Microsoft sweetens pay-to-search deal

By Yi-Wyn Yen

It’s been four months since Microsoft introduced its cashback rebate scheme that pays people to use its Internet search service. But Microsoft continues to fall behind Google in search.

On Wednesday, Microsoft (MSFT) plans to unveil a new rewards program to get more consumers searching on the company’s Live Search engine. While a company spokesperson would not discuss details of the latest rewards gimmick, a Microsoft executive says the promotion is designed to generate user loyalty and more searches on Live.

The program gives consumers a discount every time they use Live Search to find and buy a product like a digital camera. The company is banking that as more people spend time on Live, the more advertisers will promote their products, and Microsoft will grab a bigger piece of the paid search market.

So far, cashback does not appear to be helping the company’s search efforts. For the seventh straight month, Google (GOOG) widened the gap with Live Search. The search king extended its lead to 63% in August while Microsoft dropped to 8.3%, according to comScore’s latest monthly report for U.S. traffic. For the first two months of the third quarter, Live Search has lost 12.8% of its traffic from year-ago levels.

A Microsoft executive says comScore’s figures do not accurately reflect how well Live Search is doing. “Those numbers don’t seem right to me. We just had our highest month ever [for unique visitors in August],” says Brad Goldberg, Microsoft’s general manager for search.  “There is always going to be volatility with monthly metrics. Cashback is a long-term bet.”

ComScore’s numbers represent total market share. While Microsoft is steadily losing search traffic share, Live Search continues to gain more users as more people search. Goldberg says the company is pleased with cashback’s progress though he would not reveal the number of transactions made or how many people that have enrolled in the program.

The cashback promotion is part of Microsoft’s broader goal to combat Google’s ever-growing share of the online ad market. The program marks Microsoft’s first major initiative to grow search traffic since the company ended talks with Yahoo (YHOO), the No. 2 search engine that owns roughly a fifth of the U.S. search market.

Goldberg hints that the company plans to offer consumers even more savings leading up to the holiday season. “We look at traffic, different tactics, and ways of execution… and we’ve learned that the higher the rebate [we offer], the better,”  Goldberg says. “I’m not joking. EBay’s a good example. They have a relatively high rebate level in the 20%-30% range and they had a big increase in traffic as a result.”

Analysts say that Microsoft needs more advertisers to join the cashback program to attract more consumers searching on Live. Cashback has enrolled than 700 merchants, including eBay (EBAY), Hewlett-Packard (HPQ), and (OSTK).

“Our assessment is that MSFT is gaining supply side traction with advertisers and if that remains sustainable, they should eventually gain traction with end users (traffic) as well,” writes Sandeep Aggarwal, a senior Internet analyst with Collins Stewart, in an e-mail to Fortune.

Microsoft, with its deep pockets, may be committed to cashback for the long haul, but industry observers say the company needs to produce results soon.

Search marketers put a January expiration date on Live’s cashback program. “The whole value of cashback is tied to the retail season,” says John Tawadros, the chief operating officer of search marketing firm iProspect. “I would think advertisers are thinking about it now and looking at adopting cashback to differentiate themselves with the competition. After the holiday season would be a perfect time to assess if this has taken off or not.”

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