Microsoft's Cash-Back Search: Return of the Sneakerphone

Microsoft’s (MSFT) effort to bribe/reward/cajole ecommerce search business away from Google (GOOG) with customer rebates is the product of dubious business economics. It’s a trap: a customer acquisition cost that becomes a habit hard to break.

It’s just like premiums given by magazines to get you to subscribe. When I was at Time Inc. in the ’80s, Sports Illustrated had a big hit on its hands — or so they thought — with the Sneakerphone, free with your subscription. Time and other of the company’s magazines followed with clocks and other geegaws. In the end, though, they found that people weren’t subscribing to the magazines; they wanted the Sneakerphone and when it came time to renew, because they already had what they wanted, they canceled — and renewals are where magazines begin to see a return from their marketing to acquire subscribers. Advertisers eventually realized that they weren’t talking to readers; the magazines were the premium. The Sneakerphone turned out to be a very expensive problem. It took painful effort for Time Inc. to ween itself and its subscribers from the expectation of freebies with subscriptions.

Microsoft’s fees are a marketing cost, pure and simple. The company could pay to advertise its search or it can pay consumers to search. I’m glad to see money going into the pockets of consumers — the internet dividend strikes again. But I doubt that these economics are sustainable; this is just an effort to poke Google in the kidneys and I doubt that the giant will even notice. This is akin to Mark Cuban’s sillyass idea to pay/bribe/reward/cajole advertisers into leaving Google.

Michael Arrington has a well-done analysis of the Microsoft gambit. He concludes that it could increase Microsoft’s share of valuable commerce search:

A year ago Microsoft basically did a trial run of Live Search CashBack with Live Search Club, which lured searchers to Microsoft with offered of prizes to users for using Live Search. Microsoft went from 10.3% to 13.2% market share in a month, a nearly 30% rise. Live Search CashBack, which gives a much more straightforward payout to users, should see significantly better results.

But earlier in his post, I think he defeated that argument when he said, quite rightly:

This is a winner-take-most market: Having 9% of search doesn’t mean Microsoft has 9% of search marketing dollars. Far from it - publishers go to Google to partner on ads, which means advertisers must go there to get inventory, and a very healthy auction system pushes up prices. So not only does Microsoft (and Yahoo, and everyone else) have much fewer queries than Google, they are also generating much less revenue per query as well.

Right. So Microsoft pays heavily to raise it share but still doesn’t get critical mass. Then let’s say that Cuban gets on the board of Yahoo and convinces them to follow his plan and they lower their profit margin by paying advertisers, forcing Microsoft to do likewise. And what will they be left with? A warehouse filled with sneakerphones.

Is there a way to defeat the Google beast at search? Not this way. How about the Mahalo or Wikio method? I’m not sure about them either. They all have to try to change what is already a well-ingrained consumer habit and a critical mass of advertiser participation.

Does this mean that search is Google’s forever? Well, I still don’t see anything to topple them — certainly not Microsoft’s plan. It has been tried before. Remember IWon.com? I barely did.

Comments

[teriyaki]

This cashback scheme is based on Jellyfish.com which Microsoft bought awhile back. As usual you Monday morning quarterbacks miss the point.

[Lisa]

Teriyaki, can you explain why this misses the point, other than the fact that this was an acquisition?

[David Tsao]

Microsoft just needs to build a better search engine, plain and simple. Incentive gimmicks don't work. If you want me to use your search engine, make it good so that I use live.com to find something... not for some cash handout. At the end of the day you haven't solved my problem which is to find something quickly and that is also relevant.

I'm not sure who at MSFT conjured up this idea, but my guess it was some "ingenious" idea that arose from the marketing team. Get back to the basics. You have a smart engineering team, leverage it.

[David Tsao]

To continue the argument... I decided to try live.com to search for the one of the hottest things around now... the Ninentedo Wii.

search.live.com/result...

What you end up seeing is the top half of the page reserved for sponsored links, and videos. I have to move down to the bottom half of the page to see my search results. What makes Microsoft think that I care for videos?

Just give me what I want.

[CrossProfit]

Lisa,

In the business world, whenever a competitor comes out with a new idea to enhance their own business at the expense of profit margins to the industry, it is ALWAYS pooh-poohed by the entire industry. All jump on the bandwagon in a collective attempt to dismiss/destroy/belitt... the initiative.

Not all marketing ideas catch on. Some do and some don't and sometimes for reason unforeseen both for successes and failures. However, if Cashback does catch on, the author will be eating his hat in front of Macy's window.

The author has written a classic pooh article stating that MSFT could have done this or that so why do this! There is no in depth analysis relating to the marketing idea itself or tenable explanation as to why it wouldn't achieve its objective. The attack is on the objective itself! This is how you differentiate between pooh articles and those that offer insight into the chance of success. Neither you, we nor the author have the necessary knowledge to determine if the objective is a sound business decision as this is NOT like expanding through acquisition etc. This is like a company deciding to advertise on this TV channel instead of that one. You need the inside information before you can question the relevancy of the decision. One thing for sure though, it's going to cost a heck of a lot less than paying $40B for Yahoo!

Read Arrington's article here:
seekingalpha.com/artic...

It is now up to the MSFT execution team to see this through. They will not get a second chance at this. Also, if it works, there is always the possibility that Yahoo! will join in one way or another. There could be a swap; Panama or search tech for Cashback or some sort of sharing arrangement leaving the two totally independent as 'friendly' competitors (humor).

CrossProfit