It’s quarterly reporting season in the US and just like clockwork the cloud cuckoo’s are out in force chirping once again about how Microsoft cannot seem to make money out of being online (See TechCrunch’s When Will Microsoft’s Online Bloodbath End? ).
We have covered this before (Think: Does Microsoft have a future online?) so I thought it may be interesting to examine an alternative, let us say contrarian position, by asking the simple question what if MSN is a loss leader for Microsoft? What if MSN exists as a hook to entice others to “live the dream” and invest their energies and capital in becoming the next disruptive online media baron? Is there an upside in Microsoft is the sale of developer tools, information servers and database engines that might justify the online losses?
Well if you take a quick look at the quarterly financials over the past few years you could raise something of an argument in favour of this strategy. For every dollar Microsoft loses in its online division it pulls in around $5 to $6 in the Server and Tool Division.
The question then becomes why after 15 years keep up the pretense of having an online presence to create interest in the medium and the downstream tool set. Would the market be spooked if Microsoft walked away from online media? or, is the industry established enough to see yet another leading global brand walk away from the online playing field?
As we have seen before online media has never been a game changer for the established media brands. In Microsoft’s case, as with News Corp. and the MySpace saga, the online division accounts for less than 4% of corporate revenues and continues to prove to be a continuing source of industry wide embarrassment.
In the bubble chart below I have mapped the relative size of the quarterly revenues of the key Brands across the 4 key sectors of the MobCon. In the middle is a yellow circle. This represents the relative size of the global online advertising industry in relation to the start-ups and established media players who feed directly off putting ads on the menu and those leading technology and Telecoms Brands who feed the online market by putting in excess of 25% of all those ads placed on the menu.
The green lines illustrate those players who are directly involved in publishing online media (i.e. MSN and Fox Interactive).
The chart is by no means exhaustive. It is merely indicative of the wider landscape. For example key players like Cisco are missing from the Technology space. However even with this small sample of key players in the mix it doesn’t take long for a number of key patterns to emerge from the data.
The first of which is it would appear that Microsoft is the only leading Technology Telco Brand actively participating in the Online Media sector. All the other major players are quite happy to make their money selling the electronic gadgets, software and bandwidth that allows others to make money out of the media space.
The other pattern that quickly emerges is just how much more money there is to be made out of selling the electronic gadgets, software and bandwidth that allows others to make money out of the media space compared to advertising revenue pool that feeds the online media sector.
Clearly it is better to be in the business of selling iPads and wireless broadband plans than be out there trying to get people to buy content for their iPad. By the time it comes to be buying content all the disposable income for “media” is long spent on gadgets and network fees. Which is probably what Rupert Murdoch was alluding to when he made his much quoted statement about “content being the emperor of all things electronic”.
The real business opportunity here is in selling the “armaments and ammunition” to those actively seeking to disrupt the media industry with free content and/or selling the gadgets and the network connectivity to allow the masses to tap into this glut of free content and DIY media tools.
We have seen this trend before when we examined the Australian online media marketplace in more detail. Here the top local and global industry players invested in excess of $75 Billion to create an online media industry that delivered an annual revenue pool of less than $1.25 Billion (See Digging out the value buried in Australia’s $43 Billion National Broadband Network Plan).
In retrospect the only thing the Internet disrupted in Australia was the dividend payments to the long-suffering shareholders who held stock in the companies that bought into the “disruptive information superhighway” mantra of the times.
But I digress.
Back to the original question: If Microsoft walked away from online media would anybody notice? Probably a better question may be who, apart from perhaps AOL or maybe even Yahoo!, would want it? MSN may be one of the top properties on the web today but does that make it a valuable media property? Increasing it would appear the answer to that question is no.
This then is the dilemma Microsoft faces online. If it walks away from the experiment then it signals the end of an era. A failed era where media tried to lay claim to a place online and was found wanting. Not so much disrupted by the web. Just rendered meaningless.
After all if a technology giant like Microsoft and all its media partners couldn’t make money out of media online what chance have the rest of us? But here then is the paradox facing Microsoft and the rest of the technology giants. Take free media out of the online equation and what is the rational for buying all those gadgets and wireless broadband plans? The answer is friends of course and that’s why the focus on So.Me is so intense in the technology and Telecoms market today. If media has proven to be ultimately meaningless online then it has to be replaced with something that does provide meaning. Other wise the whole fauxionary “Disruptive Internet” construct that drives growth across the Technology and Telecoms sectors in the US stalls big time.
So yes, perhaps Microsoft does need to exit its loss leading online media business, but it needs to find the right So.Me vehicle to make the transition to the next wave the market is expecting. This then is the new SMS cloth Microsoft is trying to cut for itself moving forward: Social, Mobile and Search. Much the same as the Google Boys down the road.
Posted on April 30, 2011
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