If You Can't Buy Yahoo, Maybe You Can Buy The Customers

Microsoft is trying to pay users to shop online with its Live Search. According to a BBC story:

Under the cashback service, the software giant promises to pay back a portion of the purchase price of anything shoppers buy online from any of its 700-plus selling partners who are offering more than 10 million products.

Among the big box retailers who have signed up are Barnes & Noble, Sears, Overstock.com, Home Depot, J&R Electronics and a host of others.

Money will be paid either via PayPal, a cheque or into a user's bank. It will only be open to people living in the US.

The story then quotes Om Malik, a tech heavy weight and founder of GigaOm, as saying, "This is not going to affect Google. Google is so much better." I'd have to agree that it's no great shakes, but more because I think it's simply a bad business idea.

This is not the first time Microsoft has tried paying users to switch to its search technology. Last July there was a report on how it had fared. My comments then still go: this is bribing consulers, and the result is attracting only mercenaries who will be gone at the hint of the next offer. The only way you keep them is to keep increasing the incentives. In short, paying people is a tacit acknowledgment that you offer nothing else they might value. That means the cost of maintaining the customers will be extremely high and they will feel virtually no loyalty to the vendor, just loyalty to their billfolds.

Now lets add the new wrinkle. This is money back for purchases made from searches. Given that Microsoft wants huge markets, they are probably assuming that this should be a big part of the search business. But how often does a search end in an immediate purchase? I'm guessing fairly seldom. People and companies buy according to their own schedules, not to the seller's. What if they use search to get information and eventaully get around to buying days, weeks, or even months after? Google keeps that business and that means so many more times to help tie the customer close.

Furthermore, if this was such a good strategy, why didn't it work so well when Microsoft started it last year that they didn't need to try and buy Yahoo? What Microsoft needs is not an old strategy based on where they were, but a new, forward-looking stategy based on where they want to go. The more they stick with the old playbook, the more they are stuck in an old game, while Google and other companies are in a different open field using different rules.

Early Results of Microsoft Buying Search Audience

An InformationWeek story notes that MSN and Microsoft Live slice of search volume jumped from 8.4% in May to 13.2% in June, according to Internet metrics company Compete, and that what has increase business is prizes for users:

"A good portion of the additional Live searches are coming from the Live Search Club, where you can apparently play games for points which you can redeem for fine Microsoft products," said Steve Willis, a Compete analyst, in a blog post Monday. "All of the games involve using Live's search engine - to get the points, you have to search with Live."

Much of the story looks at whether this is realistic, but even if it is, this actually isn't good news for Microsoft. This is a classic example of bribing customers - I actually mentioned it here in April. Glad to hear that volume may have increased, but the problem still remains that this is not sustainable customer development. The theory is that if you bribe people to do business with you, some amount will remain out of habit so that when the bribes (whether called rebates, subsidies, or by another name) eventually stop. That might be true, but does anyone check the profitability of these "catches?" Someone drawn nothing more than one company's freebie is subject to being distracted by another's, and so the likely lifetime value of said customer mercenary will be low. Compare that with the acquisition costs, and it could be that you're actually losing money with each increment.

Short Blog Postings Don't Provide Big Business Value

Jakob Nielsen, a major expert on usability in web design, has an entry in which he argues that business web sites are generally better off with well-executed articles than with blog postings. His argument is that blog postings - particularly "numerous short comments on ongoing blogosphere discussions" - are insufficient when a company has long sales cycles and the need to build long-term relationships with customers.

Although there is an irony here in my commenting on his comment not to comment, I have to generally agree. Any corporation communication strategy must start with a business strategy. Slapping something up on the web isn't necessarily the wise thing to do. After all, just because you can serve whipped cream and cherries on pan-fried calf liver doesn't mean that you should. If you're just looking for traffic and don't need any sort of sustained connection with the audience, then, sure, have a blog. But when you do nothing but offer surface remarks on what others have written, you aren't providing much value.

Offering value in writing really means showing an audience that your experience can provide them with value. As your experience is the key, there is an understanding that they won't necessarily get the same thing elsewhere. If all you do is point to other sites, then you've become a portal or cheap news aggregtator. Psychologically you're saying that you are only in business because others let you. In that case, why bother with you? Why not go directly to the real sources?

