Microsoft has gone from one of the most influential companies in the IT world, to just another vendor. You get their Windows, Office and Server platforms and stick an XBOX under the TV. But outside of those four divisions within Microsoft, most people completely ignore the company. Everyone knows Bing exists, but when was the last time you used it? 95% of the natural search traffic to all my own sites comes from Google. 3% from Yahoo! and the remainder is Bing and all the rest of the search sites out there like Ask.com and the smaller sites.

The tragedy is that this abject failure by Microsoft to turn Bing (and its other services) into a profitable company is their own fault. It has nothing to do with the fact that Google is a bully. Microsoft’s mismanagement and failure to adapt their entire mindset behind their businesses has resulted in Google and Apple leapfrogging them. How did they do it? By ignoring the businesses they weren’t good at and focusing on their core strengths. At the moment, Microsoft wants to be a part of everything and have an influence in everything. Its costing them market and mind share. The Online Services Division of the company should be seen as the Canary in this particular instance.

The question ultimately becomes, at what point will it no longer be economical for them to continue in this vein? When you consider that the business brought in over $600 million in the most recent quarter, but still managed to lose nearly $800 million, how can shareholders and investors continue to support these businesses within the company? When will they finally decide that the online businesses are affecting their dividends and decide to cut them loose?

Here are the reported numbers for just the Online Services Division:

(In millions, except percentages)

 

Three Months Ended
June 30,

 

 

Percentage
Change

 

Twelve Months Ended
June 30,

 

 

Percentage
Change

 

 

 

2011

 

 

2010

 

 

 

 

2011

 

 

2010

 

 

 

Revenue

 

$

     662

 

 

$

     568

 

 

17%

 

$

     2,528

 

 

$

     2,201

 

 

15%

Operating loss

 

$

(728

) 

 

$

(688

) 

 

(6)%

 

$

(2,557

) 

 

$

(2,337

) 

 

(9)%

 

Microsoft Reports Record Fourth-Quarter and Full-Year Results

According to TechCrunch, this is the 22nd straight quarter Microsoft’s Online Services Division has lost money. Stop and think about that. 22 quarters is 5 and a half years. In otherwords, Microsoft’s OSD has not been profitable since 2005. Or better put, Ever.


OSD revenue increased primarily as a result of growth in online advertising revenue. Online advertising revenue grew $358 million or 19% to $2.3 billion, reflecting continued growth in search and display advertising revenue, offset in part by decreased third party advertising revenue. Search revenue grew due to increased volumes reflecting general market growth, relative share gains in the U.S., and our Yahoo! alliance, offset in part by decreased revenue per search primarily related to challenges associated with optimizing the adCenter platform for the new mix and volume of traffic from the combined Yahoo! and Bing properties. As of June 30, 2011, according to third-party sources, Bing organic U.S. market share grew over 31% to approximately 14%, while Bing-powered U.S. market share, including Yahoo! properties, was approximately 27%.
Microsoft Reports Record Fourth-Quarter and Full-Year Results

So Bing accounts for 14% of Search market share in the US. This is up 31% from 1 year ago. Not bad. Combined with Yahoo! they have a total of 27% of the US search market share. Unfortunately this reflects “general market growth” so Google could conceivably have grown their search by similar amounts. It could also include people moving to using Bing instead of Yahoo! as well. But their “third party advertising revenue” is declining. Rapidly. That means that they are failing to convince companies to sell advertising using adCenter. Their reach to external websites to display advertising on, other than Bing and Yahoo! Search, is decreasing. So in both cases, they are losing out to Google AdWords and Google AdSense.

But it doesn’t get any better for investors.


OSD operating loss increased due to higher operating expenses, offset in part by increased revenue. Cost of revenue grew $641 million driven by costs associated with the Yahoo! search agreement and increased traffic acquisition costs. General and administrative expenses decreased $157 million or 60% due mainly to transition expenses in the prior year associated with the inception of the Yahoo! Commercial Agreement. Research and development increased $117 million or 11% due to increased headcount-related costs.
Microsoft Reports Record Fourth-Quarter and Full-Year Results

So expenses are going up. The deal with Yahoo! is costing them money, plus the cost of actually convincing people to visit their sites is going up. And even with that happening, they’re still throwing more money at it and hiring more people to work on R&D.

Microsoft is like a tenacious bulldog. They’ve got a tiny sliver of a market and they’re holding on for all they’re worth. Rather than do what any sensible business would do and focus on their core strengths, they’re still throwing money at it hand over fist. They’re doing nothing differently and expecting the same result.

If I were in Microsoft’s position, I’d sell all or part of Bing and adCenter to Facebook and concentrate on Windows, Servers and Business divisions. Keep Office 365 (they will need it to compete with Google Apps) but get rid of the old MSN properties. After 5 years of failing, it is very clear Microsoft has no idea how to make money from the Online Services Division of their company. As such, it makes sense to sell them to a company with a track record of understanding their target markets. I wouldn’t be surprised if Facebook could make them profitable within a short period. Especially given it means an opportunity to truly go head to head with Google.

What is clear though, Microsoft just doesn’t have the correct mentality to compete effectively online. Either change the management from the top down, or go back to focusing on what they do understand and sell the Online Services Division.

I’d be curious to know what the rest of you think. What would you do with a division of your organisation that had done nothing but lose money for over 5 years? How would you turn them around? Or would you also sell them to someone that has a better success record on the web?