A Key Learning about Market Share from Microsoft

Early in my career, I had a front row seat for the spreadsheet market battle between Microsoft Excel and Lotus 1-2-3. I was working on the original Excel product team, and watching these two duke it out taught me some serious lessons about market share. These lessons were reinforced when I was a member of the Windows, OS-2, vertical marketing and corporate licensing teams.

These invaluable lessons were understood in the context of product management, where the main goals included maintaining public perception of enterprise technology leadership and, generally, a desire for global industry domination. They included:

• Market share is hard to gain and easy to lose

• Never concede a point of market share

• Constantly seek ways to gain market share

• Once you lose a share point, it’s really difficult (read: impossible) to regain it

Market share for businesses in competitive markets is an essential metric and one of the clearest indicators of a company’s profitability and product success. Growing market share correlates to growing revenue. It can affect operations, product and service pricing, and potential stock market performance.

In Microsoft’s case, market share was indicative of customer acceptance, technology leadership, market/revenue-generating power, and hitting business goals.

Fortunately, businesses have many strategies from which to choose that help increase market share:

• recruiting and employing a talented, dedicated workforce

• innovation

• product pricing

• M+A

• effective marketing campaigns

• efficient service offerings

• customer loyalty programs

The standard method for establishing market share as a startup in the tech industry is through innovation and employing rock star engineers.

Microsoft, though, has pioneered a new path: invest a whopping $10 billion in an AI company – OpenAI creators of GPT – with the expectation that Bing, Microsoft’s proprietary search engine, will eat into Google’s market share in the search space thanks mostly to the implementation of ChatGPT across multiple products (i.e., Microsoft Edge, Office Suite, Teams, GitHub, dev tools, etc.). This investment has paid early dividends in the form of the recent the stock appreciation of “MSFT.”

Business Research Insights recently pegged the global search engine market at almost $170 billion in 2021. For Microsoft, the upside is huge. Since the tech bubble burst over twenty years ago, Google has owned just over 90 % of search’s market share. Bing, newer on the scene, has muddled along with 2 to 3 % of the same market. March 2023 saw a modest increase in its global search market share, but that came on the heels of five consecutive months of losses.

Drilling into the desktop search engine market sub-segment, Bing holds an 8 to 9 % market share, which is higher market share than it holds in other segments but also represents a decline in market share over the past months. In the mobile search engine market sub-segment, Google dominates with ~96 % market share over Microsoft’s approximately 0.5% share. These numbers have held relatively constant for a very long time.

Bing is pre-installed on all Microsoft devices. This means that many non-technical users use Bing. This is reflected in the Bing user base being older: they are 35+ years old, and many are 55 to 64 years old. Bing’s main advantage to marketers, therefore, is an advertising channel to old folks. One of the reasons marketers consider Google the main option in search engine advertising is because it gives them an unobstructed path to younger audiences. This results in a price per ad difference: Across all industries the average cost per ad on Bing is $1.54, while Google’s average is around $2.69.

The rap on Bing, though, is its reputation for sub-optimal results and sluggishness, particularly when compared to Google. These are serious disadvantages. In addition, ChatGPT will be available through Google, perhaps erasing a huge incentive to transition to Bing.

All is not lost for Bing, however. Microsoft’s Edge browser with AI is showing some flash on the UI and UX sides, offering Googlers possible reasons to jump ship. There is also a growing sentiment that Google results are clogged with ads, and that the company doesn’t respect its users’ privacy.

While Wall Street remains bullish on MSFT, it is important to remain realistic and to not get caught up in the hype. In the latest quarter, for example, Microsoft reported just 2 % revenue growth and an 8 % net income loss.  These numbers show the company is not unscathed by the Fed’s actions and the ensuing macroeconomic environment.

MSFT has enjoyed a YTD gain of approximately 20 % mainly due to the excitement over its investments in Bing, ChatGPT, and AI. Compared to Apple, Meta, and Alphabet, MSFT stock is trading at a significant premium. But keep in mind that MSFT is trading at such lofty levels because the company actively buys back its own stock. Over the last year, however, its buy-back rate has dropped significantly to only 1 % of shares outstanding, mainly due to such high share prices.

Microsoft spends billions on stock-based compensation, its current dividend, and the stock buy-back program. All of these stock-based programs eat into cash flow and are clearly unsustainable. Obviously, Microsoft is neither a risky stock nor a bad business; but MSFT is simply a risky investment at these valuations.

Watching great companies and search engine darlings battle it out on such a mega scale always produces fascinating theatrics for tech industry fans. Pass the ‘corn. I want to and expect to see more theatrics.

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