Mike Arrington and Danny Sullivan debate Microsoft’s new Cashback strategy with Hugh MacLeod. Recorded Thursday, May 22, 2008.

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Gillmor: Hi, this is Steve Gillmor, welcome to the Gillmor Gang. Our guests today are: Mike Arrington.

Arrington: Hey.

Gillmor: Danny Sullivan.

Sullivan: Hello.

Gillmor: Hugh MacLeod.

MacLeod: Hey gang.

Gillmor: So, Danny Sullivan, you and Mike Arrington seem to have a difference of opinion about the value proposition of the Microsoft “cash in your face” program?

Sullivan: Sure. I know, well who wants to go first. Mike, you want to slam me or I could come back and talk about it.

Arrington: Well first of all, I mean obviously you are, if not the most interesting pundit on search out there, you are one of the most. And obviously I treat your opinions with a lot of respect which is saying something; I don’t know things like that on this show. But I think in this case, I just disagreed.

As I said in my post last night, I disagreed with some of the conclusions you came up with on the user experience. I am not sure, did you actually use it before you wrote the post because you linked to; I think it was Barry right, you linked to his post on that, but did you actually go through the purchase profits before…?

Sullivan: Yeah, we both actually went through it.

Arrington: And you seem to think – oh that is right, you did because you were talking about a DVD player and then that kind of thing. I understand the things you didn’t like about and maybe we should talk about that. But I was looking at it a little bit more from a high-level perspective and in particular, the fact that it is just the first day they rolled it down and they clearly are going iterate on it nearly constantly.

So I give them a little way more leeway and so you know, I just disagreed with a lot of what you said. What might be interesting is for you to give an overview of what the service is in your initial thoughts on it and then we can jump in.

Sullivan: OK. And I should say I was kind of joking on the slam and I don’t intend to sort of slam back on it. It could be very well be that you are right and that the things will iterate and that they will get a lot better, but to talk about the situation that we have now, so the idea is that you can go directly to this cash back area, find products, search and see if there is a product out there that you are wanting to buy and get a rebate off of it.

And in fact, it is very compelling in the sense that you can get a cheaper price through the system than you could if you went to the retailer directly. I think that will be a problem for some of the retailers down the line, but right now you know potentially you are saving 10, 20, 30 dollars on some of these products, so that sounds great.

To step back a bit further, the idea is that if you are going to Live Search in general and you are doing a search for a particular product and they know that they have some rebates that are available, they are putting out what they call a “glean” or they are putting a little button out there saying, “hey check out cash back” and then you are supposed to click on that, head on over and then discover the products that are available.

And the whole idea behind this is what they are hoping is that you will get sort of entranced with the idea of doing these searches that could save some money by doing it through Live Search and I will discover along the way that Live Search perhaps is a better search engine I ought to be using for all sorts of things.

Arrington: So what is interesting to me, there are two big stories here. One is what is Microsoft doing and will it work? And I think that is fascinating just because they are paying users directly and all that. There are actually three stories as well and I will say the third one as well. The second though is this massive war and that is why I titled my post “The Empire Strikes Back.”

There is this massive war between Google and Microsoft that is endless fascinating to me because what Microsoft is trying to do to Google is one, exactly what Google is trying to do to Microsoft except they are hitting different revenue streams; Google with Google Docs is going after Office and Office revenue which is so much profit for Microsoft. And now Microsoft is clearly doing the same thing back and trying to hit Google and their big revenue stream on CPC search. And I think we could talk about that endlessly.

The third thing though is how third party publishers will make out on this because one of the reasons why I think this is such a big and important discussion is that anytime we have the monopoly of users; it is bad, because they tend to keep more of the profit than they would in a competitive market.

And publishers like me and although we don’t really use Google ads on our site, but lot of publishers do, don’t get much revenue back from Google. And a highly competitive market would change that. I mean it could get to the point where Google only kept five or 10% as sort of a middleman instead of significantly more that they could keep today.

And let’s say Microsoft is hugely successful, I think the third issue is, will that be able to help publishers? And I think that is a big question because so much of the money is going back to users. So those are the three interesting things to me and it might be worth breaking up the conversation that way if you guys agree.

Sullivan: Sure. So to recap, we have got the search wars that are going on, how the publishers are playing into it and then the particular tactic.

Arrington: Well yeah, I mean the main thing you focused on so far I think in your post is will this work?

Sullivan: Right.

Arrington: And I think it will work, I think your question is will it add 3% or will it add 30% to the market share. They have 10% now. And Google has about 60%. And last year, Microsoft had a test of something called…

Sullivan: Live Search Club.

Arrington: Live Search Club which is basically, it got you to do searches on Live.com with some puzzles and things like that and you can win prizes. Their search market share according to ComScore jumped from 10 to 13% in a month based on that, which suggests, hey it works. Now on the downside, there clearly was a lot of gaming going on and maybe even some bots working on it and it is hard to tell like how much of that game was based on that.

Sullivan: Well, it is interesting because they did see the spikes and now to my understanding all that stuff seemed to being filtered out. If you go back and you look, the spikes haven’t continued. And in fact Compete last month when they put out some stats had a spike again for Microsoft and they were the only one showing Microsoft to have some kind of a spike. And when…

Arrington: Yeah, but Compete isn’t really reliable. I mean I would look at ComScore data first.

Sullivan: Well right, but if you look at ComScore data, you don’t see those spikes happening with HitWise, you don’t see the spikes happening with NetRatings and I run charts every month or I try to get them out every month where I take the trend from all four rating services and put them up against each other. And when you put them up against each other, there is just a decline for Microsoft. And did they have those spikes with Live Search Club? Yes, but then that has…

Arrington: Yes, but they stopped Live Search Club, it was a short term thing though, right?

Sullivan: No, Live Search Club is still going.

Arrington: Oh I didn’t know that. I thought it was only run for 30 or 60 days and then they stopped doing it?

Sullivan: They may have changed the prices around, but in fact they still have those sorts of things going and they are even bigger in the UK. They just rolled out like this Indiana Jones search that they are doing out there and they have a couple of other things that are going and I was with you. I sort of thought it came and it went, but they have actually been running them all along.

So I think part of the spike that happened, I think they did have some people come in, but I suspect what happened was ComScore over counted and they didn’t get some of the robotic stuff and that these days are stuff being filtered out. And when I talked to Microsoft today, I was saying all right, you guys have been saying this is thought to be having generated really regular users for you.

