Microsoft pays you to search: the war on margins has started

Recently Microsoft has announced the Live Search Cashback initiative. An interesting product that, if successful, can have far reaching consequences. And I am eager to see how it does.

Live Cashback gives you money back for shopping with selected merchants. Easy: make a search for a product (try here), select the appropriate result (or refine search by category) and you are presented with a nice page with the product description and a list of merchants with a few data about price: you’ve got the store price, the cashback you get if you purchase from that merchant, and the bottom line price (inclusive of shipping costs). If you make the purchase, the cashback is accrued in your live search account and you can claim it back as soon as it reaches 5$. You can’t really say you are paid to search, more like you are paid to buy, which is not a bad thing either. Cashbacks are interesting: from single percentage points up to 30%, apparently. I have seen a 15% myself, which, on an item of 300$, is not bad.

About the model. The advertiser decides the cashback to the customer, so it looks like it is the advertiser paying, and not Microsoft. Not really, I would say, as you expect the advertiser to manage its campaign against an ROI target, and it will adjust the CPA accordingly (downward). Yes, CPA, because cashback works on a CPA basis for the advertisers. So, at the end of the day, it is Microsoft that pays you, not the merchant. And it is paying you from its margins.

All this happens only in the cashback section of live search. Supposedly, in the “usual” live search you would see a dollar icon for every advertiser that has a cashback offer.

Even with just the few details about pricing that I have, I’d like to write down a few considerations on this model and try to take it to its extreme consequences if fully rolled out and successful:

1. right now, it is limited to a “shopping comparison” framework, so I am not sure it will have a huge impact. It is a test bed. Clearly, for the migration into the mainstream sponsored search, a few things still need to be figured out. This is how you treat things that can potentially disrupt a pretty good monetization model: you test them in a controlled environment, you learn, and you adjust
2. it’s a first step in the direction of CPA, and Microsoft will be accumulating knowledge about the ins and outs of advertiser practices in such a framework
3. it’s an interesting alternative model to shopping comparison, and shopping comparisons will have to take it in consideration if it flies, and maybe adapt
4. it might prove extremely valuable for merchants, but maybe not so much for Microsoft. Merchants might discover that the first position, with the highest discount and the lowest bottom line price, converts better than the lower position, with a lower discount. This makes sense: if you are about to buy, you go for the lowest price. The lowest price might catch most of the conversion. If this is true, advertiser will trade CPA for cashback, and users will rip the benefits. MSFT margins will be massively squeezed
5. as it is, this cannot be a distribution model. With falling margins, monetization will be hit and there won’t be much left for the publishers
6. i presume if the economics work, Microsoft might integrate it with the mainstream search and increase the number of merchants in the program. They will do this with the hope that the economic incentive drives more searches toward Microsoft
7. they don’t necessarely have to be searches, they can just be “conversions”. If the model works and Microsoft manages to capture more conversions on their properties (at detriment to Google), then Google monetization will start decreasing. It is a war on margins before it is a war on users
8. the nuclear scenario looks something like this:

• cashback spreads around and attracts users at the end of the purchase funnel
• conversions migrate from other search engines toward Live as Live offers the best prices which are not accessible elsewhere
• as conversions migrate, incentive to advertise on other search engines decreases and their CPA will go up as a consequence of falling conversions. Price will have to go down
• With PPC falling, monetization weakens and revenues at other search engines fall accordingly
• if this really happens, other search engines will have to find smarter ways to deliver the value to their advertisers, or they will be forced to enter into a similar monetization model and start a margin war
• this would squeeze the industry margins, but it is less of a concern for Microsoft (with less than 10% market share) than it is for Google and Yahoo

If this is Microsof’s “secret” plan, then it really is an attack to the core of the monetization model of its biggest competitor with the goal to disrupt it. It would be a kind of “if I cannot win, then I better make sure you can’t win too” plan. But Microsoft can afford it (with its revenues stream still solidly anchored to their application), while the others cannot. Taken to its extreme consequences, if successful this might disrupt the advertising-funded applications threat that in turn could disrupt Microsoft monetization model.

Clearly, however successful the product is going to be, Microsoft won’t be able to increase the usage of their mainstream search without a competitive product.

It is an interesting experiment, but I think it is still just an experiment till Microsoft is able to clearly figure out what beast is going to unleash. But if the economics are just barely sustainable, then possibly there isn’t much downside for Microsoft, and the end results can be:

• more users for mainstream search – if the product is competitive
• smaller margins for Google, and therefore impacting their ability to fight back – if they manage to capture a sizeable portion of available conversions

You know, there are only these many conversions in the world, and they drive a big chunk of direct marketing spend. And if Microsoft manages to capture more than its fair share, then the cake will shrink for the others. The users will rip the benefits, and the competitors will be left with the dilemma on whether to enter the margins war, or find a smarter way to regain the conversions.

It will be interesting to see what happens and how serious Microsoft is about this.

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