Microsoft hurt by poor Live branding, analysts say

On Thursday, Microsoft lowered its sales forecast for its Internet services business for the full year from 11 percent to between 3 percent and 8 percent. It also acknowledged that its search market share has dropped. Windows Live Search saw its searches drop nearly 10 percent from a year ago, while Google's rose more than 22 percent, according to figures released this week from Nielsen/NetRatings. Google has 50.8 percent market share, followed by Yahoo at 23.6 percent and Microsoft with only 8.4 percent.

While it's too early to write the obituary for Windows Live, things aren't looking good in its first year, analysts said.

"There are concerns that there has been some slippage or (Microsoft) has moved backwards" with regard to its push to better compete against Google in the market for consumer software that is supported by ads, said Michael Cherry, lead Windows analyst at Directions on Microsoft. "This is a long-term thing, so I'm not sure how to measure it on a quarter-by-quarter basis."

While Microsoft doesn't break out the financial figures for its new Live services from its established MSN content services, both of which make up its Internet services business, it's likely the newer brand is what is weighing things down.

"Microsoft's Live branding has been tremendously confusing and has hurt the company, and it is very likely contributing to the situation they are in right now," said David Smith, an analyst at Gartner. "They've created another brand and have not differentiated it."

It's too early to pass "final judgment" on the strategy, Smith said. But now is the time for Microsoft to clearly explain its strategy, he said.

Microsoft has invested billions of dollars in creating the Windows Live brand, separating the free, online consumer Internet services like e-mail and instant messaging from its MSN brand and building its own search engine and paid search platform from scratch.

Microsoft launched its paid search program, AdCenter, last May and is still working to gain traction and compete against market leader Google. In the meantime, No. 2 search provider Yahoo has launched its next-generation paid search platform, albeit a quarter late.

But the advertising program will only succeed if there are eyeballs to view the ads. How many people think to type in "www.live.com" to search the Web? Users at a Web 2.0 panel in November said they didn't even know Microsoft had a search engine.

Adam Sohn, a director in Microsoft's online services group, acknowledged that the growth in search queries and search advertisers hasn't been as good as the company had hoped.

"We feel good about the transition, but we continue to see some challenges with search query growth," he said. "There is some room for improvement there and we are going to work to increase the speed of that growth and increase market share.

"We will see more advertisers in the system--which, frankly, will drive prices up because it's an auction system," Sohn said. "More folks in there bidding will mean prices will go up."

Number of users, page views growing
Microsoft still has a tremendous number of users of its Windows Live Mail and Live Messenger services and readers of its MSN content, he said. The number of users grew as much as 40 percent from a year ago, while the number of page views was up at least 30 percent, he said. And ad revenue rose 20 percent from a year ago.

"The pieces are falling into place," he said. "Would we like the numbers to be more positive more quickly? Of course we would."

It's not just that Microsoft wants to expand its business beyond software. The company also sees the potential that more and more software, particularly consumer software, will be delivered online and, in many cases, backed by ads. Some inside the company have been pushing for the company to offer some of its titles for free.

The company even has said it is exploring whether it makes sense to have versions of its low-end Works software that are either online, ad-supported, or both.

Cherry complained that some Live services do not work on browsers from rivals. "For example, Microsoft Windows and Office Live services really are not browser independent. They really only work with Microsoft's browser and only the latest versions," he said. "So I have to question whether they even understand the marketplace."

Consumers can use any browser with Live Search and most of the Live services, except for a few, such as Virtual Earth and some MSN services, Sohn said. "We're working on this."

Despite the hurdles, don't expect Microsoft to throw in the towel any time soon.

"This is a long-term bet," said Sohn. "The big challenges are worth fighting for and worth succeeding at, and we're absolutely willing to commit the resources."