And then they said, well you know what, it is not that it actually generated regular hardcore users for us, we found that that a number of people using Search Club are still very, very small in relation to everything else, but we also found that they can become more loyal. And so in many ways what they are doing now is much more of a mass market appeal way of getting loyalty out to people who just don’t want to do the gaming.

I mean everybody wants money, right, they would like to have some cash in their pocket and that’s a lot different than people who are saying, oh I just want to play some games.

So I’m with you. This will be a real test to see if the game stuff that they did can translate into a broader appeal to people, to really get their share up.

Gillmor: Another thing that Mike pointed out was that this is a refocusing of Microsoft’s strategy around commercial transactions, in terms of search.

Sullivan: Sure…

Gillmor: Do you agree with that part of Mike’s argument?

Sullivan: No. I tend to feel like they’re refocusing around a service that they bought, and they kind of have to shove into it with everything else. I mean, they did this big thing yesterday, and they’ve got Bill Gates, who comes out yesterday and he says, “Well, here’s our grand, master plan. And our grand, master plan is we’re re-branding Jellyfish as Live Search Cashback, and we’re re-branding Farecast as Live Search Farecast.” That’s not a strategy. That’s “I bought up these things and I’m shoving them together.”

Gillmor: Hang on a second. Danny, you’re not answering my question.

Sullivan: Sure.

Gillmor: You’re answering your question, which is why do they do this?

Sullivan: [laughs]

Gillmor: What I’m asking you is whether or not you agree with the notion that it would be good for Microsoft to refocus–instead of trying to go after market share across the broad spectrum of Google’s gigantic monopoly, that they go after targeted commercial transactions. Yes or no?

Sullivan: I’ll go with no. If I have to go with yes or no, and I can’t qualify it, I’ll go with no.

And I’ll tell you why I’m going with no. And it goes back to the problem I had with how they rolled things out to begin with. Because I go to Google, everybody goes to Google, because Google comes through for you on all types of queries, on a regular basis. I don’t have to think, “Oh, I’m doing a commercial query. I’d better go here or I’d better go there.” I can go to Google and I can get what I’m looking for. And if I go to Microsoft and I think, “I’m going to go here…”

Arrington: Wait. Admit it: you go to Google because you’re used to going to Google at this point.

Sullivan: Sure.

Arrington: You go to Google for the same reason you went to AltaVista over and over again in ’97. It’s habit.

Sullivan: And why did I stop going to AltaVista? You ask anybody who used to back AltaVista about that time…

Arrington: Because something changed. Yeah.

Sullivan: Because something changed. Because they got sucky. And this is the thing that you hear from people who used AltaVista all the time. You would say, “What search engine do you use?” And they would tell you–this was in like 2001, 2002–”Well, I used to use AltaVista, but…” It was like they broke up or had gone through a divorce. And they didn’t want to leave AltaVista, but they did, because they found Google and Google kept coming through for them…

Arrington: Danny…

Sullivan: But that’s the problem Microsoft faces…

Arrington: Danny, hold on.

Sullivan: Sure.

Arrington: I need to challenge your assumptions as you go, because otherwise you’re building a whole case based on a foundation…

Sullivan: All right.

Arrington: And I want to challenge the foundation, because if you defend that, then I can agree with part of what you’re saying.

Sullivan: OK.

Arrington: But the day before Google launched, the day before you ever tried Google, you probably thought search kind of was a pain in the butt, but you probably weren’t thinking, “Wow, I can’t wait until tomorrow, when something awesome is going to come out.” I mean, right? You probably hoped that some day search would get better, but you probably weren’t thinking…

Sullivan: Right.

Arrington: I mean, obviously, if you did, you probably would’ve started the company, or started Google, because Google was a fairly simple idea when it first launched. The idea of incoming links and Page Rank was brilliant. It’s obviously not that anymore.

But if we think about today, search still sucks. I mean, particularly because it’s one-dimensional, in the sense that we can only search text. So you can’t search anything else in the world besides text right now, at least very well.

And then the other thing is it just doesn’t work very well. I mean, I’m becoming more and more frustrated with Google, trying to figure out date-based searches, trying to sort through all the spam stuff that Google still isn’t that great at getting rid of. And something some day, I assume–it might be tomorrow; it might be 10 years from now–is going to be better enough that I’m going to start using that. I mean, don’t you agree?

Sullivan: But the problem with that assumption is you have to go back to the landscape of what allowed Google to do what it did. Google shouldn’t have existed. Google was a second-mover, not a first-mover. And the reason they existed was because the monetization model didn’t exist. They came along. Nobody knew how they were going to make money off a search.

Nobody could sell the listings. When Open Text tried to sell listings in 1996 the Web went haywire. Everybody backed away from that. So the deal on how you made money off a search was you gave it away. You went through these portal deals. You signed up with Amazon. You signed up with the shipping service – whoever, I can’t remember who they were, FedEx or the other ones.

You put all these portal deals together and nobody paid attention to search. The one service that people really probably could have depended on, AltaVista had three different corporate owners in two years that didn’t know what they wanted to do with it.

[over talk]

Arrington: I think two of those were after Google launched. You have to separate Google from the monetization event because Google getting the CPC stuff right came way after Google was considered to be seriously awesome.

So it wasn’t that Google had a better business model. The reason why they were able to win as a second mover was because search fundamentally doesn’t have the network effect. So you don’t get a barrier to entry that you get with things that have network effect.

Sullivan: No, no, no, no, no. You have a huge barrier to entry.

Arrington: What is the barrier to entry?

Sullivan: Every time Erik Schmidt tells you, “Oh, there is no switching cost.” and people can go away, it’s like saying, “Yeah, and you can stop smoking cigarettes anytime you want.”

Arrington: No, it’s different.

Sullivan: But it isn’t different because people don’t switch away from Google. You can go back and you can look at all the stats and you can see that people aren’t switching away from Google. And they’re not switching away from Google because it doesn’t suck.

Arrington: It’s not because of the network effect. It’s because Google is really good.

Sullivan: Exactly. But that’s why I’m telling you AltaVista is relevant and why you’re not going to have somebody, very unlikely in 10 years suddenly go, “Oh, we’re all abandoning Google. We are all abandoning Microsoft.”

