business, but on the surface it doesn’t appear to give Microsoft the same advantages that Doubleclick gives Google and Right Media gives Yahoo. A TFSM purchase won’t necessarily help Microsoft earn more on its MSN property or network benefits that Right Media gives Yahoo. Similarly, it won’t help the company enter and take a leadership role in a strategically important area where it has a limited presence, which is what Doubleclick does for Google. Microsoft needs to buy something, but that something should have a technology and market edge. Does TFSM have that? Again, I don’t know, but my guess is that while a solid company, they aren’t what Microsoft needs. Perhaps what they need is Apple or if not Apple, to pull an Apple.
In 2000 and 2001, Apple seemed on the brink of extinction. It made slow, expensive machines. Today, they kill it. Apple still makes expensive machines, but their machines have little to do with their success. Or put a different way, their machines have everything to do with their success; it’s just a completely different type of machine than before. Instead of competing with Wintel directly, they looked at the emerging markets and focused on their real strength as a product marketing company. They always had a grasp of the latest technology, but they found their calling (and the money) as the one that simplified new technology and made it accessible to the masses in sleek, easy to use packages. Just as Apple can try and make workstations, only to find they will not compete with Microsoft on Dell and HP’s, Microsoft can try and build a web site to compete with Yahoo or search technology to compete with Google. If they do, the same thing that held true for Apple in standard computing will befell and has happened to Microsoft in Internet advertising. They need to look outside the (search) box.
From my perception of them at least, Microsoft can develop and implement complex technologies in scale, but they don’t excel in information aggregation, creativity, rapid development, and marketplaces the way Google does. Like Apple, they can’t follow the money without following their strengths. And, their strengths come in controlling the environments in which we operate. We spend more and more of our time online, and free web apps have come a long way, but they won’t top the robustness and feature richness of programs built by Microsoft. That’s why I like their recent purchase of ScreenTonic, one of the first companies in Europe to develop a mobile Internet ad platform as well as ad agency. As mobile will become a $19 billion a year business within five years, all internet companies will compete there, but it also means Google, Yahoo, and Microsoft have an equal footing – none. For Microsoft, compete where the competition will be, but isn’t today. They don’t need to buy Yahoo. They need levers for their future. If anything, why not buy Nintendo or Linden Labs for Second Life to hit consumers. And buy Salesforce to have a platform and base for web apps. While not as sexy, buy a Dell or HP, a Nokia or Motorola. Snap up an ISP and cable provider. Continue to own the user; that’s what made them rich in the first place.
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