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With search, size matters, says Microsoft

Microsoft sees size as search answer in Yahoo deal.

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A bigger number of ads in the hopper gives Microsoft’s technology a better chance of plucking out one that entices someone to click. The more times Microsoft watches someone click an ad — or not — the better its formula becomes for making the right match.

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And because search ads are sold auction-style, more advertisers vying for those spots should drive up prices, ultimately helping Microsoft eke out a bit more from every ad it sells.

Right now, Microsoft estimates that Google gets 7 cents in ad revenue for every search, while Yahoo gets 4.3 cents and Microsoft gets 3.9 cents, according to a PowerPoint slide Microsoft mistakenly posted online.

Once Microsoft is handling Yahoo’s searches, Microsoft predicts revenue per search for both companies will rise to 5 cents. Subtracting the commission Microsoft will pay Yahoo, Microsoft expects to start making a “decent” return of $400 million.

“The number of searchers is a vital driver of success,” said Tim Cadogan, CEO of online advertising company OpenX and a former senior vice president in Yahoo’s advertising division. “Being able to get nearly 30 percent catapults Microsoft from a tougher position to a more viable place from which they can build.”

And build it must. Google gets about two-thirds of U.S. search queries, according to comScore Inc. Yahoo handled about a fifth of U.S. searches in June, and Microsoft fielded less than half of that. The partnership would bring the two companies’ combined share to nearly 30 percent, still less than half of Google’s total.
Staying a distant second to Google will leave Microsoft perpetually playing catch-up while Google keeps getting better. In other words, there are almost never enough data.

And that assumes size is all that’s holding Microsoft back, a premise that Gartner analyst Andrew Frank described as “an overly simplistic view of Google’s accomplishments.”

Google had a head start on Microsoft and Yahoo in fine-tuning its search advertising system based on what works and what doesn’t, making note of everything from the number of ads on a search results page to their exact size, placement, spacing and color.

When someone does a Web search, Google does more than simply spit out an ad that matches the keyword. Google weighs many factors to figure out how likely a user will click on an ad. An oft-clicked ad on a common search might be shown first, even if it brings in less revenue than a less popular but more lucrative one.

Microsoft has smart computer scientists working full-time on the same puzzle, but Google’s lead is formidable, and Microsoft’s devotion to search pales compared with cash cows like Office and Windows.

Ultimately, the Redmond, Washington-based software maker may have to settle for something less tangible.
Google has been making incursions onto Microsoft’s home turf, the software that makes computers run and helps people get their work done. By stepping up its game in search, Microsoft may ultimately force Google to focus on its core search engine rather than its fledgling software business, including a recently announced Chrome operating system that could challenge Windows.

Microsoft may be able to claim victory even if it cannot turn size into dramatic search revenue growth.