Arrington: I’m embarrassed for you for saying that.

Sullivan: I’m not. No, I’m embarrassed for you for not understanding -

Arrington: But let me finish my point.

Sullivan: – the fundamental landscape of why Google survived. And the reason, if I can finish is no one wanted to pay attention to Google. Ask Steve Kerst. He told them to pound sand. Those are his words.

And no one wanted to do it because they didn’t think they could make money off a search. These days, when search is a $20 billion industry that is estimated to be out there, none of the major players and I am talking Google or Microsoft or Yahoo – none of them is going to sit there and let some startup come along and exist for very long without snapping them up.

That is where you see YouTube getting purchased. Maybe they will spend a ton of money. But these are the major companies. These are the search utilities. They are not going to allow another player come in and do it.

Arrington: Danny, you are speaking well and you are speaking strongly. But there is no logic to what you’re saying. You are throwing so many different ideas together.

I think the core point we’re trying to make now is, is Google disruptable? It seems to me you are arguing no based on a bunch of random stuff.

But my core point is that search sucks still, we just don’t realize how much it sucks and that someday Google would be disrupted. It might be by Google itself but history tells us that is rare.

So I think that to say that Google was in such a commanding position right now that they will never be disrupted is foolish. It’s like saying -

Sullivan: Well I guess I would have to define how you say disruption. If disruption means everybody abandons Google in the way that everybody one abandoned AltaVista and it suddenly becomes a minor player that nobody pays attention to – no, I don’t think that’s likely to happen in say, the next 10 to perhaps 20 years.

Arrington: Jesus. Really?

Sullivan: Yeah. Put me down and we’ll see how it goes. I think they are going to continue to be a major player in search in the same way that you see Microsoft is a major player in computers.

Arrington: Wait, there is a big difference between “they will be a major player in search” and “there will be nothing better than Google in the next 10 to 20 years”.

Sullivan: Yeah, and I don’t know -

Arrington: Those are very different statements.

Sullivan: Yeah, but I think you also have to define what you’re talking about in terms of better than Google because they seriously may not be using. -

Gillmor: Hang on. Hang on. This is a good place to let Hugh say one thing and then he can -

MacLeod: I would just say if there is something big enough to come along and disrupt Google, no one could predict that. You can’t just say -

Arrington: Nobody can what?

MacLeod: No body can predict that. Same way nobody can predict a third world war.

[Cross talk]

If something is big enough to come along and dislodge Google, there is no way that three guys, four guys in the globe could see it coming 10 years in advance.

[Cross talk]

There’s nobody anybody can predict anything and if I tell you what I’m thinking that’s the best I can tell you and the best I think the way it’s going to go. But I won’t guarantee that it’s going to be that way, in the same way that, Mike, I will say to you, your review could be perfectly right. You might have it absolute, and a I think I even said this in my article, I don’t even know that I can tell you that Microsoft’s program won’t work the way that I think it may not work.

But from what I saw and the way it looked right now, it either needs to change dramatically or no, I don’t think they’re going to pick up two or three percent share off of it.

Arrington: Well, that certainly is a fair opinion. And you could be right. But my point… well, let me change the dynamics of the discussion and see if this is interesting.

Let’s pretend… I was thinking about this yesterday. Let’s pretend, Danny, for all of us, that we run Microsoft and we launched AdCenter, we re-launched it in 2006. We put our best engineers on it. And it kicks ass technically and we got absolutely nothing out of it.

I think we can all agree that AdCenter didn’t do anything for them. And that Panama didn’t do much for Yahoo as well.

Gillmor: So let’s pretend that what happened happened.

Arrington: Exactly. But let’s pretend that we are running Microsoft. And we’re sitting around in our executive meeting, say late last year, like what are we going to do?

Well, we can buy Yahoo, but even if we buy them, chances are that we will continue to lose market share even as a car venerates because so that’s one thing. Or two is we can fight back. And then say, OK let’s fight back, how do we do it?

And I can see going well, better software, better technology isn’t going to be enough, right? Because there is, unlike search itself, which I believe doesn’t have a network effect; search advertising clearly has a network effect.

In the sense that the bigger you are the more advertisers you get, the more pages you get, the more users you get, the more money that comes in, the more you can pay partners… and it’s sort of virtuous or vicious cycle, depending on which side you are one, that’s why Google has 60% market share in search, but probably has what, 90% revenue in search.

Danny [soft voice]: But I mean, the problem with AdCenter is they didn’t have the searches and then when people start talking about what Panama did and what.

Gillmor: So what did we do?

Sullivan: Panama didn’t… Panama didn’t make more money for Yahoo. But Panama had nothing to do with the fact that Yahoo is largely maintained its share against Google.

Arrington: Stop being an analyst and start being an executive. We got to figure out how we are going to fix this. So we are sitting around and we say, yes, software isn’t going to do it for the reasons you just said, alone. What do we do?

What do we do to get market share?

Sullivan: The paying people or loyalty programs I think are a great idea.

Arrington: Is there anything else you can do, because I don’t know what else you do. You could buy Facebook, you can buy Digg, and you can buy the traffic which is what they do, which is money…. I mean, they are losing so much money on those deals, to get it away from Google. That’s one thing.

Or hey, why not take that money and just give it back to users and at least see if it works. I mean,

Sullivan: You can give it back to users; you could certainly give yourself a brand that people could recognize. You might start calling yourself Microsoft Search because people know what Microsoft is. They have no clue what Live if.

You stop re-designing your search engine every five seconds. You stop pretending you are a software company, where you have to roll out releases every six months, because that’s what you do with Office. You pretend that you don’t work for Microsoft and you forget that you ever heard of Internet Explorer.

You start asking the web why Firefox is willing to put out in their toolbar, Yahoo and Google as the default, but they won’t recognize a major search engine like Live. Apparently, because Life isn’t cutting some kind of a payment deal with them or isn’t even allowed to do that.

You start cutting back at Google. You say, Hey, Google if you’re supposed to be so open about everything, when it comes to mobile, and you are so open when it comes to social, then why on earth do you not open up your web….

Arrington: Let’s say they do all those things. What exactly is that going to do to market share? I mean, I don’t disagree with any of that, but I don’t think that wins the war.

Gillmor: I think that’s your essentially talking about what Microsoft’s problems are, in terms of getting off of their feed around Office and Windows and moving into an Internet environment.

