Microsoft's MSN Platform Drive
Ronna Abramson
09/27/05 - 07:07 AM EDT
Investors may typically ignore
Microsoft's(MSFT Quote) MSN division, but a recent flurry of news about the relatively small Internet business suggests its growing importance to the software giant's future.
"MSN is becoming its own development platform for providing services that will accentuate the value of other Microsoft products and platforms," says Joe Wilcox, a senior analyst with JupiterResearch who follows Microsoft.
The oft-cited example is Microsoft's use of MSN to deliver updates and patches to its Windows operating system instead of spending years developing a massive overhaul, as is currently the case.
"Right now, Windows is on a slower development cycle, whereas MSN is almost like a machine gun," Wilcox says. "MSN is a way to get some of these tactical technologies quicker to the consumer."
Microsoft's MSN unit has shifted into a higher gear as
Google(GOOG Quote) has encroached more on Microsoft's turf, most notably with a desktop search product.
Largely in response to Google's new desktop search program, Microsoft unveiled a competing product late last year, far earlier than planned.
Last year, Microsoft also launched its own algorithm-based Internet search engine, which replaced the
Yahoo!(YHOO Quote) technology formerly used on MSN.
System of Survival
Monday's launch of adCenter, MSN's own paid-search advertising platform, in France and Singapore precedes testing of a U.S. version in September. That platform will eventually replace the rival system from Yahoo! used by MSN, and compete against Google's.
The MSN system offers at least one advantage that advertisers may salivate over -- the ability to target ads based on such demographics as gender and household income, says Charlene Li, who covers media and marketing at researcher Forrester.
"The others don't have that capability at this point," she says.
Beyond just talking about boosting ad revenue, Microsoft also is touting the new platform as a way to drive sales of other Microsoft products.
For instance, Web site owners who get ads through the MSN system -- largely small-business owners -- could buy other Microsoft products, such as business application software, Microsoft VP Yusuf Mehdi said in an article in
The New York Times on Monday. (Mehdi was not available for comment for this article.)
The unveiling of the Internet paid-search ad platform caps a busy two weeks of MSN news wherein rumors abounded of a joint venture between MSN and AOL.
Many analysts doubted that Microsoft would relinquish control of MSN, and instead suggested that MSN, with its new paid-search ad platform, was trying to lure AOL's business from Google.
More recently, Microsoft announced a reorganization in which MSN would be part of a larger unit that includes its Windows and Office franchises.
Microsoft said the move is meant to better deliver on its vision of software as service.
That's been the company's mantra for years now, but the success of hosted software from the likes of
Salesforce.com(CRM Quote) suggests that its time may finally have come.
The evolution of software delivered as a service on the Web, however, could pose either a new opportunity for Microsoft or a direct threat to its core desktop monopoly.
"What it boils down to is that Microsoft is in the business of putting software on the desktop and in the back office on servers," says Forrester analyst Ted Schadler, who covers consumer devices.
But, Schadler continues, if Google and Yahoo! offer key applications such as email, search and word processing typically found on the desktop, that raises the question, "Why do you need Microsoft?"
At least one Microsoft bull, however, doubts that there will ever be a time when all applications are delivered on the Web.
Internet Ad Sales
MSN lags rivals |
 |
| Source: Microsoft, Yahoo!, Google |
Operating Income
MSN falls short of peers |
 |
| Source: Microsoft, Yahoo!, Google |
"I don't think we ever go back to the world of a dumb terminal ... that's the mainframe world, even if we go back there on the Internet," says Chris Bonavico, a portfolio manager with Delaware Investments, which owns Microsoft.
"You'll always need intelligence on the client," he adds, referring to the desktop computer.
Still a Laggard
Still, Bonavico acknowledges that MSN's execution has disappointed: Despite the flurry of recent developments, MSN still ranks behind Yahoo! and Google.
In a survey at the beginning of the year of 62,000 U.S. households, Forrester found that only 21% use MSN at least once a week -- far behind the 48% who use Google and 40% who use Yahoo! at least once a week.
"They still have a long way to go not only in terms of product development but just [catching up to] the momentum Yahoo! and Google have," Forrester's Li says.
Not surprisingly, MSN's financials also reflect this. MSN sales are running at about half those of Yahoo! and Google, and its operating margin is also lower.
On the flip side, though, Yahoo!'s and Google's numbers could suggest opportunity for growth in MSN if the division can execute.
But for now the unit is typically overlooked because it's such a small part of Microsoft -- 2.8% of operating income and 5.7% of revenue in fiscal 2005, which ended in June.
Based on a sum-of-the-parts analysis of Microsoft, Bernstein analyst Charlie Di Bona found that MSN contributes $1.90 a share to a stock with a total value of $39.82.
That's in stark contrast to the $300-plus stock price of Google and the more-down-to-earth, $30-plus Yahoo! price tag.
"Certainly relative to the way the market is valuing the other Internet properties, they're not attributing any value to MSN at all, or very little," says Di Bona, who rates Microsoft outperform and whose firm doesn't do investment banking. "It's clearly not valued like Google."
But for now, Di Bona concludes, "It's a tossup whether [the market] is overvaluing Google or undervaluing MSN."
