These comments by Charlie are certainly worth some thought, particularly in the context of something Warren said years ago about Coca-Cola (KO): “I say to myself, give me a billion dollars and how much can I hurt the guy? Give me $10 billion dollars and how much can I hurt Coca-Cola around the world? I can’t do it. Those are good businesses.”
Google’s dominance in search, and what would be needed to supplant that leadership, can be studied thanks to Microsoft’s (MSFT) entrance into the industry with the announcement and worldwide launch of the Bing search in June 2009. The question is simple: Can a company with boatloads of cash ($31 billion when the search engine was launched) supplant one of the widest moats in the world?
Looking back at Microsoft’s financials, we can see a clear breakout in fiscal 2007, when the company lost $732 million in the online services business (OSB) compared to a loss of just $74 million in fiscal 2006 and operating income of $402 million in fiscal 2005; in the explanation from the 10-K, the company attributes the loss largely to “increased headcount-related costs as a result of continued search and advertising platform investments.”
Teasing out what portion of OSB is directly attributable to Bing is all but impossible, but looking at OSB as a whole shows the increase in investment behind the segment leading up to the launch (Microsoft’s fiscal year ends June 30, so Fiscal 2009 covers the results/expenditures through the first month of the search engines existence, when Microsoft commanded roughly 8.5% of U.S. searches); here’s the operating loss by the segment per year:
|Three Year Total||($4.2 billion)|
What has happened since then? Microsoft has continued to pour money into the service, and has targeted the brand with hopes of building some equity among the average consumer (considering that when most people need to find something on the internet they “google it,” Microsoft has a long way to go with building mind share). More recently, the company has focused on blind comparisons between the two products (similar to the Pepsi (PEP) Challenge, which started in the 1975), with the claim that testers on average prefer Bing results 2:1 over Google. As expected, advertising and promotional events, along with continued product development, investments in data center & equipment, etc., can be expensive; in the three fiscal years since product launch, the online service division has reported the following figures (with Fiscal 2012 excluding the impact of the non-cash charge for aQuantive):
|Three Year Total||($7.0 billion)|
As we can see, the online services division (again, to stress this point – this is simply a proxy for Bing, since I cannot breakout the revenue/expenses by individual product in the segment) has collectively lost more than $11 billion since initial investment in the search engine began; for all this spend, Microsoft’s organic share in the domestic market is just 15% - compared to roughly two-thirds of the market for the 800 pound gorilla in the room, down slightly from an estimated 70% share in the U.S. at Bing’s inception.
The fact that Microsoft, after spending billions of dollars, has only made a small dent on the market to date, is truly astounding: Remember, we’re talking about a product that the majority of consumers consider more attractive during blind tests (at least according to MSFT), that offers a tangible benefit over the competition (essentially paid to search via Bing Rewards), and could switch to with the simple click of a mouse. It appears that Charlie may have been right to say that he’s never seen such a wide moat – because even the market clout of Microsoft and more than $10 billion has done little to unseat the dominance of Google in U.S. search.
About the author:I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.
I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over a period of many years.