The one thing that I think Arrington has right about this, in terms of the disruptive nature of it, is that this allows them to start playing on the same turf as where Google is playing. Regardless of what the kind of share they get over what period of time, at least they’re not talking about all the things that you just listed, namely the problems with having a revenue stream that they can’t escape, etc., etc.

What has that got to do to this theoretical group of executives trying to figure out what to do? What is everything that they can’t do got to do with what they need to do?

Sullivan: What do you mean, what they can’t do? They can do anything they want. If they can spend $40 billion to acquire Yahoo, then somebody over there can have the….

[Cross talk]

…guts to write a piece a peanut butter memo of their own to say, hey, you know what, Steve Ballmer, you are really screwing up and you need to change your brand.

[Cross talk]

Gillmor: …view of the universe that somehow Microsoft is somehow screwing up because none of the open source players are going to give them the time of day. That’s nonsense. It’s got nothing to do with the real world.

Arrington: And I have a different argument, which is, let’s say they did all that. I still don’t think that…

Sullivan: And I agree with Mike. Do the loyalty thing. Pay the people make it a simplistic program. I’m totally with you on that. Why not? That’s another way to do it and that’s why when I was doing my article, I was writing up on how Google did that in the beginning.

They did it through their affiliate programs but they are paying websites, what, three cents per search that was happening out on all these websites. That’s how they built up their traffic. So cut out the middleman and go directly to people, sure. I’m with you on that.

Gillmor: OK, then what are you against them about? I don’t understand.

Sullivan: Well, we’re really not against…

Arrington: You’re mad because…

Sullivan: The main thing we have…

Arrington: They are shopping comparison engine; you couldn’t find the right DVD player? Seriously, I don’t quite get what the issue is then?

Sullivan: The issue is that if you are Microsoft and you’re coming in and you’re trying to take on Google that frankly is a very fine tuned searching machine, regardless of how bad you think it is.

And you get somebody who comes over to your site finally give you the time of day to check out how you operate. If you screw up once with them, you really lose it with them. And you only need to go back and look at Microsoft share and how it’s been declining to understand that. And you only need to go back and look at any search engine that has declined in share every time they roll something out, they’re disappointing.

I think people will try something new, but if they try something new and it leaves them hanging, or leaves them upset, or leaves them concerned or disappointed, that’s it. I’m going to go back to something I trust.

[Cross talk]

Gillmor: So, let me just interject something here. What you described is a strategy of trying to out innovate Google, which nothing shows will work. And everything you talked about before about trying to the negatives of having multiple releases, disappointing people over and over again, what if that doesn’t work at all?

What does work?

Sullivan: That’s not true. People cannot innovate Google and they do out innovate Google. YouTube out innovated Google in figuring out how to they were able to get video content onto the web and make themselves into a video service.

You can look at Ask and their 3D service that they put together and you are watching Google going testing the damn thing. They are testing the 3D interface and Ask comes through and pioneers because they don’t have it quite right.

Gillmor: Google… LEEDS is not a technology LEED, it’s an advertiser monopoly.

[Cross talk]

Sullivan: The advertisers has nothing to do with Goggle’s advantage. Google’s advantage…

[Cross talk]

Gillmor: Wait, wait, Danny, rewind. Say that again.

[Cross talk]

Sullivan: I will rewind, and I’ll say it really clear so you can understand what I say. If you think Google is winning in the search space because somehow they’re doing something better for advertisers, then explain to me why on earth Yahoo is even existing.

Yahoo has, as many people like to say, the shittiest system, before they even rolled out Panama. And Microsoft came along and kept saying, “Hey, we’ve got ad Center! We’ve got demographic targeting! We’ve got all this. We’ve got all that.” But the only feature they didn’t have that the advertisers actually wanted were people who were searching on their search engine. So it doesn’t matter that the service is that great or that wonderful…

Gillmor: What Mike Arrington said about the revenue that moves in the direction? They have 60 percent of the share and 90 percent of the revenue. That is because of the advertising monopoly. The relevance of those searches is guaranteed to be more productive than any other platform.

Sullivan: For an advertiser, it’s guaranteed to be more productive on Google? No, it’s not.

Arrington: Can I say something here?

Sullivan: The advertisers don’t buy Google because they think…

Arrington: Wait, Danny. Danny. Jeez.

Sullivan: No, no, no, no. [laughs] I’ve just got to challenge that. Then I’ll shut up and you can slam at me. But look. Advertisers do not go to Google because they think, “Oh, Google is going to give me the absolute best conversion that’s out there.” And in fact, you have some studies that say someplace like Microsoft may convert better. But they go to Google because they can get a lot of conversions at a reasonable price.

Gillmor: Why is it a reasonable price?

Sullivan: No. Because, in general, they’re going to make money off the searches as they’re happening. It’s an unreasonable price…

Gillmor: They have more volume; therefore they can sell it at a less of a cost.

Sullivan: They don’t do that. They don’t sell it at a less of a cost. Have you bought ads on Google?

Arrington: Oh, I can talk now?

Sullivan: Yeah, go ahead.

Arrington: OK. Before TechCrunch, I worked at a company that we spent between $50,000 and $100,000 a month on Google and Yahoo.

Gillmor: Would you shut the TV off?

Arrington: It’s not me. It’s somebody else.

MacLeod: Not me.

Gillmor: Hugh?

MacLeod: No.

Arrington: Somebody had it. OK. It’s good now.

I spent $50,000 to $100,000 a month on advertising on Google and Yahoo, at a company that I ran called RazorGator. And clearly, most of the traffic came in from Google. I mean, even back then, they had a lot more traffic than Yahoo. But Yahoo’s system–by the way, this was way pre-Panama–was perfectly usable. I mean, it was great. You said it was a crap system. It wasn’t great, but it was fine.

Sullivan: Right.

Arrington: All we did was we pumped money in until ROI went to… Which means we didn’t really care what the cost-per-click was. We didn’t care anything. We watched transactions. We watched conversions. And we kept spending money until we gave away all of our gross profit.

Google became much more important to us because they had so much more traffic that it was worth our time, because it takes time to have people monitor it and all that. And so we spent a lot more attention on Google for that one reason, just because it was a lot more traffic.

Now, Danny, you did say that at the end of that rant. You did sort of mention that, and so I agree with that part of it.

