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If Microsoft Can't Compete With Google, Who Can?

Is there viable competition anywhere to Google? Let's forget about the poor Microsoft shareholders and ask what the fact that Bing only exists due to massive subsidies says about the health of competition in search.
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There's been a lot of commentary and response to a Reuter's opinion piece last week which calls on Microsoft to sell off its money-losing Bing search operation.

Apparently, Bing is losing something on the order of $2.6 billion per year on an operation that brings in $2.5 billion in revenue -- meaning Microsoft is losing something like 50 cents of every dollar spent on competing with Google.

Reuters's Robert Cyran thinks Microsoft could refocus on other technologies and make a little money on a sale to make shareholders happy, while other writers responded and argued (also here) that Microsoft needs to make long-term investments in search for its economic future.

Is there Viable Competition Anywhere to Google? But let's forget about the poor Microsoft shareholders and ask what the fact that Bing only exists due to massive subsidies says about the health of competition in search. And it seems to indicate that we don't really have viable competition, since you have one completely dominant company, Google, controlling something like 65% of the U.S. search market and only one viable alternative with 27% of the market, which is so unprofitable that analysts are arguing whether the operation should be abandoned.

What's really amazing about the discussion is that in any other industry, a competitor with 27% of a market with the heft of Microsoft -- and a track record of pretty vicious competitive actions itself -- would be itself seen as a threat, but instead is almost not viable economically. It's worth noting that in Europe, where Microsoft has invested far less in competing with Google, Google has even larger shares of the search marketplace -- 92% in the United Kingdom, 91% in France, 93% in Spain, Germany and Switzerland, 94% in Portugal, 95% in the Netherlands, Poland and Romania and 96% in Belgium and Hungary.

So without billions of dollars in subsidies like Microsoft, there is de facto no real competition to Google globally, despite the rhetoric that competition is "only a click away."

Why isn't Microsoft Making Money? But to me, that's not the really interesting question. The question is, why isn't Microsoft making a boatload of money from search? Yes, it has less than half the market compared to Google, but Google makes boatloads of money and half of boatloads is still at least a boatload of money.

And the answer makes the existence of a de facto monopoly by Google even clearer. The answer is that when you look at the product actually being sold by Google and Microsoft, which as I've noted is not search for users but advertising to advertisers, Google is selling the same product for far more than Microsoft.

The core product sold by search engines are those little advertisements that appear on search pages, which are sold to advertisers not for a set amount but based on how many times customers click on an ad tied to the search phrase that brought the user to the page. While Google will inevitably make more money on the same search term since it has more users, the so-called Cost Per Click (CPC) price for any search term should be roughly the same across different search engines in a competitive marketplace.

But apparently it's not. Different analysts come up with a different discount for the CPC price on Bing, but it's far lower than for purchasing the same click on Google. For example, one advertising analyst estimated that the "average CPC on Bing is somewhere around 1/4 or 1/5 of our average CPC on Google." Another analyst ran CPC rates on specific search terms and came up with somewhat higher rates for Bing (see below) but the discount is still 49% to 71% on Bing.

From an advertisers perspective, that should be great. As the analyst above notes, "You may argue that fewer people see your ads on Bing, and that's true. But since you are paying per click, you have a much better chance of getting lower costs per lead or conversion from Bing."

But what this means is that even if an advertiser pays for a search term on both Google and Bing, Microsoft will likely get less than half the clicks because of its lower share of users, but it will collect something like one-third the revenue per click -- translating into something like one-sixth of the revenue compared to Google on any advertising buy by an advertiser. On top of that, Microsoft has to share some of that revenue with Yahoo! based on whatever the details of its arrangement call for on the search going through that site.

So since Microsoft has to pay many of the same fixed costs as Google to build and maintain its search engine, it's no wonder Microsoft is buried in red ink.

Is Google Receiving a Monopoly Price for Online Advertising? The question is why there is such a large CPC discount for Bing. Any market leader like Google often has some kind of premium on the price of its product but when the price is so disproportionately high compared to its competitors, that raises a serious red flag that anti-competitive monopoly behavior is at play. When a company receives a premium price two, three and even four times as much as its main competitor, that should raise alarms about monopoly power and pricing.

Part of the explanation is no doubt Google's overwhelming control of user information, which it uses to target ads on behalf of advertisers -- in ways I've noted harm consumer interests.

But unseen to many consumers is the concern that Google also controls other aspects of the advertising infrastructure in ways that entrenches its monopoly power. Many raised alarm when Google proposed a $400 million purchase of AdMeld, a large company involved previously in helping sell ads to companies like Google itself). Last week, the Department of Justice announced it was expanding its antitrust investigation of the acquisition. The AdMeld buy follows Google absorbing a series of other key online advertising companies, from its $3 billion DoubleClick purchase back in 2007, its $750 million purchase of mobile advertiser AdMob in 2009, as well as InviteMedia, Teracent and other smaller purchases in the online advertising ecosystem.

Google is an advertising company and evidence of its ability to extract a monopoly price premium from advertisers is a key siren call to investigators to see if Google is abusing monopoly power and its overall damage to the whole online ecosystem of e-commerce.

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