Nielsen makes an even deeper point, I think, in noting that even experts are going to have a range of quality in their postings, and if they are doing the short stuff often enough, there will be times when the postings of others are better - even much better. Those occasions serve to deflate the reputation of the experts, who now look as though they can't do any better than the average person on the web. He then argues that with enough deep content, an expert can find an audience willing to pay for the information - basically reinforcing an idea I've been considering recently that the future of writing and publishing is in micropublishing good material at premium prices to dedicated audiences.

So most businesses, if they aren't satisfied being commodity entities (and some will be - and that's fine, if the business model makes sense for you), should consider how they provide content on their web sites. This also brings a question about some of the fundamental strategies of search engine marketing that I've seen. Many companies on the web try to create content that maximizes search engine potential, so that more and more people come across their site. That's fine so far as it goes, but then there's an unstated assumption that more people mean more business and more profit.

Anyone who has dealt with data-driven marketing and direct response marketing will know that isn't necessarily the case. Prospects often fall into groups, and not all groups are alike. Look at Sprint, which just dropped 1,000 customers they called customer service too often, which means the company (hopefully) did a profitability analysis to see that the former customers didn't bring in as much profit as others. Or consider a classic direct mail issue, in which two mailing lists with apparently identical characteristics respond entirely differently, and at different rates, to the same offer.

The SEO marketers assume that more is better, but it could be that the people searching most often are not necessarily the most ready to buy, or even to enter a relationship with a business. So posting material packed with specially chosen search terms might drive traffic, but the wise business sees if it drives sales. Understand the value your best customers need and find a way to provide it.

Microsoft Yodels Yahoo

(The following is a story of mine running translated right now in Newsweek Japan)

It only took one initial report a little over a week ago about potential merger talks between Microsoft and Yahoo to generate some of the biggest buzz the online industry has seen. Even as further stories suggested that the two companies were actually considering a strategic online partnership, interest was still intense because of one word: Google.

The search engine company has competed online with Yahoo and Microsoft and thrashed them both, becoming the premier destination for finding information and delivering ads. And so Yahoo and Microsoft hope that somehow the combination of the former’s audience – the top ranking web destination according to site ranking service Alexa.com, with visits from more than 25 percent of all global Internet users – and the latter’s technology leadership might let them compete more effectively.

Were this any other industry, the combined forces would be powerful: almost $51 billion in 2006 revenue and well over 80,000 employees. However, on the Internet, size isn’t enough. Customers must identify a company and its site as the preferred spot to get something done, whether to keep in contact with friends, share video, get news, or look for some piece of information. Lack that connection with people, and your business is bound for bad times. Microsoft and Yahoo is just one example in the online industry of how companies are trying to use alliances to gain a spot in the hearts of customers – though it’s not clear that the approach will often work.

Finding examples of corporations that are using acquisitions for greater customer contact is easy. For example, Yahoo bought the popular photo sharing site Flickr (recently closing its own service, Yahoo Photos, because so few people used it). News Corp acquired personal networking destination MySpace as part of Fox Interactive Media, the Internet division the company created in 2005. “That’s working out quite well,” says a top venture capitalist Todd Dagres of Spark Capital. “MySpace already had presence in the online world that Fox didn’t.”

The difference between these acquisitions and a possible Microsoft-Yahoo marriage is that they were targeted at popular but still niche properties that had enthusiastic customer bases. Amalgamating more broadly based companies, however, is too unfocused. Unless companies can catch the eye of the public, they will remain stuck where they are as their competitors blow past them.

Google is a danger to Microsoft and Yahoo because it competes with them in the vital areas of search engine services and online advertising, being far more successful at both. According to NielsenNetRatings, Google’s share of U.S. searches in March was 53.7 percent, while Yahoo had 21.8 percent, and Microsoft, 10.1 percent. So Google brings more people in who want information.

