Microsoft loses about $2.5 billion annually with Bing

Microsoft may be thinking about trading its Bing search with Facebook for more of the social network's shares once FB goes public.



According to Rick Sherlund of Nomura Equity Research, who has a Buy rating on Microsoft and a $37 price target, Bing is an unnecessary burden to Microsoft at this point.

"Microsoft loses $2.5 billion a year with Bing, and that's a 7-percentage-point hit to operating margin, so it's huge," said Sherlund. "Investors have not been a fan of that line of business for a long time. They just don't see the rewards."

Sherlund added that Microsoft's decision to unload Bing onto Facebook would make sense because Microsoft really has no business being in search to begin with. Originally, the company probably did this to give Google some competition, but surrendering Bing to Facebook would give Google more of a run for its money.

Instead of search, Sherlund believed that Microsoft should focus on its strengths, which are operating systems, its gaming platform Xbox 360 and Xbox Live, and mobile touch-screen technologies.

Breaking up with Bing and gaining Facebook shares could also allow Microsoft to monetize its services like Xbox Live through Facebook without all the additional headaches associated with owning it.

"In order for Microsoft to have monetization through search or display ads, they could just turn over the work, the costs to Facebook, and get it back in TAC [traffic acquisition costs]," said Sherlund. "They would still get 80 percent to 90 percent of the revenue returned through TAC, they would end up getting most of the revenue anyway."

The advantages are there, and Sherlund isn't the first to recognize them. According to Forbes, a new e-book for Amazon Kindle called "The Facebook IPO Pitch," which was written by an anonymous author claiming to run an internet advertising and marketing firm, made the same claims.

Back in July, The New York Times wondered why Microsoft didn't hand Bing over to Facebook as well. More recently, CNBC reporter Gary Kaminsky brought the idea up and spurred more conversation on the topic.

If Microsoft were to give Bing up to Facebook in exchange for additional Facebook shares, it would have to be after the social network's initial public offering (IPO). Microsoft could possibly get 1 to 2 percent of Facebook's approximate valuation, which is $75 billion to $100 billion.

A leaked Microsoft road map shows that the next version of Office won't ship until the first quarter of 2013, according to the Dutch developer who found the document.

Maarten Visser, the CEO of Meetroo and a decade-long Microsoft partner, stumbled upon the road map a week ago after clicking on a link posted on Microsoft's Dutch website. The PDF was not password protected.

"I'm always curious about the road maps," said Visser in a YouTube video he posted yesterday. "For me, since we build SharePoint applications, the release of SharePoint 15 is an important thing. The better I know when this will happen, the better I will be to ready my products before launch."

Visser's Meetroo is building project management software that relies on SharePoint.

While Visser noted that much of the information in the roadmap was already known -- that Microsoft will release a public beta of Office alongside betas of supporting products like SharePoint and Exchange -- he pointed out that the document pegged the suite's final release as the first quarter of 2013.

The road map's date for the public beta, however, doesn't jibe with Microsoft's recent comments.

On the road map, the Office beta was marked as smack-dab between the third and fourth quarters. While Microsoft has not yet revealed a detailed timetable for Office, two months ago the executive who runs the Office group, P.J. Hough, said "Everyone will have the opportunity to try the Office 15 public beta later this summer." To meet Hough's "summer" promise, the beta would have to appear in the stretch between late in the second quarter and near the end of the third.

Microsoft has not assigned the next Office an official name, but has used "Office 15" as a placeholder. The road map used the same label.

Another section of the road map showed timelines for Windows -- both client and server editions -- as well as IE10 (Internet Explorer 10) and Windows Phone.

Windows 8's schedule was bare, with only last September's Developer Preview marked, and others, including Windows Server 8 -- which is expected to launch at the same time as the client editions -- simply showing a label of "Historical Release Cadence" that stretched from mid-2012 through early 2013.

Most experts anticipate a formal release of Windows 8 -- at least the desktop version -- in the fourth quarter, possibly October, because they assume Microsoft wants new Windows 8 PCs on shelves during this year's holiday sales season.

IE10's launch was marked as some time in the second half of 2012.

Microsoft has published its numbers for the third quarter of its 2012 financial year and the company reports record revenue for the period with double digit operating income growth. Revenue for the quarter was $17.41 billion, up 6 percent year over year. Operating income was up to $6.37 billion, a 12 percent rise on the prior period. Net income and earnings per share were both down, at $5.11 billion and $0.60, respectively.

In the second quarter, the Windows and Windows Live Division showed a drop in revenue, attributed to a slow PC market and hard disk shortages. The situation seems to have picked up. Third quarter revenue was up 4 percent year on year at $4.62 billion, with operating income growing 5.7 percent. The underlying PC market grew by between 2 and 4 percent. Business PCs grew by 8 percent and consumer PCs excluding netbooks grew by 6 percent. This was a much stronger performance than in the second quarter, in which business PCs grew by 2 percent and consumer ones fell by 6 percent.

Microsoft said volume licenses grew by double digits, and that 40 percent of enterprise desktops worldwide were now on Windows 7.

Microsoft Business Division revenue was up 9 percent year on year at $5.81 billion, and operating income up by 14 percent. Office 2010 continues to perform well, with Software Assurance revenue up 13 percent, transactional revenue up 5 percent. SharePoint and Exchange also experienced double digit growth, with Lync revenue growing by over 35 percent. The company's Dynamics range continues to steadily expand, with overall revenue growth of 11 percent, and a 30 percent increase for Dynamics CRM. The CRM product now has over 2.25 million users globally.

The Server and Tools division was up 14 percent year-on-year with revenue of $4.57 billion, and operating income up 29 percent. This growth was driven primarily by SQL Server, which had revenue growth in the high teens. The System Center range of products also had a good quarter, with revenue up more than 20 percent. Enterprise Services grew by 21 percent.

Online Services Division continues to struggle, but continues to head in the right direction. Its revenue was up 9 percent to $0.7 billion, and its operating loss was cut by 38 percent. Advertising revenue was up 9 percent. Bing showed a small quarter on quarter gain, now powering 15.3 percent of US searches, up from 15.1 percent last quarter.

The Entertainment and Devices Division was the only loser: revenue is down 16 percent year on year, at $1.62 billion. The group has gone from a $0.21 billion operating profit in third quarter 2011 to a $0.23 billion loss this quarter. Xbox 360 sales have declined sharply, down 48 percent year on year, though it retains its top spot in the US market, with a 42 percent share, and market-leading sales for the last 15 months. The company neglected to offer any Windows Phone sales figures.

In its guidance for next quarter, Microsoft said that it expects Windows division revenue to continue to be influenced by the overall PC market, with stronger performance in business markets than consumer, and emerging market growth outpacing developed market growth. For Business Division, Software Assurance licensing (about 60 percent of total revenue) will grow in the low double digits; transactional revenue (the remaining 40 percent) will lag changes in the PC market.

Server and Tools transactional revenue (30 percent) will track hardware sales. Multi-year license revenue (50 percent) and Enterprise Services (20 percent) are both expected to see growth in the high teens. Online services expects improvements and greater operating efficiencies, and the Entertainment Division expects revenue to grow in the low double digits.