ON MICROSOFT DISRUPTING GOOGLE'S BUSINESS MODEL

GO FOR THE JUGULAR

Reading Nicholas Carr's post on Bill Gates' epiphany on Google's model (via Infoworld) brought on a woozy case of deja vu this evening:

"Microsoft (Profile, Products, Articles) Corp. will share a part of its advertising revenues from its search engine with users, the company's chairman Bill Gates         said in a panel discussion on an Indian television channel...

Gates said that search engines like Google (Profile, Products, Articles) Inc. get their revenues from advertising because people use these search engines. "Google's business model is not based on free software," Gates said. "Their business model is based on advertisements from which they make a lot of money."

But they don't share these advertising revenues with the end users who help them get the revenue, Gates said. "Google keeps all of the money with itself," he added."

Search engines sharing revenues with their users...an idea whose time may have returned.  In a post back in October titled "On payment for peer production", I noted:

"It's been tried before of course in Web 1.0 days...the notion of paying money to search users.  iWon.com is the poster child here, which continues to pay users in cash prizes to this day (over $64 million to date according to their website).

Of course back in the web 1.0 days, the prize money was a customer acquisition expense.  Today in the world of paid-search, there is real revenue that can be split with users.

Alternatively, search engines could offer a loyalty program a la the airlines that offers specific awards and benefits for sustained usage and loyalty.

In a trillion dollar plus world of global advertising, direct marketing and promotion, it's not unreasonable for peers to collectively ask for a piece of the pie.  Especially when there's SO MUCH of it to go around."

Microsoft is blatantly trying to pull a Netscape again.  Go after the competitor's core revenue stream by trying to make it as "free" as possible.  Only this time, it's disguised as a "Robin Hood" strategy...take from the rich (Google) and give to the peers who are the source of those revenues in the first place.

Will it work? Umair of Bubblegeneration sees three problems with this :

"1) It's fraught with moral hazard = click fraud^1000000.
2) It's a very nice market for adverse selection. That is, the guys that will pay you the most to click on their ads will be exactly the guys you never want to see ads from.
2) Google can imitate it overnight."

Good points, but not show-stoppers from a Microsoft perspective:

1. Click fraud as a moral hazard exists in the current model as well.  Not clear if sharing revenues with users INCREASES it.  If anything it may DECREASE it, since end-user click fraud is likely to be more penny ante compared to the organized, institutional click-fraud that exists today in the "House" favored model.  Also, the reward to the user doesn't have to be just through clicks, but on discounts through the company's OTHER products and services...this mitigates the click-fraud risk.  As an example, Amazon offers users a small shopping discount to users of it's A9 search services.   Alternatively, the model does not have to rely on on end-users' getting a piece of the pie, but rather tweaks in how the revenue pie is shared with the paid search industry.
2. See point number 1 above...existing problem not necessarily exaggerated.
3. Google can imitate it, but at the COST OF SHAREHOLDER CONFIDENCE.  The stock and valuation would take a meaningful hit, which from Microsoft's point of view is much of the battle.  Decline a competitor a high stock valuation with which they can fuel additional competition for their core software OS and application model.

So, it remains to be seen whether the strategy spinning in Bill Gates' head will work.  But Microsoft's obviously thinking about it hard.

As I concluded in my earlier post:

"In a trillion dollar plus world of global advertising, direct marketing and promotion, it's not unreasonable for peers to collectively ask for a piece of the pie.  Especially when there's SO MUCH of it to go around.

Whatever form it takes, at some point in the evolution of the web, consumers and users may ask for and get more tangible compensation beyond functionality, reputation and feelgood generosity, in exchange for their attention to all things on the web.

Why, we may even call it web 3.0."

Now that Microsoft's actively thinking about all this, we may yet see these theories in action.  Google and other search participants may need to fasten their seat belts...there's a Microsoft-sized thunderstorm ahead.

Comments

[Peter Hershberg]

I don't think that paying users to click on ads is a sound strategy. As Umair pointed out, click fraud will turn into the huge issue many people *think* it is today. AllAdvantage, who paid people to view ads, comes to mind here. Perhaps MSN should think about sharing revenue with users once they've converted instead?

More reasonably, I think MSN should take the two following approaches:

1) Cut into competitor distribution by offering syndication partners guaranteed revenue that exceeds the (sometimes generous) rev shares they're currently receiving from Google/Yahoo. This is the approach GoTo used early on and we've all seen how that story played out.

2) Reward advertisers and agencies. If MSN is so anxious to give a share of the billions of dollars in their war chest back to those who help make them money, why not simply offer discounts to SEM's and agencies? The features included in MSN's new adCenter (demographic/behavioral targeting) are clear evidence that they intend to compete for market share not by targeting the SME market that initially drove the growth of Google and Overture, but by targeting the market's most sophisticated advertisers (i.e. largest spenders) instead. If MSN gave some percentage of total monthly spend back to SEM's, they'd see many more dollars start to flow their way. This would essentially be the paid search market's version of a "volume discount" -- something that no other engine offers (or can afford to offer) today.

More thoughts here:

http://searchviews.com/archives/2005/12/can_money_buy_m.php

[vinnie mirchandaniv]

I almost sense glee in the market Google is about to be tweaked. CIOs are far more worried about IBM's 100 b, Mircosoft's 40b, Oracle's 15b - v/s 6b for Google. Because they realize Microsoft has 87% gross margin, Oracle 75%...almost pure profit...CIOs would love a results based model like Google's instead of the lock-in pricing they have from so many vendors...

[Michael Bayler]

I see this talk from BG as pretty naive. Since when has MS demonstrated leadership in brand comms or customer experience - even in 1.0? The demands of the 2.0 user render any form of interruptive advertising a brutal deal-breaker. Far more sophisticated, indirect, enabling models of branded experience enhancement need exploration before MS can go anywhere near this strategy. Respect the firm, but this is way off their zone.