Eat Baidu's Dust, Microsoft

On the global search-engine stage, Microsoft (Nasdaq: MSFT  ) isn't even fit to be bronzed.

A study that comScore released last week shows that China's Baidu (Nasdaq: BIDU  ) -- not Microsoft -- is the world's most popular search-query source after Google (Nasdaq: GOOG  ) and Yahoo! (Nasdaq: YHOO  ) .

December Worldwide

Market Share

Google

62.4%

Yahoo!

12.8%

Baidu

5.2%

Microsoft

2.9%

Everyone Else

16.7%

Source: comScore qSearch 2.0.

The gap looks big between Baidu and the two leaders. But the comScore data came only from home and corporate connections. It didn't account for search-engine usage at Internet cafes, which are a major access outlet in Baidu's home turf of China.

Either way, Mr. Softy can't even claim to be playing small ball profitably. The company's online arm continues to lose money.

Destination unknown
This news takes us back to comments that seem more and more laughable with every passing usage report.

Addressing the crowd at a UBS analyst conference two months ago, Microsoft executive Kevin Johnson suggested that his company wants to claim 30% of online search queries over the next three to five years.

To be fair, Johnson never implied that Microsoft's global market share would grow tenfold, from less than 3% to a whopping 30%. He was referring to the domestic market, where Microsoft has a thicker 12% slice of the overall query market.

Johnson's goal still sets a high enough hurdle to fire up the old rumor-mill chatter that Microsoft might acquire Yahoo!, since Microsoft is unlikely to gain sizable chunks of market share organically. The search-engine market is too established for swings that wide.

There is greater potential to mix things up overseas, but Microsoft is clearly less relevant the moment it whips out its passport. Since we live in a global marketplace, any dreams of search-query domination for Microsoft will probably have to happen through strategic partnerships or outright acquisitions of leading country-specific players, such as Baidu in China, South Korea's NHN, and Russia's Yandex -- all members of comScore's list of the 10 most globally queried sites.

Buy Baidu
In reality, though, strategic partnerships may not mean squat. Popular home teams are unlikely to surrender to Microsoft's joint-venture handshakes. When MSN China was struggling, it handed the paid-search monetization keys to Baidu, not the other way around. In other words, if Microsoft wants a bigger piece of the global market, it will have to open up its billfold and actually buy the key players.

Easier said than done, because Microsoft isn't the cash mattress it used to be. Allow me to borrow the chart from my bearish argument in last week's Dueling Fools to make my point.

Date

Cash and Short-Term Investments

6/30/04

$60.6 billion

6/30/05

$37.8 billion

6/30/06

$31.1 billion

6/30/07

$21.1 billion

Microsoft has spent a lot of money over the past few years on share buybacks, beefy dividends, and acquisitions. Using stock as legal tender is a reliable option domestically, but it won't be compelling to attractive overseas targets as long the dollar continues to weaken against most global currencies.

The easy solution would be to walk away from search, but Microsoft is smart enough to know that even its software stronghold of operating systems and productivity applications is migrating to cyberspace. Microsoft needs to be the portal. It needs to be the landing page for users and a "must-buy" candidate in any interactive marketing campaign.

Having bought aQuantive last year helps, though Microsoft could still use a little more dot-com ad exposure through a company such as ValueClick (Nasdaq: VCLK  ) , or smaller search engines such as IAC/InterActiveCorp's (Nasdaq: IACI  ) Ask.com.

The real shame is that Microsoft's purse has been shrinking as its potential shopping list gets longer. Even worse, time is ticking.

Baidu's serious entry into Japan -- and eventually other markets with character-driven alphabets -- will make Microsoft an even more distant fourth-place finisher. Even eBay (Nasdaq: EBAY  ) , with a 2.2% chunk of the global search-query market, may pass Microsoft in cyberspace.

Forget about winning back the bronze, Microsoft. Act quickly before you no longer even qualify to compete.


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