The e-commerce world is a-buzz with the report from Jay Yarow @ Forbes that he has heard that Bing and Amazon are in talks.
The report indicates that Amazon is pitching Bing on Amazon replacing Bing shopping (and cashback) instead of Bing doubling down and recreating the space post cashback’s demise.
Let’s look at this from both company’s points of view to help handicap if a deal can be done, but first a brief background refresher.
Microsoft started getting serious in the CSE space in 2007 with the acquisition of Jellyfish, followed up by the acquisition of Ciao. In 2008, they combined them with the old MSN shopping to form Live Shopping w/ cashback and re-branded when they launched Bing as Bing Shopping. The general ideas was to compete with Google by having a better product search experience – a two-pronged approach: 1) eat away at various google verticals such as travel, ecommerce, health, etc. and 2) grab share whenever possible (Yahoo deal).
According to Comscore, Bing is 7th largest CSE by traffic. At ChannelAdvisor they are the 7th by ‘GMV’, but growing rapidly and on track to be top-five in a couple of months (the cashback cancellation could change all that though). So in short, Microsoft has made some major progress in a 2-3 year timeframe.
As part of the Yahoo! deal, all data and mock-ups we have ever seen indicates that shopping is not part of the deal (in other words, Bing won’t power Yahoo! shopping results or have any Bing shopping integration there.
Now let’s look at this deal from Amazon’s perspective:
- Access to Bing’s 9m/m CSE shoppers and whatever additional users can be pulled in from the search side.
- Probably could get some access to some other Windows/Microsoft properties such as MSN, browser search box, etc.
- Maybe work to get digital river out as Microsoft’s e-commerce partner
- Amazon would probably at-best have to pay a heavy rev-share and at worst some ‘non performance oriented’ up-front payments and or guarantees (probably a combo actually). If I’m Microsoft, I don’t want to lose $X of revenue from Bing shipping to have it replace by something lower, so you structure the deal to have minimum performance. Amazon would have some risk of not achieving this. In the history of internet deals, these mins can go really well or as in the example of myspace/google they can be a real problem if not structured correctly.
- As Yahoo! has proven (twice), outsourcing something like search/cse can be a very alluring business proposition from a financial/ P+L standpoint –
- You get to keep 100% of the revenue if you structure it right (wow!)
- But you outsource almost 100% of the expense – thus it turns what can be an investment area (losses) into one of pure profit. Based on the model of most CSEs, properly monetized Bing shopping would generate around $100m/yr, and cost $60-80m. An Amazon deal would strip out that cost and turn it into a $100m pure profit contributor (if structured correctly)
- In short, bean-counters love it.
- While everyone thinks about Amazon primarily as a retailer, we’ve spent a lot of time helping everyone understand that at over 30% 3P sales and with programs like Product Ads, Amazon is really becoming the best product search experience on the internet.
- As Yahoo! has proven (once so far), outsourcing something like search (organic search to google) can be a tremendously bad strategic choice. The P+L picture you envision falls apart because:
- Consumers are smart – if they go to Yahoo! and see google search results, they start to ask themselves – wow, why am I going to Google for this, if I go straight to the source, maybe that’s better?
- They always lose control of the user experience.
- Your partner is always misaligned and actually driven to get you out of the picture to avoid the economic over-hang.
- 40% of searches are product-oriented and these are the most lucrative searches from a RPC perspective. It would be a big decision to essentially cede this piece of the business and make the bet that Bing+Amazon is better than Google+GPS.
Can a deal be done?
It really boils down to two variables that only Microsoft knows:
- How strategic they view product search in the war with google (I think it’s pretty darn strategic)
- How much $ they are willing to invest to keep fighting google. The Yahoo! deal is very very expensive (some speculate it’s the reason cashback was ended) and if Microsoft has some financial pressure (yes hard to imagine for Microsoft, but they are investing/losing $700m/Q which is serious even by msft standards) then doing this deal could help fund a pretty big chunk of the Y! deal.
Do you think Microsoft should outsource product search to Amazon? Sound off in comments.
Seekingalpha disclosure – I am long Amazon and Google. eBay is an investor in ChannelAdvisor