Can Microsoft Improve its Search Revenues with Facebook?

Microsoft (NASDAQ:MSFT) Bing’s search market share in the U.S. is expanding and currently stands at 14.7% according to research firm ComScore, driven by increasing number of searches conducted online particularly through use of mobile phones. ^[1] But the same cannot be said about its revenue per search (RPS) which is still a cause for concern for Microsoft. Notably Yahoo (NASDAQ:YHOO) and Microsoft entered into a search advertising partnership in 2009 to boost their search revenues. Yahoo’s ads are powered by Microsoft’s adCenter platform, which has had consistent technical issues and has resulted in lower RPS for both companies. Yahoo’s ex-CEO Carol Bartz has also publicly blamed Microsoft for Yahoo’s lower search revenues. ^[2]

However, Microsoft is experimenting with newer features like incorporating Facebook’s social graph data in Bing search results, which can be a threat to Google (NASDAQ:GOOG) and its +1 initiative, and a boost to Bing’s search ad revenues.

Our complete analysis for Microsoft’s stock is here.

Declining RPS Still a Concern for Bing

Microsoft’s revenues from online services division (Bing, MSN & aQuantive) grew 17% last quarter and 15% for fiscal 2011. The company saw increases in both search and display ad revenue aided by share gains in the U.S., but its RPS has seen a decline. Microsoft attributes this decline to technical issues with its adCenter (and is working to sort that out) as well as lower volume of traffic from combined Bing-Yahoo properties.

Due to the lower volume of clicks, Microsoft had to bear the costs for RPS guarantee to Yahoo which together with traffic acquisition costs amounted to $641 million for fiscal 2011. ^[3]

Facebook Integration Could Improve Bing’s RPS

Bing’s integration of Facebook’s social graph into its search results is a big bonus for Microsoft. Through Facebook’s “Instant Personalization,” Bing can pull a user’s publicly available information such as “likes,” posted links and other recommendations. Other features include shared shopping lists and flight planners where friends can share ticketing information to get the best deal.

Google has its own +1 feature that is similar to Facebook’s “like” and is used for promoting products based on the number of clicks. There are two problems to this: +1 has to be added from the main search results page before clicking on the page, and second, Google doesn’t know who the users are in terms of age, gender, needs, attitudes, etc. ^[4] However, Bing can access these finer details through Facebook, which means it can provide more personalized ads to users and this can boost its search revenues as well as RPS.

While we estimate Bing’s revenue per search (per 1,000 searches) will decrease from $12.20 in 2012 to $8.60 by the end of our forecast period, Trefis members expect a decrease from $13.10 per 1,000 to $11.90 during the same period. Bing, MSN and aQuantive account for less than 5% of Microsoft’s stock price by our analysis.

We currently have a Trefis price estimate of $28 for Microsoft’s stock, about 10% above the current market price of $24.75.

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

1. comScore Releases August 2011 U.S. Search Engine Rankings, Sept 13, 2011 [↩]
2. The Yahoo Search Revenue Disaster, SearchEngineland, April 20, 2011 [↩]
3. Microsoft Reports Record Fourth-Quarter and Full-Year Results, Press Release, July 21, 2011 [↩]
4. Why Microsoft’s Facebook Alliance Really Is a Threat to Google, Adage, June 24, 2011 [↩]