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Microsoft made some substantial bets in 2010. In addition to pouring millions of dollars into the development and marketing of its Windows Phone 7, the reboot of its smartphone franchise, the company invested in somewhat riskier endeavors.
One of those endeavors was Kinect, a hands-free controller for the Xbox. Intended to appeal to the same casual gamers who made the Nintendo Wii a breakout hit, Microsoft hoped that Kinect would increase the lifespan of its 5-year-old Xbox 360, whose sales success represents one of the bright spots in Microsoft’s consumer product line. A hit with Kinect would help balance out some notable recent failures in that arena, including the Kin social networking phones, which utterly failed to find a substantial audience.
At the same time, Microsoft also continued to invest in Bing, its search engine, which has experienced incremental growth since its summer 2009 launch. Despite its Online Services division recording massive losses throughout 2010, the company seems determined to not only maintain Bing but also expand its capabilities.
As with its “all in” cloud strategy, Microsoft’s moves with Bing and Kinect suggest a company seeking new avenues for expansion beyond its traditional product lines.
Bing
In January 2010, a snapshot of the search engine market by research company ComScore suggested that Bing, while not expected to overrun Google any time soon, was at least managing to hold its own in an aggressive marketplace: With a 10.7 percent market share, it lagged a few points behind second-place Yahoo at 17.3 percent, with Google continuing to dominate at 65.7 percent.
That note arrived Jan. 15, a few days before Microsoft ripped the “beta” tag off its Bing Maps Silverlight site, offering viewing options such as Streetside and Enhanced Bird’s Eye. That upgrade arrived in the same time frame as other Bing improvements designed to boost the product’s usefulness, including more information and charts in specific categories such as nutrition.
On Feb. 18, Microsoft and Yahoo received clearance from the U.S. Justice Department and European Commission to commence their 10-year search-and-advertising agreement. Under the terms of that deal, first announced in summer 2009, Bing would power Yahoo’s back-end search, while Yahoo took over worldwide sales-force duties for both companies’ search advertisers.
“U.S. market participants express support for the transaction and believe that combining the parties’ technology would be likely to increase competition by creating a more viable competitive alternative to Google,” read a statement at the time from the Justice Department. “Most customers view Google as posing the most significant competitive constraint on both Microsoft and Yahoo, and the competitive focus of both Microsoft and Yahoo is predominantly on Google and not on the other.”
If Yahoo’s search numbers were ported over to Bing with no attrition-so went the theory-then Microsoft would be competing against Google with roughly a quarter of the U.S. search engine market. That wouldn’t necessarily threaten Google’s hold on the market, but it would certainly alter the competitive dynamics of the search engine landscape in ways potentially beneficial to Microsoft. That being said, the smooth implementation of a deal that size would be necessary if Microsoft, which previously tried and failed to acquire Yahoo, wanted to squeeze all possible benefits from the deal.
Around that time, in response to growing privacy concerns among Internet users, Microsoft announced that Bing would delete stored IP addresses after six months. “The change is a result of a number of factors,” Peter Cullen, Microsoft’s chief privacy strategist, wrote Jan. 18 in a Microsoft On the Issues blog posting, “including a continuing evaluation of our business needs, the current competitive landscape and our ongoing dialogue with privacy advocates, consumer groups and regulators.”
Between March and April, Bing’s U.S. market share dipped from 9.62 to 9.43 percent, according to research company Experian Hitwise. At the same time, Google’s rose incrementally, from 69.97 to 71.40 percent. Even if Bing hadn’t fulfilled early pundits’ predictions of a quick death, its month-to-month changes nonetheless seemed incremental. During a March talk at the Search Marketing Expo, Microsoft CEO Steve Ballmer suggested that it could take Bing years, if ever, to overcome Google: “I don’t know how old I will be when that’ll happen.”
At least in public, Bing’s executives declared they were focused less on winning the war for traditional keyword-based search and more on specific areas such as event-driven tasks and commercial queries.
“People are happy with keyword-based search,” Bing Director Stefan Weitz told eWEEK in March. “People are creatures of habit, and they’re fairly happy with Google’s keyword search today and they think it works well and there’s no reason for them to look around.” User behavior, Weitz added, would be the ultimate arbiter of Bing’s road map: “The more exciting place, and the place we’re looking at more often, is how we expand the art of the possible in search.”
Bing Burn
In June, Microsoft also introduced a new set of Bing features that brought parts of the search engine more in line with a Yahoo-style Web portal, particularly when it came to entertainment. From an Entertainment tab on the home page, users could now access movie trailers, gaming cheat codes, and even whole television episodes and songs. The TV section offered full-length episodes from more than 1,500 shows, some of them offering high-definition content, while Movies touted the latest showtimes, reviews, synopses and trailers.
