Microsoft Corp. is giving a good reason not to Google. The software company announced a new search model that sees advertisers paying only after a sale and rewards shoppers with cash-back incentives. This is an attractive deal for both advertisers and consumers. But the rewards for shareholders don’t seem so obvious.
The programme works in two ways. When customers find and buy products using Microsoft’s search, they receive ad-funded cash rebates. And advertisers only pay Microsoft when these sales are made. This differs from most Internet advertising, where payments are based on clicks, regardless of whether or not there’s a transaction.
Microsoft isn’t the first company to implement this sort of payment system—Google Inc. offers a similar plan—but it’s the first to provide incentives to both consumers and advertisers. The key factor is whether it will be able to woo them.
Given that online advertisers have longed for a competitor to Google, they will likely flock to a system in which they pay for performance—this is, after all, the whole reason Internet advertising has thumped traditional forms of media. Ebay Inc., Barnes and Noble Inc., and Sears Holdings Corp. have all come on as early partners in the Microsoft programme.
Bringing in customers may be harder. The rebates are certainly one form of motivation. But Microsoft controls less than 10% of the US search market, so there is a problem of scale. If Microsoft succeeds in its ambitions to swallow Yahoo Inc.—with its 21% search market share—the dynamics could shift in the software giant’s favour. But giveaways don’t obviously help Microsoft’s shareholders.
Indeed, from the looks of it, Microsoft’s owners will be subsidising the model with cash flows from the core software and desktop businesses. Google could replicate the model, too. Come to think of it, that may be the aim. If Google spends a little more of its prodigious cash flows to prop up its search business, it might spend less going after Microsoft’s dominance of the desktop.