Sullivan: Right.

Arrington: But that’s exactly what Steve is saying, and that’s exactly what everyone’s saying, is that advertisers spend more time on Google because they get a lot more traffic from Google, and so big advertisers spend their time on it. Even if it’s cheaper to advertise on Microsoft, you don’t waste as much time on it because it takes a lot of time to deal with it.

Sullivan: Sure.

Arrington: That’s a big issue for advertisers. And so the bigger Google gets, the bigger that effect is.

And what Steve was saying–which I don’t think you disagree with, Danny–is that the more third parties that join Google’s system and the more pages that are created, the more money Google makes, because there’s a more robust auctioning system, and therefore they can pay out a lot more money to the partners, which brings in more partners. And that’s the virtuous cycle I was talking about.

Sullivan: Sure.

Arrington: That’s exactly what Steve was saying, which I don’t think, fundamentally, you disagree with…

Sullivan: No, I agree with all that.

Arrington: It’s that it’s very hard to disrupt that.

Gillmor: So the question is, what do you do to disrupt it? That was what the straw man that Mike put on the table is. If we’re all sitting around at Microsoft, what do we do? And if the answer is, “We do more releases of more technology, “pretty much the answer to that is “fail.”

Sullivan: But that’s not what I’m saying that they do.

Gillmor: I didn’t say you were…

Sullivan: I’m saying that’s actually part of their problem.

Gillmor: I’m asking you, what do they do? What do they do? This is a thought experiment. What do they do?

Sullivan: So, first of all, you get a brand that somebody can rally behind. I think that’s one of their biggest issues they have right now.

Have you ever launched a clean install of Internet Explorer seven and seen what happens when it asks you to choose your search provider? It comes along, and because they’ve been so freaked out by Google and so freaked out by the antitrust stuff, it asks you to pick your search provider, on a clean machine, and you have to choose from Google, Yahoo, and something called Live. That’s what they call it: Live Search. What’s Live Search? [laughs] They don’t even call it like “Microsoft Live Search.”

Arrington: The answer is, they fix the brand and they’re going to win.

Sullivan: No. But that’s one important thing that I think they do need to fix.

Gillmor: OK. All right. So that’s one recommendation. Next?

Sullivan: I’m totally on board with the idea of some kind of loyalty program–paying searchers, paying users that are out there. Understood, by the way, on all this is that your web search had better have rocking core relevancy. And they’re better at it. They’re much better at it. But they need to stay on top of that.

I think the strategy of going after the verticals is great. I think the stuff that they’ve been doing to try to expose it and getting it out there is great, and I think that they can certainly attack Google and pull people in on some of those verticals as well. The stuff that they’ve talked about is good. It’s hard to get people to go out there, so the loyalty programs that are being discussed make a lot of sense.

I would go through, though, and separate out that unit and tell them to act like they don’t work for Microsoft. I’d almost tell them to treat it like the way the military would train, where they would have the red team that was supposed to be the enemy, and they lived like the enemy. I’d replicate a Google environment. I’d replicate it out there where you don’t even know that Microsoft exists out there. I think that’s part of their problem is, in their core, they think they’re building software.

Gillmor: You’re going to sneak that by the Internet? “Hey, nobody realized that Microsoft is now called Odeo,” or whatever it would be. I mean, come on.

Sullivan: I didn’t say anything like that. I said Microsoft should be proud to come out and say, “Hey, we’re Microsoft, and we’ve got a great search engine, which we actually call Microsoft Search, and we’re doing this thing. And we’re going to be out there. We’ve got a good product, and we’re going to pull you in through all this sort of stuff.”

Gillmor: History doesn’t show that that works.

Sullivan: Doesn’t show that Microsoft works with products?

Gillmor: No. Every time that Microsoft talks about advances in technology, they are rebuffed in the marketplace and Google’s share goes up. So, why is that going to work?

Sullivan: Oh, you mean in terms of search. But that’s because Microsoft has just been playing at search. Right?

Arrington: Danny, you’re disagreeing with yourself. I agree with most of what you’re saying. But you’re saying, on the one hand, that Microsoft, on the tech side, can’t do anything to win market share. And then, on the other hand, you’re saying these sort of tactical-level improvements–I don’t know if you’re saying that’s going to improve their market share, or it’s sort of a bare minimum to sort of get in the game. I hope you’re saying the latter.

I don’t disagree that they should do that. One is I don’t know they aren’t planning on doing most of that. I hope they are. But two is I don’t know if it’s going to help at all.

MacLeod: I was in Paris six months ago, when Steve Ballmer made his big advertising announcement. I actually got to ask him a question and everything, which was kind of cool. And he was saying, “We’re going to do something really big for advertising.”

And I remember the hit of the show. They brought a Microsoft Surfaces table to the show. And everybody was fascinated with that. [laughs] And when I talked to people at Microsoft, it’s like, “Well, what’s your plan, guys?” And they said, “Well, we just want to go where software’s going.” In other words…

So I started thinking, hey, maybe in a couple years they will have software on Coke cans, so we can all watch videos on our Coke cans or whatever.

Or we can have software in our bathroom tiles, so we can send emails while we take a shower.

Sullivan: And I’m with you in the sense that that’s what Gates talked about in the first part of his keynote. It was like, software, software, software and software is our solution to this and software is our solution to that. To him, search is a software problem.

Arrington: He didn’t say that. No, no, he didn’t say… he specially said the opposite of that. He said there’s three approaches you have to take to search. He said you have to have a competent platform on the software side. He said you have to have a compelling user experience and you have to have the right business model.

He clearly stated that in the keynote, as you have to do that.

Sullivan: well, I’ll come back to you when I get done going through this.

[Bad spot in tape]

When I read through it I had… I read through it and I thought, yet again, they are looking at this as a software thing. And what gadget can we put search into and what upgrade can we add to search.

I wish I could better explain why I think that’s a problem for them. Why it is that I don’t think Google is a software company that sees what they are doing that is something different and how maybe that would help Microsoft that they could get out of that mode, but ask me in a week or two.

[Cross Talk]

Gillmor: You said you talked to Microsoft…

Arrington: Here’s the question that you get. Video on the Coke can question.

Here’s a question for you Danny. Do you think Microsoft actually likes the Internet? Or do you think they just feel they have to react to it? Amazon and Google came along.

