November 06, 2009, 3:50 PM — Throughout its history, Microsoft has earned a reputation for tenacity when entering markets created, and initially dominated, by innovative startups.
Competitors and observers have jeered when Microsoft put out a first basic product that didn't come close to matching the market leader's. But Microsoft has a history of stubbornly staying the course, refining its wares, investing in development, until gradually the products become strong enough to push out the competition.
That was the case with its Internet Explorer browser, its SQL Server database, its Exchange messaging server and its enterprise software applications.
But there is one market where Microsoft's doggedness has failed to pay off: search.
Despite spending hundreds of millions of dollars since the late 1990s, Microsoft has been unable to deliver a search engine whose popularity matches the company's expectations.
Along the way, Microsoft has seen billions of dollars in search advertising revenue flow into the coffers of its hated rival Google, whose stranglehold on this market keeps growing stronger.
In 2008, U.S. online ad spending reached US$23.4 billion, with search advertising taking 45 percent of the pie.
The consequences of failing at search aren't limited to missed revenue opportunities. Rather, the inability of Microsoft, Yahoo and others to contain Google have let it grow into a powerhouse that is using its advertising riches to pursue broad ambitions that threaten to disrupt core Microsoft markets -- office productivity and collaboration software, PC and mobile operating systems, Web browsers, and consumer online services.
Now Microsoft is again trying to get search right. In late May, it launched the latest version of its search engine, which it named Bing, and is reportedly spending $100 million to promote it.
However, it's clear that while Bing isn't a fiasco, it also isn't a marvel with earth-shattering innovations capable of pulling the rug from under Google's feet.
Search-engine experts have praised some of its features as innovative, and Microsoft's downward trend in search market share has been reversed, albeit not dramatically.
"Bing offers a much better experience overall compared with its predecessor Live Search," said industry analyst Greg Sterling, from Sterling Market Intelligence.
"However, it doesn't seem like it will in the near term challenge Google in a significant way. It's not rocketing up to 25 percent or 30 percent of the market," Sterling added.
In fact, the latest signs suggest that, after the initial excitement over Bing's launch and its heavy promotion gave Microsoft a modest market-share boost, it is losing velocity.
According to comScore, Bing's share of U.S. search queries rose slightly from 9.3 percent in August to 9.4 percent in September, while Google grew more, increasing its share from 64.6 percent to 64.9 percent. Yahoo, in second place, saw its share of queries fall by half of a percentage point to 18.8 percent.
While almost flat growth in sequential months has to be disappointing for Microsoft, it's a better scenario than the one painted by Hitwise, another search market researcher. According to Hitwise, Bing actually lost market share of U.S. queries, from 9.5 percent in August to 9 percent in September, while Google grew its share roughly from 70 percent to 71 percent.
With Microsoft apparently unable to improve its lot in search on the strength of its new engine alone, the deal it signed with Yahoo in July is even more important.
For starters, it will give Bing a big boost in queries, since the deal calls for Yahoo to turn off its back-end search infrastructure and route all its queries through the Microsoft engine.
This is important, because the more queries a search engine processes, the more precise it gets at selecting appropriate results, according to Hadley Reynolds, an IDC analyst.
"The number of queries a search engine handles is a pivotal part of the technology, because the way search engines tune themselves to improve the relevance of the answers is by learning from the queries users execute on the system," he said.
Google will still retain the edge in this department even after Bing gets the Yahoo queries, but at least it puts Microsoft in a better position.
The higher volume of queries will also make Bing more attractive as a platform for pay-per-click, text search ads, which the 10-year deal stipulates will be sold by Microsoft. Yahoo will sell premium search ad services.
"Certainly marketers are concerned with reach, so this is important. With the Microsoft-Yahoo deal, you get a stronger second player, so search marketers will take them more seriously," Sterling said.
When and if the deal gets regulatory clearance, its full implementation will take about two years, according to the companies.
