Why Microsoft’s $6.2bn writedown probably isn’t a harbinger of doom

Microsoft’s US$6.2-billion writedown for internet advertising company aQuantive has the press talking about “big oops moments” and “Bing Internet Web Woes“. It also has people speculating that it could also write off Nokia. But is it all that bad?

The short-term answer is yes. It effectively means that the Redmond-based tech giant won’t post a profit this financial quarter. Analysts had previously predicted that Microsoft would post a US$5.3-billion profit.

It also means that Microsoft failed to equal Google in the online advertising game. That’s not good for company morale when, as The Wall Street Journal notes CEO “Steve Ballmer, has spent a decade and billions trying to build a Web unit that could compete with Google Inc. in selling online ads and delivering search results”. Microsoft’s 2007 purchase of aQuantive for US$6.3-billion was one of the flagship efforts at pushing that competition.

Google’s own advertising service DoubleClick — bought around the same time as Microsoft bought aQuantive — has been raking in the cash. The majority of Google’s US$37.9-billion came through online advertising.

It’s also just one more area that Google can claim decisive victory in, adding to its dominance in the desktop browser, mobile OS, and free email spaces.

The company’s online division clearly hasn’t been doing it any favours with Colin Gillis, an analyst at BGC Partners LP in New York calling it the “biggest drag on the company right now”.

Here’s the thing though, Wall Street barely budged when the news came though. Microsoft shares dropped 0.7% in early morning trading, after climbing 18% throughout 2012.

Panic? I don’t think so.

It also might not be the end for Bing. Despite the writedown on aQuantive, Microsoft claims the search engine is gaining in market share and revenue per search.

That said, Bing still only accounts for around 3.75% of the global search market.

On the other hand, its operating losses are shrinking and according to Bloomberg, sales gained 11% to US$2.13-billion in the period.

The message from the top doesn’t seem to be one of failure either:

“This is an accounting decision that the company made based on how the business is performing relative to the projections we had made during the past five years,” Microsoft Chief Executive Officer Steve Ballmer and online unit President Qi Lu, reportedly wrote in an email to employees.

“We want to be very clear that we are strongly committed to a strong and financially successful” online division, they added.

Microsoft hasn’t necessarily thrown itself over the cliff edge by competing with Google either. It knows Google is good at ads. It ran a campaign saying as much, but it also has a few aces up its sleeve.

For one, it owns Skype and the VoIP service is about to get in-call ads as well as a not insignificant stake in Facebook. Those aren’t businesses that are going to fail any time soon.

It’s stake in Facebook also means that you get a good few Bing features on the social network. Being forced to use Bing Maps when you look for a location on Facebook is just one way it’s slowly imprinting itself on millions of people’s minds.

Microsoft’s biggest strength though is that it lays claim to the most dominant installed base and ecosystem in the world: Windows.

Windows and, more specifically, Windows 8 is why we shouldn’t be so quick to write off the rest of Microsoft’s business in the wake of the aQuantive failure. In Windows 8, it has an OS that will give people the same experience across smartphone, tablet and desktop.

Google just can’t match that. Android works well enough on phones and tablets, but Chrome OS? Come on.

If we’re honest, the news isn’t actually a massive shock either. “aQuantive didn’t work out, but everyone already pretty much knew that,” Gillis said. “Now, they are just mopping up.”