Microsoft-Yahoo Search Partnership Brings Underwhelming Returns

Microsoft’s (NASDAQ:MSFT) venture into Internet search may quickly prove to be its biggest flop, as the company reported that its Bing search engine (“online services division”) expects to lose more than $2.5 billion this year in this week’s earnings call. Last year the tech leader, after having struggled to gain substantial search engine market share on its own, forged an alliance with search engine old-timer Yahoo! (NASDAQ:YHOO), as the companies put their heads together to try to help drive up user traffic, ad revenues, and returns for marketers on those advertising investments. The large loss Microsoft expects from Bing came as puzzling to many investors, especially in light of the fact that its engine has wrapped 40% YoY traffic growth as of June, and now accounts for 14.4% of all U.S. based searches. Though this still lags well behind leader Google (NASDAQ:GOOG) with 65.2% share of all searches, it represents substantial progress at least in traffic numbers for the two year old engine, and a collective 30.2% market share for the Bing-Yahoo partnership.

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Analyst Mark Ballard argues that the reason the alliance is floundering is that the two have failed to deliver on the potential of those promises, saying on a blog post, “Bing’s revenue per search (-RPS) has not lived up to expectations.  As advertisers, we care far less about which engines are driving traffic than how well we are able to take advantage of the traffic that exists…We do not see a jump in Bing share, and the increase we did see at the beginning of the year is largely tied to the Conduit deal.”

Business Insider does some more explaining of Ballard’s analysis, getting to what they believe is the crux of Bing’s revenue problem, “Microsoft (NASDAQ:MSFT) doesn’t do a very good job of matching inexact queries with search ads. As a result, a lot of searches that should have ads are coming up with no ads. That’s an inventory problem. Ballard explained that they measure three kinds of paid clicks. Say an advertiser buys the search term “pancake syrup.” If I search on “pancake syrup” and click an ad, that’s an exact match. If I search on “Vermont pancake syrup,” that’s a phrase match — the phrase contains the exact keyword. But if I search on another similar term, like “breakfast,” and the ad based on the keyword “pancake syrup” comes up, that’s a broad match. Back when Yahoo was running Panama, 60% of the clicks that RKG measured on Yahoo (NASDAQ:YHOO) were for broad matches. Now, only 40% are. That means a lot of searches that used to show ads are not showing ads now.”

If BI and Ballard are on the money, hope for “Bing-Hoo” to make some changes to its advertising models…for the sake of your portfolio at least.