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HUGE News courtesy the Financial Times (subscriber wall, free at CNN) and Business Insider.

Microsoft is offering News Corp and large publishers money to de-list from Google search. The source says the talks are in initial stages.

• Business Insider thinks it won’t work.
• Financial Times seems to be neutral.

Given that the former is a blog and the latter is a newspaper it’s not a surprise they cover the news the way they do.

Lots of great snippets in the FT.com article -

One website publisher approached by Microsoft said that the plan “puts enormous value on content if search engines are prepared to pay us to index with them”.

“This is all about Microsoft hurting Google’s margins,” said the web publisher who is familiar with the plan.

Microsoft is definitely making life difficult for Google.

Brilliant Strategy on Microsoft’s Part

It doesn’t even matter whether it works or not.

• It helps content creators realize their content is not worthless. 
• It gives newspapers a revenue source that Google will have to match. 
• It puts to the test the notion that Google doesn’t need trusted brands like the big newspapers.
• It forces Google to focus more on search which ought to help make Search better.

There is a 5% chance it works and it might earn Bing an extra 5-10% of the search market.

If that happens it’ll be worth every single penny Microsoft pays.

Microsoft can definitely afford it

Microsoft spend heavily on Search already and they can afford to spend more -

1. Microsoft have thousands of engineers and employees working on Search. They spend close to a billion a quarter on it.
2. Microsoft have $81 billion in total assets ($36 billion of which are in cash, cash equivalents, and short term investments).
3. They earn nearly $4.5 billion a quarter in profits ($4.482 billion).
4. Windows 7 is doing great – that solidifies the Windows revenue stream for a few years.

Why Microsoft Needs to Do This

This is Microsoft fighting for survival.

• They are under threat in both Operating Systems and Office Software from Google’s free products.
• Google helped fuel Firefox’s growth.
• Google is making more and more things free.
• Google is doing very well in Mobile with Android.
• Google is going for netbooks with Chrome OS.

Basically, Google is coming after every single thing Microsoft sells and devaluing it.

Microsoft going after something Google gets for free (i.e. top content) and making it a paid commodity is brilliant strategy.

The only thing that Google makes money from is Search – make content, the raw material for search, a paid commodity and suddenly those billions of dollars of profit are in danger.

How Much does Microsoft need to Pay?

Note: This is just a back of the envelope calculation – it could be very wrong.

PhysOrg says that online advertising revenue for newspapers in the previous quarter was $623 million. It declined 16.92%.

Microsoft only has to balance out what Google contributes. Probably a quarter of that figure i.e. $156 million a quarter.

$156 million a quarter is not that much for Microsoft. They have $81 billion plus in assets – enough for 130 years of subsidizing.

From the NAA we know that -

1. Total online advertising revenue for 2008 was $3.1 billion. If Google is responsible for 25% of that we have $775 million a year.
2. Quarterly online advertising revenue for last quarter of 2009 was $623 million. Google is perhaps responsible for $156 million of that.

Microsoft could afford to buy exclusivity for a long, long time.

What would happen if Microsoft and 10 of the Big Publishers entered an Exclusive Deal?

Update: Mark Cuban talked about this 1.5 years ago and Jason Calacanis talked about this some weeks ago.

We would find out whether news really has value.

• If the experiment fails it would sound the death knell for newspapers. For Microsoft it would be an expensive but necessary experiment.
• If the experiment succeeds – suddenly content would have value again. Microsoft would gain an advantage on Google and Google would be forced to pay for content – which would cut its profits.

If the rumors turn out to be true and the Microsoft-Newspapers agreement happens, suddenly we find out whether news and content has value. Look for the FTC to get involved soon .