Sullivan: I think that’s a great question and I think they still think that they have to react to it.

Man: Right.

Sullivan: I don’t think they have, if you will, the Internet in their soul yet. And I think that at the lower levels you have people that are that way, but I think at the upper levels and I think the bulk of the company operates around, we put stuff on computer desktops and you buy it in retail packaging.

[Cross talk and argument]

Gillmor: Well, I don’t happen to agree with that.

Man: I have a Hotmail account, although Gmail is my email of choice. It’s just such a nicer experience to use Gmail. And I’m not anti-Microsoft. I like Microsoft. They’re good friends of mine for the most part. But I wish Hotmail was better than it was and I just don’t feel there’s that kind o… The thing about Larry in Serbia, they like the Internet. They studied it at school. [laughs]

Sullivan: I mean, they grew up on it and they were born of it. And they re used to this idea that you push stuff up that maybe is half-baked, but it seemed to get along OK.

Gillmor: You know the only problem with that logic and I certainly… it’s obvious that there is one team is in the driver’s seat here. But look at what happened with Yahoo. Everybody adopted this sort of perspective that Yahoo are the guys in the white hat and they were the Internet guys and they knew what they were doing and that they were all…. You know, it was a kumbayah kind of a thing.

And the Microsoft was the other guy and… The only problem with that view is that Microsoft had their foot on Yahoo’s neck. And they didn’t let go. We now see Yahoo, in my opinion, as a completely destroyed company, which is looking in search of how to be able to divest itself of its assets.

Sullivan: I feel like Yahoo doesn’t get anywhere near the credit that they deserve. I think that many people have tried to paint the whole search wars as a battle between Google and Microsoft. What I’ve watched is Microsoft has been losing, losing, losing and Yahoo has lost share but no where near to the degree that Microsoft has.

Without putting in the degree of money that Microsoft is putting into it, in my camp there are winners. So I think Yahoo is…

[Cross talk and argument]

Gillmor: There’s a point I want to make here. When you start talking about these sort of ephemeral notions of Internet goodness and of, Linux, I don’t mean you specifically, but the whole idea of Unix as a religion, that it doesn’t have a lot to do with the dynamics of what Microsoft has to do, in order to prosper and to survive.

I think that it’s a little bit Pollyannaish to think that these slick kinds of metrics that Microsoft is looking at, in terms of trying to come back here.

I don’t think it’s about… I don’t think it’s about messaging. It’s not about selling the idea that Steve Ballmer is a good guy and we should all just bend over. I mean, come on.

Sullivan: No, I don’t mean it that way. I mean it like, for example, so I was just at what, the Microsoft summit that they did for executives in the UK and they talked their search message. And they started talking about one of the things that they started talking about was how great Silverlight is going to be.

I’m thinking Silverlight is going to be great in my search experience? Because Flash was so helpful as a search experience. Why are you talking about Silverlight? They were talking about Silverlight, because Microsoft has to reach into their bag of tricks to come up with something to show that they are doing something, so they got Silverlight.

It has nothing to do with search.

Gillmor: That’s an opinion. You’re saying that Silverlight is meaningless. There are other people, like me, who think that Silverlight is enormously important. And that it is going to be on 100 million desktops in about two months.

Sullivan: For search?

Gillmor: I don’t care. We’re not talking about search here. We’re talking about…

Sullivan: They were talking about it at a search conference as if it had something to do with search.

Gillmor: If Microsoft… First of all, Microsoft had a conference this past week because it was scheduled for a year. And Bill Gates is also leaving the company, for all intents and purposes, in 30 days.

Sullivan: I’m not talking about this conference. I’m talking about a conference I went to three weeks ago here in London, what they did to explain why they’re going to be successful in search, for industry leaders here in the UK.

And it was an entire day type of thing. They do similar things in the US, where they were talking only about search and one of the things they started showing us is…this product is great because they got Silverlight.

Gillmor: I get what your point is, but what you tagged onto your point was that Silverlight has nothing to do with search. Maybe, does it have anything to do with them, Microsoft regaining it’s footing and becoming the superpower that it is in the Internet space? I think it’s got a lot to do with that.

Now, just because there are factions inside of Microsoft who are talking out of both sides of their mouth about various strategies that they may have or may not even have, about search, doesn’t mean that this isn’t a significant asset to them and it is part of…

You haven’t even talked about Microsoft Mesh. I doubt we’ll talk about it at all in this call. But in fact, that’s significant that’s being made by Microsoft by Ray Ossey, who is nominally in 30 days going to be easily the first or second most important person in the company.

So, what Microsoft is about to do and how they are about to turn this ship around or not, is a pretty interesting scenario. I think what Mike is suggesting with his analysis of this cash back service is that has, for whatever reasons, that it may or may not be a significant part of Microsoft gaining share in the search market place.

It may also have tremendous assets in beginning a turn around for the company which will have an impact on Google.

Arrington: Well, I also think that… let’s say they only did a couple. Say, in the next few months, they gained 2% market share. Again, what would if you just had an over/under what would you think two months from now they would gain in market share? Zero? A percent? 2%?

[Cross talk]

Sullivan: They were lucky I think that… honestly, 2% would be lucky if they gained that. I think that it’s more likely that they will probably hold their share, realistically speaking.

MacLeod: How come we have heard no mention about Amazon so far?

Arrington: Hugh, I hate the fact that I made half a point and then we moved on.

MacLeod: Oh I am sorry.

Arrington: It is OK because I do it to everyone to but I just want to finish one point, which is let’s say they gain a little bit of market share, the interesting thing about their strategy is, let’s say it is 1% — I mean it has to be more than zero or else I have no point — let’s say it is 1%, the point is that it is likely to be mostly commerce related, which is all the revenue, most of the revenue. And so it is going to have a much larger sort of effect, a leveraged effect, if you will, on revenue.

And not that that’s going to help Microsoft’s bottom-line much at all right now, but it is just dollars out of Google’s pocket. And my main point of my post is that this hits Google. The more successful it is it has this leverage effect of hitting Google revenue. And if it is all they do, that has got to be at least of what they win from Microsoft.

Sullivan: I mean that assumes that the people are going to suddenly take money away from Google and put it into Microsoft to do this. And they may not do that, they may pull money from other places and the other odd thing about the whole program is none of the ads that are actually, when you do a keyword search are CPA based.

