Nick Wingfield over at the WSJ has posted an argument that Microsoft has “turned the corner” which specifically refers to (in his opinion) Microsoft have gone from being an inefficient monopoly in terms of building bad products and blowing billions – MSN and Vista – to returning to a lean, mean competition-stomping machine.
I’m not going to dive into the exact details of the post as I think that you should read it but I think that the argument is wrong for several reasons and while I think and have said on several occasions that Windows 7 will do well and that their corporate software and xbox divisions will keep making the company decent revenues for a while yet I am not convinced by several other aspects of Microsoft.
However, my main concern is the internet division of Mircosoft as I’m not sure if they are able to build an impressive Internet business even with the launch of Bing and the the Yahoo deal.
The latter which could be argued that it is Microsoft’s Big Mistake. This is because, now the deal has finally been done it has led to many blogs that I read clearly stating that they believe Microsoft’s new search business will be similar to Google’s just roughly half the size – since Google has around 65% and Microsoft now 30%.
Those guys are wrong because, the deal won’t give Microsoft 30% of the market and whilst in terms of queries processed Microsoft will be roughly half the size of Google’s assuming Yahoo and Microsoft don’t loose any market share in the two years it will take to implement the deal and that we are ignoring every other country outside the US as Google are far bigger on the international scene.
Anyways lets get to Microsoft’s Big Mistake – money in terms of the internet division. That’s right the same money that at one point made Bill Gates the richest man in the world, the same money that we use everyday on groceries etc and even the same money that you paid your internet service provider to be able to read this post 
Let me explain.
When anyone values a business they may look at other factors such as ethics, company history etc but there is only one factor which means the most – the money aspect of the business aka. profit and revenue – and because of the Yahoo deal Microsoft’s relative share will still be tiny.
This is because, almost two thirds of Microsoft’s search share share in the US will come from Yahoo and of that two thirds they will keep exactly 12% of the revenue from this share. This means that on top of a fee Microsoft gave to Yahoo for its search business they will give them 88% of the revenue and bear all the costs.
In other words if we are imagining that Microsoft are a mini-Google then Microsoft are incurring all the costs which Google do for every search – in fact I believe that Microsoft actually have a higher average cost then Google so their costs are actually higher – and unlike Google who keep all of the revenue, Microsoft only keep a fraction of it.
Furthermore, as Microsoft already have a $2.2billion loss making division in its Internet business and that because of the deal it means that they won’t be the owners of the market share it has acquired via the Yahoo deal after the deal expires – the deal doesn’t seem to make any sense and this only means one thing:
Microsoft will still be loosing money….a lot of money.
P.S. Steve you should have acquired Yahoo rather then done this deal.