Free Pie at Microsoft

The knee-jerk verdicts are in for Microsoft's (Nasdaq: MSFT  ) gutsy Live Search Cashback product, where shoppers will get cash rebates if they buy from participating online retailers ... and the headlines aren't pretty:

  • "Microsoft's new tack: Bribery as a business model," goes CNET.
  • "Whoa: Microsoft Cashback Google-Killer Generates NO Revenue For Microsoft," writes Henry Blodget.
  • "Microsoft's cashback on search looks like a desperate last move," opines Blogging Stocks.

Tough crowd, and I didn't even get around to the potentially biased MacUser.com's "Use a lousy service, get cashback" headline.

You may as well print those out and sprinkle them with salt, because I think many of the cynics will come to eat their words.

Turning a loss leader into a gloss leader
To be fair, Blodget's critique isn't as pessimistic as his header bait. "It's a pretty cool model," he ultimately concedes. His initial concern stems from Microsoft's decision to pass on 100% of the merchant commission to the end user.

Existing loyalty shopping programs like Fat Wallet and United Online's (Nasdaq: UNTD  ) MyPoints doubtlessly pocket some of the participating merchant commissions. MyPoints is the sole profitable arm within United's Classmates Media subsidiary.

Where's the harm in Microsoft being so generous with its disbursements? Obviously, it will do wonders to attract an audience. If I can get 5% back from buying a digital camera at Circuit City (NYSE: CC  ) , why wouldn't I go to Microsoft's product search first? Comparison-shopping sites like CNET Networks' (Nasdaq: CNET  ) MySimon and Google's (Nasdaq: GOOG  ) own Google Products do a somewhat similar job of sorting results by my final delivered price. Why not give Mr. Softy a shot and get some pocket change back, too?

If Google offered two similar search engines, and one offered me a slice of pie with every query, I'd go with the pie. I like pie. Who doesn't like pie?

No egg on Ballmer's face
Unless you've sworn off viral videos this week, you've probably seen the clip of a heckler in Budapest hurling eggs at Microsoft CEO Steve Ballmer during a presentation. The key takeaway is that Ballmer managed to sidestep all three of the eggs. He kept going, without any egg on his face.

That's a good sign, because I think he will dodge the Cashback critics this time too. You won't see any egg on Ballmer's face when the company turns this model into a market-share nibbler.

Even if Microsoft takes a hit in subsidizing the program, this doesn't have to turn a profit to be a winner. This is about getting folks to bookmark the Live.com search engine. It's about getting folks to realize that it actually exists. Microsoft will profit handsomely from the traffic, especially from potential shoppers who ultimately leave the site through one of its revenue-generating clickthrough ads.

This is about embracing the big picture -- and squeezing Google's grip on the juicy demographics of online shoppers.

Plan A9 from outer space
I realize that better companies have failed here. Amazon.com (Nasdaq: AMZN  ) tried to get folks to use its A9 search engine by offering regular users a small discount -- 1.57%, or half of pi -- on Amazon.com purchases. It didn't pan out, and Amazon shut down the service two years ago.    

The difference here is that Amazon was never truly committed to being a search-engine monster. Microsoft is so committed to search that it was willing to pay as much as $47.5 billion for Yahoo! (Nasdaq: YHOO  ) before abandoning ship this month.

Microsoft won't fail. If anything, it might be the victim of its own success. Merchants like Circuit City, who have hopped on the program as a creator of incremental sales -- at attractive rebate price points, relative to their typical acquisition costs -- may get cold feet once regular customers avoid going to the merchant sites directly.

It's no surprise that Amazon isn't on the list of merchants in the Cashback program, even though Microsoft has done a great job of lining up plenty of household names like Sears, Circuit City, and Home Depot.

This program's success is ultimately tethered to Microsoft's commitment to promoting it. And with everything from search-engine market share to visions of Microsoft as a marketplace hub at stake, how can Mr. Softy not swing hard here?

Amazon failed with its half-baked pi. Microsoft will make it work with thicker slices of pie. (Poorly tossed eggs not included.)

Microsoft, Sears Holdings, and Home Depot are Inside Value recommendations. Amazon.com is a Stock Advisor selection. CNET Networks is a Rule Breakers pick. A free 30-day trial subscription will let you see which tickles your tastebuds most.  

Longtime Fool contributor Rick Munarriz is a fan of pie, especially key lime flavor. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy is partial to banana cream, with pecan a close second.


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  • Report this Comment On May 22, 2008, at 7:15 PM, cjandhollysmom wrote:

    I think the absence of Amazon from the merchants eligible for MS Live Search Cashback is because Amazon's affiliate agreement prohibits all partners from offering any type of purchase incentives. That's why you won't find Amazon on MyPoints, Ebates, or FatWallet, either.

    I was very happy with Live Search Cashback's prototype, Jellyfish.com. I earned, and was paid, over $400 in rebates since its inception. If MS can manage to not screw it up, I think new members will also be pleased with the program.

  • Report this Comment On May 22, 2008, at 7:19 PM, RyanAnon wrote:

    How about being honest with your quotes. Although technically accurate, if you actually read the articles you can see that they hardly represent their author's sentiment.

    Your 'kneejerk verdicts are in' leading paragraph misleads readers into thinking the quoted sources find MSFT's plan silly and a losing strategy, and that is simply not the case.

    Cred is important.

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