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Remaking Microsoft: Get Out Of Web Search

Microsoft continues to pour good money into search -- a market where it can't compete.

Microsoft continues to pour time, money, and management resources into online search--a market where it not only can't win, it can't even compete despite the billions of dollars it has spent on acquisitions, a Live Search program that pays users, and overtures toward Yahoo.

It's time for Microsoft to get out. Its deep investments in search are bearing little fruit, and they're diverting resources from core franchises that are under siege. Microsoft's client sales fell in the most recent quarter, and sales of Office to consumers plunged. In mid-January, Microsoft announced it would lay off 5,000 full-time workers and cut 5,000 contract positions over the next 18 months. With more tough choices ahead, underperforming products must go.

In an interview last year, senior Live Search product manager Martin Stoddart said Microsoft "is not where we want to be in terms of market share." That's an understatement. Microsoft has less than 5% of the Web search market, as measured by user search queries. To boot, the company's Online Services group, which includes search, posted just $866 million in revenue in the most recent quarter, virtually flat from the previous year, while recording a $471 million operating loss, almost double last year's $247 million loss.

Even if the race is only at the quarter pole, Microsoft is losing ground to Google. MSN and Live Search started 2008 with a 6% share of the Web search market and finished with a 4.6% share, according to Net Applications. An acquisition of Yahoo's search business wouldn't change much. Combined, Microsoft and Yahoo had 15% of the consumer Web search market as of December, compared with Google's 81% share.

Microsoft also faces a tough go in enterprise search, despite spending $1.2 billion last year to acquire Fast Search & Transfer and an undisclosed amount for semantic search specialist Powerset. In the enterprise market, it's squeezed between niche players like Autonomy, which is enjoying double-digit growth, and Google. With weak footing in Web and enterprise search, it lacks leverage in both.

Microsoft argues that it must compete in search because it represents a strategic hilltop in the Web 2.0 market and because it's a gateway to online advertising and e-commerce. There's truth in that reasoning, but Microsoft's focus needs to be on halting the decline of its Windows and Office franchises. Its continued investment in search is throwing good money after bad.

MARKET GROWTH
WEB SHARE FINANCIALS
6% 4.6% $866M $471M
January
2008
December
2008
2Q
online revenue
2Q
operating loss
Microsoft's online services business operates at a loss
amid single-digit Web search market share

Illustration by Sek Leung

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