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Bing Gains Cost Microsoft Millions

Redmond's search business posts seven-figure losses, but company officials insist the effort to catch Google will pay off.
Microsoft is pouring millions of dollars into its campaign to become a serious player in Internet search, a market utterly dominated by rival Google. The campaign is having an impact, but at a pace that's so glacial and costly some skeptics wonder whether it's worth it.

Microsoft's share of the U.S. search market grew 11% to 14.1% in June, compared to a 12.7 % share in the same month a year ago, according to the latest data from comScore.

Over the same period, Google's share increased 4.6%, to 65.5%. Microsoft's miniscule share of the global search market, meanwhile, is also creeping up--from 3.25% in September 2010 to 3.76% as of July, according to statistics from Net Applications. Google's global share was roughly flat over the same period at 83%.

Microsoft also is gaining traffic through its search alliance with Yahoo, which now routes queries on its sites to Bing. But Yahoo's share is falling--from 18.9% of the U.S. market in June 2010 to 15.9% in June 2011, according to comScore. Yahoo searches also produce less ad revenue, or revenue per search, currently than they did when Yahoo handled search independently.

The companies blame problems integrating Yahoo's operations with Microsoft's adCenter search platform.

Microsoft's search gains are coming at a huge cost to the company. Revenue in the company's Online Services unit, which houses search operations, increased 15%, year-over-year, to $2.53 billion in the most recent fiscal year. But the unit's loss widened to $2.56 billion over the period, from $2.34 billion a year ago.

For some industry watchers, the numbers don't add up. Greenlight Capital hedge fund manager and Microsoft investor David Einhorn earlier this year said Steve Ballmer should step down as CEO, in part because of the search unit's lackluster performance. "His continued presence is the biggest overhang on Microsoft's stock," Einhorn said at an investment conference in May.

Ballmer's defenders note that, under his watch, Microsoft has struck potentially lucrative search alliances with a number of third parties. In addition to Yahoo, Bing's search results now incorporate data from Facebook. Also, if Microsoft can keep Bing on its current 11% growth track in the U.S., its domestic market share would be just under 20% in three years. Not Google territory, but enough to make it a legitimate player.

"As we grow our revenue for search, that's a highly leveraged revenue dollar that we get that goes against that fixed cost base," said Microsoft CFO Peter Klein, on a conference call with analysts last month. Translation: Microsoft has already spent much of the money it needs to in order to build a search business, in the form of data centers and other investments. As traffic grows, the business should eventually become profitable.

Whether that will happen fast enough for investors like Einhorn and advertising customers who want to see more traffic remains to be seen.

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