In addition, Bing began offering streaming songs via Microsoft’s Zune service, including one play-through of any song from the catalog for free. Users could also route through Bing to purchase music from Amazon.com, Zune and iTunes.
Meanwhile, Microsoft and Yahoo worked to have the major aspects of their search-and-advertising deal in place by 2010’s year-end holidays, according to official blog postings by both companies. That included porting Yahoo’s U.S. advertisers and publishers onto Microsoft’s AdCenter platform.
Despite all that feature-adding and interface-tweaking, Microsoft continued to burn money with Bing. By the first quarter of fiscal 2011, its Online Services division reported a $560 million loss despite $527 million in revenue. Nonetheless, the company seemed willing to spend that sort of cash to stay competitive with Google and other cloud-centric companies. In an Oct. 28 earnings call, Microsoft executives also reported a 13 percent increase in online advertising.
A few weeks later, anonymous sources reported to AllThingsD’s Kara Swisher about Microsoft’s apparent worry over “a stable Yahoo,” hinting at the increased interdependency as the two companies’ search-and-advertising businesses conjoined. Yahoo had been wrestling with much-publicized difficulties, and CEO Carol Bartz made no secret of her willingness to kill underperforming divisions. Despite having its back-end search powered by Bing, Yahoo also unveiled several new features, including a new Yahoo Messenger beta and Yahoo Local Offers, designed to compete directly against similar applications by Google and Microsoft.
As 2010 closed out, Microsoft continued to buttress Bing’s capabilities with yet another round of new features, including integration of OpenTable and Grubhub into its Bing for Mobile application for the iPhone and Android. And how did Microsoft fare overall in the search engine market? According to ComScore, Bing occupied some 11.8 percent of it, eclipsed by Google’s 66.2 percent-good for a year-over-year rise of 31 percent, according to the research company, but little more than a point above those January numbers.
Kinect
Kinect
Microsoft has suffered some well-publicized missteps in consumer products. Its Zune HD, a portable media player whose design was praised by critics, failed to gain ground against Apple’s iPod line. And the ignoble failure of its Kin social networking phones may have led to May’s massive shake-up in Microsoft’s E&D (Entertainment & Devices) Division.
“This has been a vampire division since its inception. A vampire division is one that lives off the value created by the rest of the company and, from a corporate perspective, does more damage than good,” Rob Enderle, principal analyst of Enderle Group, told eWEEK in May. “Its profit, which wasn’t much, was massively offset by the economic cost it caused to the corporation and needed to be rethought.”
As part of the E&D reorganization, Ballmer appointed Don Mattrick as head of the company’s Interactive Entertainment Business and Andy Lees as president of Microsoft’s Mobile Communications Business.
Despite those setbacks, Microsoft has enjoyed one bright spot: the Xbox. Thanks in part to games such as the ever-popular Halo series, the console has managed to transition from a revenue loser to a strong seller. The Xbox 360 led the console market in sales midway through 2010, outpacing the Nintendo Wii and Sony’s PlayStation 3.
However, the flagship Xbox 360 was also 5 years old, and Microsoft needed a way to increase its lifespan. The answer was Kinect, a hands-free game controller originally known as Project Natal. Kinect uses a three-dimensional camera to track 48 points of movement on the user’s body and then translates those movements to a digital avatar.
Released in early November, Kinect proved something of a hit, with 2.5 million units sold within the first 25 days of its release. “We are on pace to reach our forecast of 5 million units sold to consumers this holiday,” Mattrick wrote in a Nov. 29 statement posted on Microsoft’s corporate Website.
There are indications that Microsoft intends to use that 3D sensing technology for a range of products besides gaming. In recent months, Microsoft acquired Canesta, a maker of 3D-image sensor chips and camera modules that can be embedded into a variety of consumer products, including laptops and vehicle dashboards.
“There is little question that within the next decade we will see natural user interfaces become common for input across all devices,” Jim Spare, president and CEO of Canesta, wrote in an Oct. 29 statement posted on the startup’s Website. “With Microsoft’s breadth of scope from enterprise to consumer products, market presence, and commitment to NUI [natural user interface], we are confident that our technology will see wide adoption across many applications that embody the full potential of the technology.”
During a Dec. 1 meeting in New York, Microsoft executives suggested to eWEEK that the company is indeed continuing its push into some of the same user-interface technology powering Kinect. In addition to gesture, spoken commands represent a substantial part of that evolution.
“Speech is a common key ingredient in NUI,” said Ilya Bukshteyn, senior director of Microsoft Tellme, while suggesting that it would be “two to three years” before voice commands become a more ubiquitous factor in both the enterprise and consumer spaces.
Within that context, Kinect doubles as an investment in the future, a way for Microsoft to introduce consumers to the idea of gesture control. In the shorter term, Kinect has reinforced the Xbox as an example of Microsoft success in the consumer arena.