Marketing Memos

Is desperation the right word to apply to Microsoft?

I avoid using terms of human psychology to describe an entire corporation, but desperation may be accurate. If a person or organization ignores basic principles, and instead chases odd and tangent opportunities, they do so in order to fool themselves, avoiding painful realities and hard work.

Which explains why Microsoft wants to bribe you to use their search engine.

Having failed to produce a competitive solution against Google, Microsoft wants to pay people to use their search engine. In a scheme slightly more complex than the U.S. tax code, Microsoft will reward customers when they buy a product located through LiveSearch. Retailers benefit because they only have to cough-up money to Microsoft when something is actually sold to a consumer (pay per acquisition) and not for the mere lead (pay per click). The system is an affiliate program for sellers.

To make all this work, retailers need to contract with Microsoft. To their credit, Microsoft lined up an impressive array of top-shelf retailers like eBay, Barnes & Noble.com, Overstock.com, Sears, and others.

And it will succeed as well as the iWon search engine (what, you aren’t using iWon?).

Microsoft ignores why people use search engines to begin with, which is to intelligently discover things. When they search for products, these products fall into two broad categories: commodity and specialty. Microsoft’s scheme doesn’t work for specialty products because the customer is often searching for special features from (typically) small vendors.

This leaves commodity products, which creates a problem with Microsoft’s rebate plan. An iPod is exactly the same regardless of it you buy it from Circuit City, Best Buy, and Jersey Frank’s “fell of the back of a truck” Emporium. When the product is identical between retailers, there are only a few significant differentiators, namely price and trust in the retailer. Take it from me, don’t trust Frank.

Which is why a lot of people skip product searches and run straight to Amazon.com, a company that has a solid customer service history and regularly has the best price available.

There have been several studies of search habits for consumers. People use search to:

1. Learn more about the originally desired product.
2. Discover competing products.
3. Find the best deal for the selected product.

Quality of results drives all three items. The quality of search results will most rapidly educate a consumer about the product. A few extra keywords will lead a consumer to competing products and a wealth of comparison sites and customer reviews. And adding the phrase “price compare” after the product name will lead a customer to the best price, typically through many price comparison sites like Price Grabber.

Microsoft is ignoring the fundamental need of the customer. Applying what is essentially a rewards program to search does not improve search, where Google is the master. Instead of adding value where users need and want said value, Microsoft is desperately chasing nothing.

LiveSearch, the next iWon.

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In the all business, and especially in technology, there are three ways to grow: you can innovate product, you can change the rules of the game (marketing), or you can buy your way up (cash).

When I see a hyper-competitive company like Microsoft making a multi-billion dollar plays to buy their way up a market, then I know they failed to innovate or market. And that is the condition in which we find Balmer and Company with their mega bid for Yahoo.

We’ll call the merged company-to-be Micro-hoo?

Microsoft — despite making the Internet a consumer product by bolting a TCP/IP stack into Windows long ago — was slow to see that former Sun CEO Scott McNealy was right when he said “The network is the computer.” The Internet is the only infrastructure bigger than what Microsoft had already created. As such it is a glorious place to make some money. But Microsoft was late to the dance, made many of the same mistakes that predecessors made, and never earned the top tier.

Microsoft’s bid to buy Yahoo for a hefty premium shows they still don’t get it.

Let’s stipulate a few things about the Internet before continuing.

• It’s big. “Really big. You just won’t believe how vastly, hugely, mind-bogglingly big it is,” as the late Doug Adams said about a different universe.
• It is changing faster than any company can create, map, or contain it.
• The real money comes not from trying to create content, but by selling advertising on and around it.

Which brings me to Yahoo, MSN, and AOL. Each has in turn tried to be both an Internet search engine and a content aggregation portal, centralizing a set of content and features with the goal of making their portal the first stop and home page for users.

And the users have largely ignored them.

But they have not ignored Google because Google understands the situation. Instead of trying to corral ever-growing content, Google simply helps users navigate it, and make a buck as a byproduct of that basic service. When content is exploding beyond anybody’s control, there is money to be made merely bring some semblance of order from chaos.

Thus, Microsoft’s move is understandable, confounding, and I believe ultimately regrettable.

It is understandable because when you have vaults full of cash, have struggled to achieve a meager third-place in the search business, and risk having the world’s largest money generator (the Internet) default to someone else’s domain, buying your way out of the mess is quick and relatively painless … at least in the sort term. But it is confounding because Yahoo, for all the nifty things they do, are not innovating the basic function of search — and thus the core source of revenue within the Internet as we know it. Google has maintained this focus, and thus has a 57% share of all searches, while Microsoft has a paltry 14% (which is still a damn sight better than Ask, who had to fire their butler after scrapping up a meager 2% of the market).

Google has added non-search entities to their empire, but not with the goal of becoming a content provider, a strategic mistake made by AOL … and we see where that got them. Even in buying YouTube for a seemingly ridiculous price, Google sought not to centralize it within a walled garden of content, but to make its separately branded content searchable and to drive advertising through-and-around it.

Which brings us back to Micro-hoo? and their goals, which are poorly articulated in public. In their press release, Microsoft was clear that advertising dollars were driving the decision, along with the typical mega-merger drivel about economies of scale (that sure worked well for Carly Fiorina right after the Compaq merger, eh?). Microsoft’s purchases last year of advertising exchange and distribution technology companies (AdECN, aQuantive, ScreenTonic) indicates they have a slightly more thought-out scheme than merely merging MSN and Yahoo, and firing redundant staff.

Yet even if we assume that Micro-hoo? loses none of their respective search traffic in the post-merge melee, their total reach would be around 31% of all searches. This will undoubtedly decline as Micro-hoo? attempts to sew together their Frankenstein monster using left over body parts from Yahoo, MSN, and all the recently purchased trafficking and analytics appendages. The merger will disrupt existing services, annoy users who will be told to vacate one of the other mail/IM/portal services, and yet create nothing new. In short, Micro-hoo? adds zero, and all for a mere $41 billion bucks.

Quite a price to pay in order to be the Avis of the Internet.

What will be more interesting perhaps is merger mania among the bottom feeders. AOL and Ask, both struggling to maintain relevance, may just merge in a last-gasp at life (though combined they currently don’t rack-up even 7% of searches). If they do it will be as ugly as a NASCAR pile-up or a presidential election. Hmmmm, maybe we should put all the presidential candidates into high-powered race cars and ….

Is their a marketing lesson in all this? Of course, and that is that you must have product in order to market something thinker than air. Google has product (search) which they constantly enhance and improve, and reap huge stacks of lucre for their efforts. Micro-hoo? won’t have innovation or a superior product, and thus will have nothing exceptional to sell. If your products are weak, then your first strategic marketing task is to determine what better product needs to be created, and then how to get engineering to build it.

Of course, the company that brought us Vista cannot comprehend a lesson this basic.

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