What got Microsoft Corp. (NASDAQ: MSFT) started on its Yahoo! (NASDAQ: YHOO) takeover proposal was a fairly boneheaded idea that it could turn its money-losing online advertising unit -- known as the Online Services Business (OSB) which in the last nine months lost $775 million -- into a profitable contender to Google Inc. (NASDAQ: GOOG).
Now that Microsoft has withdrawn its offer, it's still stuck with OSB and it lacks a compelling strategy to make it profitable. But if Microsoft goes back and asks why it got into OSB in the first place it becomes pretty clear that this is not a good business for Microsoft to be in at all. It got into the business for the simple reason that it had Internet envy -- that is, it saw other companies get all the hype and profit from online advertising and it wanted its share. While that is a common reason for companies to get into new businesses, that doesn't make it a profitable one for shareholders.
Here's how badly Microsoft has done in online advertising. According to PC World, in November 2005 Microsoft ramped up its plan to provide Web-based services through the Windows Live and Office Live brands with the intent of bolstering its online ad revenue. Between August 2005 and December 2006 its share declined from 11% to 8%. By February 2008, its share had fallen even further to 5% of the online advertising market.
It would obviously be great for Microsoft if someone was willing to buy OSB but I don't know why anyone would want to own its negative cash flows. So that would leave Microsoft with the option of closing down OSB -- or at least those parts of it that are losing money.
At this point, the only thing that keeps Microsoft "investing" in OSB is pure ego. It can't stand the idea that another company -- Google -- has come along and created a new business that leaves Microsoft out of the limelight. But Microsoft has yet to prove that it can create a process that outperforms Google at giving advertisers better returns on their online advertising investment. So Microsoft has been steadily losing share.
Why it thought a combination with Yahoo would help is hard for me to grasp. If I owned Microsoft shares, I'd feel that there was no way that I would ever get a return on OSB and therefore it's time to close it.
What do you think?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
5-04-2008 @ 4:41PM
johnshantz said...
As a Microsoft shareholder, I would like to see Bill Gates back in the driver's seat. This company needs a vision and it hasn't got one that excites its employees, clients or investors. Maybe they could merge with Google to get leadership quality.
5-04-2008 @ 6:10PM
Bill Metz said...
Peter,
You're points and observations are well taken, and Microsoft undoubtedly SHOULD cut bait as you suggest.
Three reasons why they won't: 1) their infinite ego; 2) their near-unlimited financial resources such that they can indulge that ego at will; and 3) their apparent contempt for their countless little-people shareholders.
On reconsideration of 3), possibly I'm being a little harsh; perhaps the reason for Microsoft's dismal stock-price performance over the last several years is incompetence on the part of management rather than "contempt."
I don't have any idea what salary Ballmer draws but I'm sure it's infinitely more than Steve Jobs' draw of $0 at Apple.
Based on multi-year sales growth and also stock price performance, it would appear that Ballmer is grossly overpaid and Job's is likewise underpaid.
Pray tell why Microsoft, with all of it's resources, can't find and hire and pay the very best management team that Earth has to offer?