Microsoft has a huge problem and it is their Online Services Division. For those who may not know, the Online Services Division manages the Bing, MSN, and online advertising teams. It also works with other teams across the board to develop strategy for software and services. They also are responsible for most of Microsoft's sites.
The Online Services Division reported 15 percent of growth for the year and 17 percent in the fourth quarter. That's impressive growth. Unfortunately, according to TechCrunch, the division lost 728 million dollars for the fourth quarter and this is the second highest loss in the Online Services Division's history, with the highest occurring in Q4 2009. So that begs the question, how can Microsoft report growth in the Online Services Division and still lose money? However, it gets even worse: The Online Services Division has also lost 2.5 billion dollars for the year.
Oh and by the way, some say give Microsoft more time to improve revenue in the Online Services Division. However, the loss for the quarter was 2 million dollars higher than the third quarter. This is also the 22nd consecutive quarter with a loss reported in the Online Services Division. Microsoft mostly blames the loss on the Yahoo! deal:
OSD operating loss increased due to higher operating expenses, offset in part by increased revenue. Cost of revenue grew $641 million driven by costs associated with the Yahoo! search agreement and increased traffic acquisition costs. General and administrative expenses decreased $157 million or 60% due mainly to transition expenses in the prior year associated with the inception of the Yahoo! Commercial Agreement. Research and development increased $117 million or 11% due to increased headcount-related costs.
This is not good news for the division and signals there may be problems with the company's online strategy. Microsoft needs to close the gap in revenue, or it may be left behind in the online arena. Simply pouring money into the problem won't fix the issue.