The CPA based stuff is only after you click through on Live Search’s own house ads. So if you are still running all the CPC campaigns, you are likely to still keep doing them and there are plenty of players and Amazon is a good example [cross talk].

Arrington: [cross talk] said, yeah.

Sullivan: What is that? And Amazon is a good example of…

Gillmor: [cross talk] in Dan.

Sullivan: Sorry. Which one of us?

Gillmor: Just the last thing you said three times.

Sullivan: I was saying that Amazon was I thought a notable example of somebody who is not in this program and when I do a search on Live Search from the home page and I get their little cash back button, I am also still seeing Amazon sitting there, so are the products and the products actually will exist at Amazon because that is the way the targeting is happening. It was notable to me.

I think Amazon might be thinking, sure the CPA stuff maybe we are going to pay off better there but right now, it still makes sense for us to have our ads, if you will, on the frontlines even if they are on a CPC basis.

Arrington: You want to know something interesting that I found yesterday when I purchased an external battery that you can plug your computer into and so when you are on the road you have an extra four or five hours. And I knew I wanted one and I knew what I wanted at Amazon and I almost bought at Amazon a few days ago, but I ended up buying this yesterday through Microsoft and I actually found some random e-commerce site that was like, it was a good like $40 cheaper than Amazon.

And I always used to think of Amazon like not necessarily the rock-bottom prices but like safe enough that like you could just buy there and not worry about getting ripped off. I am like, wow, I mean this is pretty material like margin difference. And just completely as an aside, literally yesterday, I lost a little bit of faith in Amazon; I may not just automatically make purchases there anymore.

Sullivan: And you know what, I had the same experience because I looked at some of these prices and I went back to Amazon as, exactly as you, my faith, I am going to get a really good price, maybe I could find it little bit cheaper but it won’t have hassles and I could see I think it was like on the Xbox Elite, I was like: oh my god, Kmart is actually going to do better for me than Amazon.

I lost a little bit of faith when it turned out when I got to the Kmart site that the price, even when you figure that the rebate wasn’t showing was slightly different. But yeah, I could have very well done it and if I knew the exact product I wanted, you bet I will be right behind you if I am not pushing you out of the way to go over there and see if this pricing works better for me over there.

But I think that was the other part of what I was trying to say was, yes they built a very interesting deal search engine or coupon search engine and maybe that will translate into people using the general Live Search and getting them in the other places to go, but it might be very well be it is this sort of niche thing and they will get some revenue off of it, but they are not trying to be a niche player against Google. They want to be out there with Google in a bigger way than that.

Arrington: Let me ask something else Danny, let’s go back to our virtual exec meeting. Now that we have done this, I mean OK we have done this and let’s keep making it better, what if somebody says this: let’s build this right into IE, says well so that like FatWallet does today, anytime I sort of make — with the plug-in I believe — anytime I sort of make a purchase, it sort of automatically brought into my cash back account if I have created one. And you know what else I do is I’d create a Firefox plug-in too. I don’t think Microsoft has ever created software for Firefox, have they? I am asking if they did that as well.

Gillmor: Mesh.

Arrington: What’s Mesh?

Gillmor: Mesh was demo’ed.

Arrington: I got to read up on that, but you know, like let’s say they did a Firefox plug-in too, could suddenly get kind of interesting like the people could really go, well I need to be a part of this, right?

Sullivan: Sure.

Arrington: It is interesting to you then.

Sullivan: Well I tend to get worried when the idea that IE will somehow help Microsoft because I guess that just comes from years of having them and other people say and IE is going to say this, that it has nothing for them in terms of search, just like Vista did nothing for them in terms of search. They don’t have any built-in advantage that is getting them anything off of that.

Arrington: Because the government stops them from doing it.

Sullivan: Not really, because at this point, it seems like when people decide that they want to go search, they could just type in Google and when they get to Google, Google either gets them a toolbar that gets installed very quickly or of course Google has got the partnerships with a lot of people out there like Dell. So I think…

Gillmor: It is a couch potato model. There is no reason to switch.

Arrington: Right. If you have IE, if it had default Live.com search, I think obviously that would help them tremendously, but they don’t do that as you said. By the way I didn’t know that until you said it, because I am a Mac guy and I don’t go anywhere near Microsoft desktop software if I can. But it seems to me that if you install IE that it should have Live as at least the default search and if I were them, I wouldn’t even have Google as an option.

Sullivan: But they weren’t able to do that, they were going to get into too much trouble because of the antitrust provisions and Google made a big stink about how they were really worried about that. And so what Microsoft came along is, if you already had something on a computer that you bought, you upgrade it, it would keep your things, but otherwise if it is a brand new computer — and this compacts the hypocrisy of Google by the way.

In a brand new computer, Microsoft to keep Google off their back, will have used the user decide what you want to choose and Google was saying this is really important because we need to have choice out there, because we need to have choice and consumer deserved protection.

But then, when you get a new copy of Firefox, Google for all they told and we want to protect the world and save everybody and give you choices, is quite happy that the default in Firefox is Google because they paid for it.

Arrington: Because Firefox is effectively owned by Google.

Sullivan: Exactly. And I know it is not the only thing that would help Microsoft, but I think it will be nice to see Microsoft really step up the attack on Firefox and say, if you are supposed to be out there and supposed to be this open source thing and you are thought to be doing it, we have a kick-ass search engine as well and it shouldn’t be that the default in your browser is going to be Google just because they are paying you the money anymore than Google allows the default fights over our stuff. They may not really fight about that, but they just kind of bold over and take it from Google in that regard.

Arrington: Now, the version of Firefox — we are going a little off topic – but the version of Firefox that say Yahoo promotes, that has Yahoo as default search I assume, right?

Sullivan: Right. So if you were to go to Yahoo, you would get it directly or if you get a Firefox…

Arrington: But Microsoft doesn’t promote Firefox downloads because that doesn’t make any sense for them.

Sullivan: But see, but that’s why it might make sense for them because they won’t promote it, because they like IE7 because they are owned by Microsoft, right? But I would just love to see them say like: you know what; we are promoting both Firefox and IE7, both together, because we think these are both great products. So we don’t care that we work for Microsoft.

