This week Microsoft produced their annual report for 2012. It's been commented on by many and the main theme seems to be that they've reported their first quarterly loss since ages (or ever).
Well, yes. And so what?
The Online Services Division, a eufemism for "we wanna go where Google went" has been a bleeder for years. Its mission:
Online Services Division (“OSD”) develops and markets information and content designed to help people simplify tasks and make more informed decisions online, and that help advertisers connect with audiences. OSD offerings include Bing, MSN, adCenter, and advertiser tools. Bing and MSN generate revenue through the sale of search and display advertising, accounting for nearly all of OSD’s annual revenueThe graph above reflects revenue (straight line) and operating income (dotted line) from 2007 till 2012. Where the other divisions flourish, it's clear that OSD doesn't.
However, OSD has changed quite a lot over the years. Here are the figures for the historic OSD up from 1999 till now:
From July 1, 2002, MSN included MSN Subscription and MSN Network only.
Effective July 1, 2005, functions related to MapPoint previously reported in Mobile and Embedded Devices were moved to MSN.
In 2006, Windows Live™, a set of Internet services and software designed to improve the users’ connected experience, including Windows Live™ Local and Windows Live Messenger was developed and added to MSN.
In 2006, MSFT launched MSN adCenter – MSFT's internally developed advertising platform.
"We believe MSN adCenter will enable us to increase both display and search advertising revenues by reducing our reliance on third parties for delivering ads"
MSN revenue decreased in 2006 primarily reflecting a $195 million or 28% decline in access revenue, partially offset by a $126 million or 9% increase in advertising revenue and a $23 million or 9% increase in revenue from subscription and transaction services other than access.
As of June 30, 2006, MSN had 2.1 million access subscribers compared with 2.7 million at June 30, 2005. In addition, MSN had over 261 million active Hotmail accounts and over 243 million active Messenger accounts as of June 30, 2006.
So, the bandwidth-driven MSN now becomes an advertisement-driven MSN. And although revenue increases, so does the loss.
Basically the OSD division was profitable from 2004 till 2006, and has been bleeding ever since narrow bandwidth use has dropped dead. Betting on Windows Live to revive MSN, and investing money in MSFT's own adCenter has not proven a lucky move. The real question is: what happened in 2008, at and after which MSFT's advertsing *really* went down the drain? Here's what happened:
- New releases of Windows Live Search
- Updated MSN Video Service
- New release of adCenter
- Acquired a number of companies, the most significant of which was aQuantive, Inc., "a digital marketing business that we expect will play a key role in the future development of our Online Services Business. We believe the acquisition will help us build and support next-generation advertiser and publisher solutions for cross media planning, video-on-demand, and Internet protocol television"
Suffices to say that 2008 was a costly year, extremely costly. In 2010 OSD even manages to make more loss than revenue, and the year after there's only $31 million difference. So it doesn't come as a surprise that MSFT wanted to cut loose aQuantative. But is that the real cause for the extreme bleeding?
Since December 2009, MSFT provides the exclusive algorithmic and paid search platform for Yahoo! websites worldwide. They have completed the worldwide algorithmic transition and the paid search transition in the U.S., Canada, U.K., France, Germany, and several other markets, and are transitioning paid search in the remaining international markets. And again, it seems, every penny MSFT makes in advertising is paid for by themselves for the full 100%
If I were Microsoft, I'd just stop the whole advertising business immdeiately. After a decade, it's clear that they're never going to make a dime on it. After all the losses, they now set a record with an 8 billion loss on a 3 billion revenue. If you do take into account that they labeled aQuantive 6.2 billion before writing it off, that would actually mean they incurred 30% less loss with 10% more revenue, but make no mistake - even Microsoft knows they should get out of the advertising bizz.
How can I tell? the OSD Competition paragraph in the annual report has become smaller and more humble over the years:
From 16 lines in 2007, among others
We believe that we can compete effectively across the breadth of our Internet services by providing users with software innovation in the form of information and communication services that help them find, discover, and experience what they want online and by providing merchants with effective advertising results through improved systems and sales support
and still 16 lines in 2010, with the hilarious yet painful
OSB competes with AOL, Google, Yahoo!, and a wide array of Web sites and portals that provide content and online offerings of all types to end users. (...) We believe that we can compete effectively across the breadth of our Internet services (...)
MSFT went to 5 lines in 2012:
OSD competes with Google and a wide array of websites and portals that provide content and online offerings to end users. Our success depends on our ability to attract new users, understand intent, and match intent with relevant content and advertiser offerings. We believe we can attract new users by continuing to offer new and compelling products and services and to further differentiate our offerings by providing a broad selection of content and by helping users make faster, more informed decisions and take action more quickly by providing relevant search results, expanded search services, and deeply-integrated social recommendations
Microsoft and advertising? My guess is they'll just abandon that costly pastime in the next year or so. And they bloody well better...