Wednesday, November 30, 2005

Online Advertising - Why should Microsoft Bother?

This article contains a review of the following Articles from the Business section of the November 17, 2005 issue of the magazine “The Economist”:

The latest in memoware
Classified calamity

Since its inception, Microsoft has been known for its market leadership and extremely ruthless competitive spirit. The company still controls the operating systems of nine out of ten desktops worldwide, and has regularly crushed any competition that it has faced challenging its dominance. In 1995, though it was slow in responding to the threat posed by Netscape, it emerged victorious by adopting a series of measures that eventually forced Netscape to be acquired by AOL. It must be remarked that in the last few years, the prime objective of Microsoft has been to “shape” the adoption of software and the growth of Internet in a way to protect and nurture its monopoly, rather than create newer, pioneering products and services that themselves “shape” the software industry and Internet. Thus it cannot be surprising to find Microsoft missing the Internet wave in 1995, and now belatedly responding to the threat and challenges poised by “Web 2.0”.

How is the web-based software impacting Microsoft today? The following are some of the key points that come up:

Service Based Offering: The threats to Microsoft are primarily from service-based offerings. The examples of service-based offerings can be Internet Search (Google), Online Collectibles (ebay), Online Classifieds (Craigslist) and Online Maps (Mapquest, Google, Yahoo). All you need a web browser, irrespective of the operating system you run, and you can get your task done. Technologies like AJAX are breaking the stranglehold of the Desktop on the rich User Interfaces (AJAX is the technology that allows for rich user-interface demanding applications like Google Maps or Amazon’s A9 run effectively inside a browser). It is interesting to note that the Economist criticizes Microsoft for inventing AJAX in 1998, but failing to exploit it further. It is more likely that if AJAX was developed and refined further by Microsoft, it would be the threat to the dominance it enjoys in the Desktop arena. It is more of a strategic choice, rather than the failure to extend technological breakthroughs.

In pure economic terms, the service-based offerings can be considered to be complementary products. Thus Google Search is a complement to Microsoft Windows (or Linux), and at the same time, Microsoft Windows is a complement to Yahoo’s email service. The availability of Yahoo Email at a commodity price (free) encourages more people to buy Microsoft Windows for sending and receiving emails. However the whole idea of complements is that one always tries to make its complements available for free or at commodity prices. If CDs are available for a commodity price, more CD players get sold. In the case of Microsoft Windows, the complements are already available for free (in most cases) and it is an advantageous situation for Microsoft, but not for its competitors. The competitors delivering the complementary products cannot charge a higher price, and at the same time, in order to grow, they need to move Microsoft Windows to the commodity side of the equation. By delivering the web as a service (from web based email today to web based word processors tomorrow), that is what they are exactly trying to do: make the operating system and word processor a replaceable commodity. These service-based offerings make the choice of Desktop and Office tools immaterial, threatening Microsoft’s stranglehold.

Sustainable Business Model of Competitors: Companies like Google are challenging Microsoft’s might. Google obtains its revenues exclusively from Internet Search Advertising. This model, pioneered by Google, shows that although it costs a few pennies per click for advertising, the power of technology makes it feasible to collate these individual clicks, and a million clicks do turn out to be sustainable revenues. People make billions of clicks on the web every day and each click entails the delivery of value and thus an opportunity to make money. A penny isn't a lot of money in itself, but when you start gathering millions or billions of them, you've got a business. Microsoft’s monopoly does not give it any strategic advantage to arm-twist these companies on pricing, bundling or delivery.

Disintermediation and Hyper mediation: These online intermediaries like Google and online classifieds advertisers are leading to disintermediation and hyper mediation. Newer online intermediaries disintermediate the traditional newspapers for classified advertisements, and at the same time create new powerful hypermediaries in themselves. They practically control what and who gets seen, and what gets sold. Search advertising that sustains the revenue models for Google and Yahoo is accounting for a large chunk of online advertising (upto 40% of the market). In addition to creating powerful intermediaries (Google, Yahoo) who control the way products and services get highlighted, online advertising is something that Microsoft does not have much of a control on. Its online service MSN still lags behind the ones provided by Yahoo and Google, and repeated attempts to shore it up and refine it have proved futile.

To summarize, the above discussion highlights the fact that even seemingly unrelated developments like shift in classified advertising from print to the web and attempts by Microsoft to compete against web based software can be analyzed using a common scale of competitive analysis. The move of classifieds to the web strengthens the positions of players like Google to act as intermediaries. This makes it tougher for Microsoft to dislodge these service providers as they are able to create sustainable business models around their search and advertising position, further fortifying it and then graduating to attack Microsoft’s monopoly in the Desktop and Office productivity arena.

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