Gillmor: Jay Shapiro in the Chartroom says Mesh defaults to Safari even when Firefox is the default browser; it is much discussed in the Mesh forum. So obviously, there is an understanding at Microsoft that they need to be able to have what they used to call a down-level browser which is not IE in order to be able to sell the idea that this isn’t open platform. Now looking forward…

Arrington: That goes back to Danny’s point that they need to put somebody in charge of the online division that just doesn’t ever have to deal with the other execs in the company; that it basically treats it as a standalone company — that is by the way losing a billion dollars a year — but a standalone company that needs to succeed or fail…

Gillmor: Well, this is exactly why I talk so much about Mesh because this is Ray Ozzie’s platform. It is an Internet operating system and I believe Silverlight will be a significant part of that puzzle because it essentially becomes the driver base to talk to the hardware. And this is not going to be your father’s Microsoft as a play because if it is, to Danny’s point, it won’t work.

MacLeod: Steve, I have got a question for you. Hello?

Gillmor: Yeah I can hear you.

MacLeod: It seems to me like Google gets all its money basically from members of the public like people like you and me, right, where I think 94% of Microsoft’s money comes from its partners. And there are different kinds of partners, where they were talking about Toshiba, were talking about consultants, where they were talking about all sorts. When I hear this kind of Google, Microsoft battle, to me Microsoft business model is so diverse. It basically makes software for other people’s stuff.

Arrington: No, Microsoft business model is incredibly not diverse. I mean they sell Office and they sell Windows and then they do a whole bunch of other stuff that mostly loses money.

MacLeod: Yes.

Gillmor: And I would push back on the notion that Google is getting money from users, I think they are getting money from their business partners which are the advertisers.

Arrington: Yeah, Google is an advertising company. I mean they have a search product that is really cool, but Google is an advertising company.

Sullivan: So it is clear channel, it is not a music company.

Arrington: So anyway, the fascinating thing to me here is this huge fight where Microsoft has software revenue and profits and is trying to get some market share in advertising and is now trying to hit Google hard by giving all the money back to users and trying to take market share from them, which may or may not succeed.

And then on the other end, you have got Google which has all this money and all this free cash from advertising and is trying to just knock out Microsoft by offering in particular Docs for mostly free and trying to sort of disrupt the Office apple cart and so it is just really interesting to me.

Sullivan: It is and if you go back to when Google rolled out Gmail, back at that point is when actually around the time the whole search war started because you had Yahoo dump them and run their own search engine, you had Microsoft come along and say, we are going to build our own type of thing.

And a lot of people at that time started talking about how: oh you better look out Google because these guys have these mature portals and they are going to come through and they are going to wipe you out. And Google diligently built out what I always called the “stealth” portal: look we got Gmail, oh look we have personalized home page, oh look we have all these things that you would normally get splattered across the Yahoo home page and we have got them all too and we are going to kind of suck you in with it.

And so it is fun to see if you will Microsoft pushing back on Google not just in search but also was saying: fine we will underwrite search and make it more expensive for you in the same way that you have been trying to underwrite the free apps with your search advertising income.

Gillmor: So it doesn’t sound like at least on that part of what Mike wrote that you disagree with him at all?

Sullivan: No, not at all.

Gillmor: So I guess we are talking about 2% versus something like…

Arrington: No, the main disagreement was the user experience, Danny didn’t like it and I thought it was actually pretty darn good.

Gillmor: All right, well can we cover that quickly, can you explain what you didn’t like about it?

Sullivan: What I was saying the problem is that they are saying, look you should be coming and using this thing because it is a great consumer search product. And what I was trying to show is: if you don’t already know the product you want to buy, it is a horrible experience. You know it can’t tell you and I have gone through it several times with this point because I actually need to buy DVD recorder when I get out of the states. And it is like there is no refinement; there is no way for me to go through and find one that has a hard drive versus a VHS that was put into it. There is no way for me to pick and choose which one was better rated. It was just a bad experience in trying to get that.

Now you know the good new is and I was talking with them again today, they actually have a shopping search engine which has a much better experience and apparently they are going to be merging these sorts of things together. So in the three months or four months if that experience gets better and if it gets better in terms of the integration with regular Live Search, I may have a different opinion of it. I guess I just come down hard on them when they roll something out like that.

And I think you are rolling this out, you are getting all this press now, people are going to immediately go and check it out and if they are disappointed when they go check it out, they may not come back. I think that is a problem.

Arrington: I don’t disagree with that but I think one reason why I gave them a little leeway on that is, there is two reasons; one is, the item I bought that battery, I actually bought a different item at the retailer, I wish I can – actually the screen shots on the page, I bought a different item at the retailer than I clicked through on and the rebates still came through. It was a totally different item; I still got a rebate for it.

So it seems like you can sort of click through to at least that retailer and I assume all of them and then do searches and browse a site and buy something and you will still get a rebate on that. So that was one reason why I was less concerned. The other thing is Farecast, which I am sure you are familiar with, which is now live at Farecast.live.com — they bought it for whatever, $115 million a couple of weeks ago — that is going to have the rebates as well. And Farecast is a pretty darn good search engine for travel of both hotels and flights.

And I think that there is a real chance of seeing them on that particular vertical with, you add what Farecast already has, which is awesome to like getting rebates, which means you might be able to get a United flight on Farecast for cheaper than you can on United.com, I don’t think that United will be happy about that, but I am not sure they can do anything about it anyway, that at some point I think they are going to fix all those problems that you said.

And yes, the press issue on why roll it out now and why blow their launch, sure, but I think they got some good stuff coming from what I have heard.

Sullivan: Sure.

Gillmor: All right, I am going to wrap this one up. Danny, it has been great to have you and I hope you will come back.

Sullivan: I will be more than happy; it has been a lot of fun. I like how the…

Arrington: You have really got opinions on things; I like that even though it is…

MacLeod: Really good stuff there, yeah.

Gillmor: And Hugh thanks for taking a back seat with these two…

MacLeod: Oh, I can listen to you guys all day, it is not a problem.

Gillmor: And Mr. Arrington, it has been a great pleasure as always.

Arrington: Thanks guys.

Sullivan: Thank you.

Gillmor: OK. This is Steve Gillmor. This has been the Gillmor Gang for Thursday of May 22, 2008 and we will see you again tomorrow 10:45 AM Pacific Time. Our guests are going to be David Glazer, Director of Engineering for Google. See you then, bye-bye.

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