Microsoft's new advertising scheme is clever but fatally flawed. Somebody better tell Yahoo.

Microsoft's new advertising scheme is clever but fatally flawed. Somebody better tell Yahoo.

Microsoft's new advertising scheme is clever but fatally flawed. Somebody better tell Yahoo.

Moneybox
Commentary about business and finance.
May 22 2008 5:16 PM

Rock the Cashback

Microsoft's new advertising scheme is clever but fatally flawed. Somebody better tell Yahoo.

Microsoft logo.

If there's one thing that the Microsoft-Yahoo off-again, on-again love affair has laid bare, it's how badly Microsoft blundered its mid-'90s search and advertising advantage. Feeling the need to prove its competence with search, Microsoft tried to convince investors that they can do better, with or without Yahoo, through a big announcement on Wednesday. They unveiled a clever new advertising innovation that, at a minimum, shows they're committed to thinking creatively about monetizing search. Of course, that matters only if the feature actually works.

The new program is called Live Search cashback, and it's built upon a clever business model. (No, the C in cashback is not capitalized. That's how Microsoft is insisting on writing it. Blame e.e. cummings.) Search for a product through LSc to compare prices on any item you can imagine—everything from obscure hiking socks to under-the-radar fiction. On top of a routine price comparison, though, is an extra goodie: cashback savings, usually between 4 percent and 8 percent of the pretax price.

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Once you find a price and item to your liking, you click through to the retailer, enter your e-mail address for Microsoft to track your discount earnings, and buy the item from the retailer's Web site. Microsoft then credits your cashback account, and once you accumulate at least $5 of savings, you can cash out. Microsoft says it has partnered with 700 different merchants, all of whom are eager to capitalize on the estimated 68 percent of online transactions that originate via search engines.

This is a dramatically different model than Microsoft's competitors are using. Typically, online advertisers pay search engines each time a user clicks through to the advertisers' sites. Cashback's tactic, though, is to have advertisers pay Microsoft only when searchers click through and make a purchase from the advertisers' catalogs. Microsoft then takes some of the advertising revenue and gives it back to the user as a thank-you present—and as incentive to come back and shop again.

On its face, this is a smart move for Microsoft. Paying people to do something they do already—use a search engine—is sure to increase traffic and build brand loyalty (as it has when Microsoft has employed similar pay-to-search initiatives). Its competitors don't have similar programs (Google Checkout comes closest with a one-time rebate through some retailers). Thus, Microsoft seems to have recognized an opening in the market and figured out a way to capitalize on it. If cashback gets hefty word of mouth, it could drive steady, advertiser-friendly traffic to Live.com, Microsoft's search engine. Considering Microsoft is muddled in a stilted flirtation with Yahoo's board, any potential for growth is a good thing to soothe antsy shareholders.

But once you start to use cashback, you start to question Microsoft's ability to follow through, let alone its ability to merge its technology with Yahoo's should a deal ever be reached. Curiously, the cashback search is not integrated with the rest of Microsoft's product search engine, which means results are very limited.

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Take a search for Harry Potter through cashback; it yields 717 results. Search for the same lightning-scarred wonder through Microsoft's Product Search, and there are 1,370 results. Cashback's top return is a video game while Product Search's is a box set of the Potter books. It's an explainable discrepancy: Cashback is scanning through only the 700 retailers registered with the program. That's understandable.

The deeper problem is that Product Search doesn't seem to know cashback even exists, even though it carries a small standing link to it in the site's upper-right-hand corner. For example, let's focus on Harry Potter and the Order of the Phoenix for the Nintendo Wii. Product Search lets us compare prices from 17 retailers, ranging in cost from $27 to $49. Cashback, meanwhile, offers 13 retailers with a similar price range.

Here's the catch: Although both of these Microsoft search engines list DeepDiscount.com among the retailers, they display different prices for the game. If you're using Product Search, you wouldn't know that cashback is available for this purchase. But that's not the worst part: You wouldn't want to buy it through the cashback search, even with the discount, because Product Search's DeepDiscount.com price is $20 cheaper than cashback's. This may be an error on DeepDiscount's end, but to the user, it doesn't matter. It's hard to build site loyalty if visitors think the site is trying to dupe them.

I contacted Microsoft and DeepDiscount this morning, and both companies said they're looking into the matter. As of press time, neither had furnished any reasoning behind why the discrepancy was occurring. It's probably not Microsoft's fault—DeepDiscount is most likely to blame for having duplicated listings.

In that case, it's tempting to let Microsoft off the hook. After all, the company did build a search engine (Product Search) that can drill deep enough into DeepDiscount's inventory to find that bargain-bin price. But the question remains: Why isn't Product Search's technology the same as cashback's? Two possible options: The technology won't allow a merge, or the company has made a conscious decision not to synergize. It's unclear which is worse.

All of this leaves investors and Yahoo executives to wonder: If Microsoft can't even get its own products on the same page, how is it going to apply corporate synergy to a Yahoo merger? Ignoring stock prices and proxy battles for a moment, product launches like cashback unintentionally reveal that Microsoft needs Yahoo more than Yahoo needs Microsoft. It's time for Steve Ballmer and pals to pony up for Yahoo—even if they don't get any cash back.