Is Microsoft trying to pull an 'IE' on Google's product search?

By Scott M. Fulton, III | Published May 22, 2008, 12:42 PM

Apparently Microsoft is fine with not earning any money at all in a lucrative market where it finds itself no better than second place, and where its competitor has a dominant stake, if Microsoft can gain a foothold. Sound familiar?

Yesterday's announcement from Microsoft that it will give consumers sizable refunds on purchases they make from participating online retailers, on products they purchase through its Live Search service, has analysts split this morning. It was a big deal on Wall Street yesterday, with Microsoft shares dipping a tad, and the company targeted by this move -- Google -- following suit.

"Each time you click a Live Search cashback listing, you'll find great deals on the product you chose," reads Microsoft's promotion for the deal. " Your results will clearly list the cashback savings you'll receive off the store price, and your final bottom-line price that includes tax and shipping costs."

What financial analysts discovered, reading through the bold print of yesterday's promotion, is that Microsoft plans to effectively eat its profits from what's called cost-per-action or pay-per-action marketing -- essentially, what it earns from each sale each time a customer clicks through to make a purchase. It was Google that helped pioneer the concept, announcing a beta of an alternate revenue model for partner advertisers back in March 2007.

At that time, analysts worried about the prospects of advertisers -- or perhaps even Google itself -- engineering textual content through AdSense in such a way that it "funnels" users through to high-value shopping links where both could earn the most revenue. They wondered at the time how much this might theoretically impact "free" content, or even the placement of items on a search page or news stories in Google News.

If that is indeed a lucrative revenue generator for Google, then Microsoft's action yesterday may have been a functional equivalent of how it positioned Internet Explorer against Netscape Navigator in the 1990s: bundling it with Windows, giving it away free -- thus increasing users' economic and convenience incentives to try it out -- and placing it in such a prominent position that users could not ignore it.

Granted, nothing Microsoft did yesterday may be worthy of such legal scrutiny as its anti-Netscape move of the past decade. But it could be using its considerable revenue base from other sources to enable it to forfeit any advantage it would get from Live Search shopping, in order to force Google to make a similar move to stay competitive.

Such a move might also have the curious side-effect of deterring both services from making possible "funneling" services available, on the basis of cost-per-action services providing no serious revenue for them anyway.

Late yesterday, a Microsoft spokesperson told Silicon Alley Insider blogger Henry Blodget that "torpedoing" Google's hold on cost-per-action (CPA) isn't Microsoft's intent at all. Apparently confirming Blodget's calculations that Microsoft would earn zero from CPA, the spokesperson said CPA would continue to co-exist with traditional cost-per-click (CPC) methods, where the company would continue to earn revenue. The spokesperson did not provide any detail as to why.

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