Then it delivers small ads whose content matches the search terms that users choose. The result is advertisements that people often actually want to read – and many advertisers willing to pay lots of money to Google. According to Karsten Weide, program director of digital media and entertainment at market researcher IDC, Yahoo was the online advertising leader until 2005, when Google blew past them. Last year, according to research firm eMarketer, Yahoo had 15% of U.S. paid search advertising, compared to Google’s 58.7%, and next year it projects Google as taking over three-quarters. “It’s dominant already and growing so fast that it will be difficult for the other players to catch up,” he says.

That spells trouble for the other two. According to Yahoo’s 2006 annual report, 88 percent of the company’s revenue came from advertisers. And while 80 percent of Microsoft’s income is from selling copies of Windows and Office product families, the company sees its economic future elsewhere because the old software lines are now mature businesses that are unlikely to offer high rates of business growth. Before becoming vice president of media development at PodTech.net, Robert Scoble was a Microsoft developer who also wrote a popular blog about the company. He remembers upper management stressing two years ago “that the growth of the company will come from advertising, not from selling another copy of Windows or another copy of Office.”

Yet Microsoft’s online advertising revenues have been flat at about $2.3 billion for the last four years while the industry has grown at an annual rate of over 30 percent, according to Weide. That means the company has faced a constantly declining market share. “I’m at a loss,” he says. “How do you pull zero percent in a growth climate like that? It’s an accomplishment in itself.”

The problem is that bigger is not necessarily better on the Internet. The attitude comes from an old strategy of traditional industries. By acquiring other businesses, a company could create economies of scale, driving down manufacturing and distribution costs and pressuring competitors. On the Internet, though, a small and reasonably funded company can quickly reach millions of consumers: look at MySpace or YouTube.

Microsoft’s difficulty is that it understands selling packaged software, not the media world of online, so it tries to copy someone else’s success. According to Scoble, Microsoft is preoccupied with FOG – fear of Google. “Microsoft has some technologies that are really good, but they’re in clone world right now,” Scoble says. “They’re trying to clone everything that Google is doing.” For example, Microsoft is emphasizing online ad sales and even giving away use of software business applications on its Live.com site. Unfortunately the drive to copy another means that the company remains reactive to the Internet and not developing the new services that will catapult it to the lead among consumers.

Yahoo has a grasp of media, but can’t force how consumers will react. Look at its acquisition of photo sharing service Flickr. That step was necessary because Yahoo’s own photo sharing service, Yahoo Photos, simply never caught on with users. “Now you’re going to bring that together with a behemoth like Microsoft and be able to operate in a nimble and innovate way in an industry that really thrives on rapid [change]?” asks Willan Johnson, formerly a vice president at Yahoo and now general manager of SupplyFrame.com. “Many have speculated that if that deal went through, you’d want to buy Google stock.”

In the view of Kim Caughey, a senior investment analyst at Fort Pitt Capital Group, the combined entity would have a hard time hiring the “cool people … to continually create new products to drive people to your web sites and capture eyeballs.” They would find a large-scale company a bad fit. “If they have a really great idea, venture capital will give them money,” she says.

Smaller entrepreneurial divisions might do the trick, but large companies typically don’t have interest in such endeavors because the returns are too small. Scoble found this when he worked at Microsoft and in 2005 urged management to consider purchasing such companies as MySpace, Flickr, or Internet phone service Skype when they were much smaller and less expensive to acquire. “I was telling them to pay attention to something that hadn’t yet sold for $20 million,” he remembers. “I asked, ‘Why aren’t you doing things in this market?’ and the answer was, ‘We’re too busy … running multi-billion dollar businesses.’” By the time large companies see the value, it’s often too late to acquire the truly innovative businesses that are now literally worth billions of dollars.

There still might be sense in a close alliance between Microsoft and Yahoo, even if not for an online consumer market. Caughey says there might be natural synergy for corporate customers – an integration of Microsoft’s commanding presence on desktops with Yahoo’s search technology. The two could become a way to pull together data scattered throughout a large company in the form of word processing documents, spreadsheets, and other files – an area that has caught Google’s eye. Or Yahoo and Microsoft could develop software and systems that would allow others to create the next big thing for consumers. Maybe even Google developers could give the products a test. They probably wouldn’t have to search too hard to find them.