#7: MSFT and Search

A longer piece on MSFT which came out of the news that Yahoo bought Overture. THE MESSAGE Mr. Gates and the Hunt for Search Yahoo’s grab for Overture seemed to outflank Microsoft. But wait: Bill’s search-engine strategy is not what everyone thinks. By John Battelle, September 2003 Issue Like TV…

A longer piece on MSFT which came out of the news that Yahoo bought Overture.

Mr. Gates and the Hunt for Search
Yahoo’s grab for Overture seemed to outflank Microsoft. But wait: Bill’s search-engine strategy is not what everyone thinks.

By John Battelle, September 2003 Issue

Like TV broadcasting and the automobile business before it, the Internet media industry has now resolved to the Rule of Three. Of the scores of companies that battled for dominance in the 1990s, only Yahoo (YHOO), Microsoft (MSFT), and Google remain serious contenders. They, along with AOL (AOL), own the lion’s share of Internet advertising and worldwide English-language traffic. Yahoo’s recent acquisition of Overture (OVER) reaffirms, if the idea needed reaffirming, that Internet media obeys the same urge to consolidate as every other industry.

It proves something else, too, about this phase of the Internet’s evolution. The key driver is no longer content, but intent. The business is no longer about selling advertisers the eyeballs you’ve caught with news, images, games, and the like. It’s about selling users at the moment they make their online desires known through their search queries. In plain terms, the engine of Internet media is once again search. (That, by the way, is why I’m leaving AOL out of this discussion. Preoccupied with many other problems, the dial-up giant — a corporate sibling of this magazine — is leaving its search functions to Google.)

Search will account for more than $2 billion in advertising sales this year. It’s predicted to grow at 35 percent annually, to nearly $7 billion by 2007, according to U.S. Bancorp Piper Jaffray. Beyond the numbers, search has become the most important commercial application on the Web. Not only is it the defining task of any portal, but it’s also the preferred doorway into e-tailers like Amazon (AMZN), as well as auto, home, and dating sites. An online consumer business can no longer afford to have poor search capabilities.

By the middle of last year, both MSN and Yahoo had realized that they needed to rethink their search strategies. To profit from search, a company needs three elements, all of which Google already had. First, you must have high-quality “algorithmic” search, which attempts to match users perfectly with what they’re seeking. For years MSN and Yahoo have outsourced algorithmic search to companies such as Inktomi and Google. Second, you need a paid search network, which allows you to display links to paying advertisers alongside your editorial results. Both MSN and Yahoo had outsourced this to Overture. And third, you need your own distribution. In other words, you must own the site where the consumer makes his or her query and the results are displayed. Until recently this was the only element that either Yahoo or MSN truly owned.

By buying Inktomi last December and then Overture in July, Yahoo has taken control of the two missing elements, which arguably leaves MSN in the worst position of the Big Three. Besides having the only site of the three that is consistently unprofitable, it is outsourcing both its algorithmic and its paid search technology to a major competitor. Not exactly an ideal situation.

But aside from Netscape’s early investors, not many people have ever gotten rich by underestimating Microsoft. (more via link below)

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Earlier this summer, just before the Yahoo-Overture deal was announced, big news began rippling through the Silicon Valley grapevine: Bill Gates had seen the next great opportunity, and its name was search. Microsoft had recently posted scores of new job openings in the field, and a new “MSNbot” had been spotted crawling the Web. Within a week Microsoft officials had confirmed the rumor, and Valley dwellers once again invoked Netscape, this time as a verb — as in “Microsoft is about to Netscape Google.”

But Microsoft isn’t out to crush Google, at least not directly. The best way to think about anything Microsoft does is to ignore the market leaders it might squash along the way and focus instead on the market lead it already commands. That has a one-word name: Windows.

Put another way, Microsoft’s interest in search, or Internet media in general, has a lot less to do with beating Google or Yahoo and a lot more to do with ensuring that the next version of Windows has enough features to persuade customers to pony up. For now, potential search profits are a rounding error compared with the billions the company could earn from a new version of Windows.

What makes search an attractive battleground for Gates, apart from its importance to Internet media, is that it’s still in its infancy as a computer science problem. That means there are extraordinary opportunities to create great new applications in the field. “Fifty to 60 percent of consumer search queries go unanswered by any search engine,” points out Lisa Gurry, group product manager at MSN. “No one is successfully doing [search] today,” she adds, echoing a view expressed by many engineers who specialize in search.

If Microsoft acts true to form, it will define “successfully doing search” as “making search a feature of Windows.” Whether this is a wise approach remains to be seen, but the next Windows upgrade — code-named Longhorn — is planned for 2005 (it was originally due next year). And while Microsoft won’t say it quite this way, it’s clear that one of Longhorn’s most marketable new features will be its integrated search functions. Sources both inside and outside the company say that Longhorn will blend local (your own hard drive or server) and Internet search, and will even go so far as to crawl your favorite websites overnight and cache them on your hard drive, creating an extraordinarily fast Internet experience.

If all Microsoft wanted was a great search engine over at MSN.com, it might as well keep its current arrangement with Yahoo/Inktomi/Overture — or fire a shot across the bow of Yahoo CEO Terry Semel and cut a new deal with Google. MSN’s contracts with Inktomi and Overture are staggered across multiple markets and product offerings, and are set to expire by 2005 at the latest. Microsoft could probably wriggle out of them all should it wish to — its execs have already taken to referring to their Overture partnership in the past tense. But in the short term, the company will likely continue outsourcing its search functions while armies of Microserfs labor away on integrating search into Longhorn.

Given the critical nature of search, it makes sense for Microsoft to develop its own code. CEO Steve Ballmer may accelerate the pace through acquisition of a second-tier search engine like FindWhat, LookSmart, or Ask Jeeves — all three companies saw their stock prices jump in response to the Overture deal. But the most far-fetched scenario has Microsoft acquiring Google. While Google founding lights Larry Page and Sergey Brin privately say such a deal will never happen, Ballmer & Co. have $49 billion in the bank, and upon closer inspection, the two companies are not that incompatible. Both have engineering-driven cultures that prize intelligence over all else. To further cloud the horizon, the Yahoo-Overture deal won’t be final until late this year. There’s always the chance that Microsoft — or someone else, for that matter — could make Overture a better offer.

So where does that leave Google? It never pays to underestimate the leverage that Redmond wields with its Windows monopoly, but once search is integrated into Longhorn, the folks at Google should be smart enough to learn from Netscape’s mistakes and step quickly out of Microsoft’s ponderous path. They can simply play to their strength, offering all those frustrated Windows users a better way to find things on the Web. Chances are good there’ll always be a market for that.

John Battelle directs the business reporting program at UC Berkeley’s Graduate School of Journalism. He founded the Industry Standard and was a co-founding editor of Wired.

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