Microsoft: The Bing Thing

Recent numbers put out by analytics firm StatCounter indicate that Microsoft’s (MSFT - Analyst Report) new search engine, Bing, gained market share in July. The company’s share of U.S. search engine users increased 14.3%, mostly at the cost of Yahoo (YHOO - Analyst Report) and smaller players. Google (GOOG - Analyst Report) continues to dominate, with a three-quarter’s share of the market.

Last month, Microsoft announced a ten-year agreement with Yahoo that allows it to power, control and process search-related information. Yahoo gets to collect advertisements and keep 88% of the revenue. While management of both companies expressed enthusiasm on the deal, investor responses varied.

Microsoft shareholders were happy since the company was not making any upfront payment, while Yahoo shareholders were disappointed for the same reason. Meanwhile, shareholders of market leader Google appeared concerned at the prospect of increased competition.

There are several positives for Microsoft. The company will be able to collect user information through which it can determine user preferences and thus attract more users. This in turn will attract more advertisers and thereby generate higher revenue.

As Yahoo will have limited access to customer information, most observers are of the opinion that the deal effectively marks the company’s exit from search. The combined global market share of the two companies is nearly 30% versus Google’s 65%. Therefore, if all goes well on the regulatory front, Microsoft Bing could emerge as a strong second to Google search.

Yahoo, for its part, will also gain. The company will save around $200 million in search expenses and increase $500 million in search advertising revenue (once the deal closes in roughly two years time). While the terms are subject to revision a few years down the line, it is obvious that the company has created a cash cow.

For the next ten years, Yahoo will be able to build strategy and focus resources on other areas, including banner advertisements on its portal and email pages. It will also be in a position to strengthen relationships with advertisers, the source of all revenue and profits.

Meanwhile, Google is not sitting idle. In a first-time move for the company, it has decided to make a dig at Microsoft. Starting Monday, the company will launch a month-long advertisement campaign pulling down Microsoft Office and extolling the virtues of Google Aps.

However, Google’s concerns are rising more and more. With Microsoft offering a free version of its Office (Word, Excel, PowerPoint and OneNote) on the web, Google’s domination of the “free” world could come to an end. Microsoft on the other hand, is playing on Google’s turf and all new announcements made by the company are more about cash drains than gains.

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