WSJ: How Microsoft lost to Google in paid search

An interesting article in the Wall St. Journal offers some insight into just how many missteps Microsoft took in the early years of paid search, only to see itself land at the bottom of the heap, well behind market leader Google. While hindsight is indeed 20-20, it's amazing how close Microsoft came to ruling paid search. If the article is accurate, Microsoft had three good chances to turn things around, but squandered all of them.

First, Microsoft had a chance in 2000--before Google's paid search debuted in October of that year--to leverage its own internal system, called Keywords, that tied Web search to advertising. But top execs didn't take the revenues from paid search (which at the time were dwarfed by other online revenues, including banner ads) very seriously. Finally, fearing that paid search would cannibalize banner ads and other revenue streams, the company nixed the program.

Second, in 2003, Microsoft had the chance to buy Overture, a pioneer in paid search and the eventual engine of current No. 2 Yahoo's paid search success. But it decided against the buy, figuring it could build the technology itself for less, and Yahoo ended up buying Overture for $1.8 billion. But while Microsoft spent the next 18 months building its own paid search service, Google and Yahoo ran away with the market. (Microsoft didn't launch its search engine until 2004, and its search-ad system debuted in 2006.)

Third, Microsoft failed in its attempt to buy up Yahoo last spring, and is now, almost a year later, still in the same place: a dismal third in search ad revenue trying to woo Yahoo once again.

The tale is one of missed chances and new product tunnel vision. It quotes Microsoft CEO Steve Ballmer as admitting that five years ago, Microsoft didn't want "discordant and dissident" directions and "ran the risk of some things not happening." Claiming to have learned from that mistake, Ballmer points to Microsoft's new service that pays people a fee for using Microsoft's search engine to find and buy certain products. Ballmer says: "We're letting some flowers bloom." Right.

Perhaps Microsoft may get an outright purchase or at least a search ad partnership in the works with Yahoo now, although Yahoo's new CEO Carol Bartz will probably strike a tough bargain if she does the deal at all. But it's probably too little too late. Google has sewn up over 70% of the paid search market. It doesn't matter anymore whether the third try's a charm for Microsoft -- or more likely -- after three strikes, it's out. It's already lost.

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