Microsoft’s Dilemma: Take a Shot at Google with Firefox-Bing Deal or Back Internet Explorer

Microsoft (NASDAQ:MSFT) is one of the largest consumer and enterprise software makers. It dominates the operating system space with the Windows OS, and the office productivity software market with the Office suite. Thanks to Windows, it has traditionally had a dominant market share in the browser market as well with the much ridiculed Internet Explorer. Even now, it controls more than 50% of the desktop browser market with Internet Explorer. However in recent years it has seen a consistent decline in market share due to the growing popularity of competing browsers like Google (NASDAQ:GOOG) Chrome, Apple (NASDAQ:AAPL) Safari, Mozilla Firefox and Opera.

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We currently have a $32 Trefis price estimate for Microsoft, which stands nearly 25% above its current market price. Bing and other internet services account for only around 2% of its Trefis price estimate.

Chrome Might Spoil the Mozilla Party

Google has been one of the biggest backers of Mozilla Firefox to date and has used it as a vehicle to drive innovation and push new open technologies to market. It has also funded Mozilla Firefox’s development by being the default search engine provider in the Firefox browser. More than 80% of Mozilla’s revenues last year were generated by its contract with Google. ^[1]

However, the relationship between Google and Mozilla could sour rapidly, thanks to the explosive growth of Chrome, Google’s own browser. Google launched Chrome in December 2008, and since then it has attracted tens of millions of users. It now has more than 18% share of the global browser market compared to Firefox’s 22% share. It may soon overtake Firefox to become the second most popular browser after Internet Explorer.

As part of its deal, Google paid roughly $100 million to Mozilla to be the default search provider in Firefox last year. Given Chrome’s popularity, there is speculation that Google may not enter into an agreement with Mozilla to be the default search engine provider in Firefox, at least not at the price they paid last year, which could leave an opening for Bing.

Microsoft’s Opportunity

While Internet Explorer has always been and still remains Firefox’s greatest competitor, Microsoft still needs all the help it can get to make Bing a force to be reckoned with in the search engine space, which is currently dominated by Google. While Bing has been making some inroads in the U.S. market, it still has only around 4% share in the global search market. This climbs to around 10% after adding Yahoo’s market share given their agreement. Google on the other hand has around 84% share.

This could mean that Microsoft would be more than willing to pay Mozilla to make Bing the default search provider in Firefox as it would definitely help increase Bing’s market share. Microsoft has a track record of using enormous amounts of cash to grab additional market share, at least when it comes to Bing. 

You can see how any increase in Bing’s search market share impacts Microsoft’s Trefis price estimate.

Microsoft’s Biggest Priority: Bing or Internet Explorer?

With Firefox’s user base of more than 250 million users, Microsoft could quickly grab some market share from Google if Bing were to become the default search engine on Firefox. Since a majority of Firefox’s revenues come from search engine provider royalties, Mozilla will have to sign a deal with either Google or Microsoft in order to continue development and other operations.

If Google doesn’t enter an agreement with Firefox this time or tries to drive down the fee by bargaining, Microsoft has a good chance of snagging a deal with Mozilla. Microsoft has already invested heavily in Bing, and the royalties would add very little from these deals. It also could help Bing meaningfully increase its reach, but it also means that Microsoft is funding its biggest current competitor and accelerating the decline in Internet Explorer’s market share.

Herein lies Microsoft’s dilemma. It has two options – fund Firefox and boost Bing’s market share and sideline Internet Explorer; or ignore Firefox and give up the chance to increase Bing’s market share and continue to support Internet Explorer completely. Which is the better move?

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Firefox faces uncertain future as Google deal apparently ends, ZDNet [↩]