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| MSN's Evolving Advertising Business |
| Jun. 21, 2004 |
Strong growth in advertising revenue has enabled MSN to become profitable despite a decline in its paid subscriber base—a business condition that could cause MSN to invest more heavily in free services than subscription services. Although MSN has some unusual advantages, including almost-guaranteed traffic via links in Microsoft software, its advertising strategy—including the diversity of its advertising programs and its recent decision to eliminate pop-ups—offers useful lessons for other Web-based companies that rely on advertising revenue. Understanding MSN's advertising programs can also help advertisers determine how best to reach MSN's large audience. Riding the Wave The Internet advertising market is finally recovering from the dot-com collapse: online advertising totaled US$7.3 billion in 2003, up from US$6.0 billion in 2002—the first year-on-year increase since 2000—according to a joint study conducted by the Internet Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC). This growth is expected to continue through 2004, with researcher eMarketer predicting record online advertising sales of US$8.4 billion, higher than the 2000 peak of US$8.1 billion. One big reason for this turnaround is the growth of sponsored keyword search, in which businesses pay for advertisements to appear when users enter a particular word into a search site. This business model, popularized by GoTo.com (later renamed Overture and purchased by Yahoo in Oct. 2003) and subsequently capitalized upon by search leader Google, has skyrocketed in popularity because it is affordable for smaller advertisers, and because it allows advertisers to narrowly tailor their commercials to the individuals who are most likely to be interested in their products. Total revenue from keyword searches doubled in 2003, and they now account for more than 30% (about US$2.3 billion) of all Internet advertising revenues, according to IAB/PwC and eMarketer. MSN has successfully capitalized on these industry trends. Quarterly advertising revenue on MSN has almost doubled since the quarter ending Mar. 2002, and it surpassed subscription revenue in the most recent quarter, according to estimates based on statistics in Microsoft's quarterly earnings reports. (See the chart "MSN Revenue Breakdown".) Meanwhile, MSN's subscriber base has declined from more than 9 million in late 2002 to about 8.2 million as of Mar. 2003, and subscription revenue has fallen accordingly. Thus, growth in advertising revenue, along with operational cost-cutting, is directly responsible for MSN's transformation into a profitable business—the division showed its first-ever profit in the quarter ending Sept. 30, 2003, and will probably show a profit for fiscal year 2004, which ends June 30. Types of Advertising Although keyword search is a major component of MSN's recent success in advertising, MSN offers many other types of advertisements, from traditional banners to interactive advertisements to entire sections of sponsored editorial content. This diversity helps MSN appeal to a broad range of advertisers: smaller businesses can purchase sponsored keywords on MSN Search for as little as US$20 per month, while large corporations may be willing to pay tens of thousands of dollars to place advertisements in high-traffic areas. The diversity of advertisements sold by MSN is matched by few other Web sites. In particular, Google is largely reliant on keyword search, making it less interesting to large advertisers conducting branding campaigns. MSN's advertising programs can be divided into three main categories based on how advertisers pay for them: pay-per-click (keyword search), pay-per-impression, and sponsorships. Pay-Per-Click In pay-per-click programs, advertisers pay MSN a fee each time a user clicks a link to the advertiser's site. Keyword search is the most popular form of pay-per-click advertising (and the only form currently offered by MSN). Users conduct more than 90 million searches at MSN Search every month, thanks in large part to the built-in link to MSN Search within Internet Explorer, and nearly all of these searches return advertisers' listings, most of which are provided by Overture (owned by Yahoo). Specifically, Overture operates a running auction in which advertisers bid for particular keywords based on cost-per-click. At any given time, the advertiser with the highest bid gets the highest placement in sponsored search listings for that keyword, with other bidders appearing in descending order. Overture then contracts with MSN to place these sponsored listings in MSN Search results, and the two companies share revenue based on click-throughs. Overture results also appear on Yahoo, AltaVista, and elsewhere. The Overture arrangement gives smaller businesses a way to advertise on MSN, because Overture requires businesses to bid a minimum of only US$0.10 per keyword and to spend a minimum of only US$20 per month. Top bids on some keywords run close to US$100 per click, meaning that smaller businesses may appear fairly low in search results. But because they're paying a lower rate, and only for users who click their advertisement, this arrangement can still be effective. Pay-Per-Impression Most of MSN's advertising programs operate on a pay-per-impression basis, in which advertisers pay a fee every time MSN displays their commercial. This model is sometimes referred to as "CPM," or "cost per thousand impressions" (a metric also used in offline advertising). MSN enjoys extremely high traffic compared with most networks of Web sites, with more than 350 million unique users visiting at least one MSN page per month. As a consequence, MSN can serve between 2.5 billion and 4 billion impressions per day, according to Joanne Bradford, vice president of MSN media revenue. This makes the pay-per-impression model extremely important and lucrative for MSN, despite the risk of downward pressure on CPM rates as pay-per-click advertising—mainly keyword search—grows in popularity throughout the industry. On MSN, CPM advertisements most often appear as buttons or banners in the margins of MSN Web sites and services, including Hotmail, which has more than 190 million accounts, and MSN Messenger, which has more than 120 million users. Although MSN does not publicly disclose its advertising rates, the CPM model generally requires advertisers to make a minimum purchase in the thousands of dollars and is therefore not suited for smaller businesses. In 2003, MSN began overhauling its advertising platform to better support CPM-based advertising. For example, MSN can now track and report to advertisers in real time the frequency at which a particular advertisement is served, which page groups the advertisement is appearing on (e.g., Hotmail, CarPoint, Slate), and whether users are clicking on the advertisement or leaving for another MSN page without doing so. This information can help advertisers tailor their messages more effectively—an important consideration, given the rising popularity of keyword search. Sponsorships For the largest advertisers, MSN offers sponsorships, in which the advertiser pays MSN a set fee (often in the tens of thousands of dollars or more) for advertisements in one or more high-traffic areas for a specific period of time. MSN guarantees a minimum number of impressions in return, but does not charge per impression. The following are some examples of advertising that MSN may sell on a sponsorship basis:
MSN sometimes works with partners from the advertising industry to help sell these sponsorships. For instance, in June 2004, MSN announced a new program, Creative Connection, in which creative directors from advertising agencies will work with clients to develop cross-media advertising campaigns that include sponsored advertising on MSN. Other efforts include a program introduced in 2001 called MSN Agency Alliance, in which MSN provided agencies with information and training about MSN's advanced advertising technologies and alerted them to new sponsorship opportunities, which they in turn passed along to their clients. MSN's improved advertising platform is also important in selling sponsorships, as large advertisers want to be certain that they're getting value from their large expenditures. "Rich Media" Replacing Pop-Ups Until recently, MSN offered pop-up advertisements, which launched in a separate window and appeared on top of the MSN Web page users intended to visit, and "leave-behinds," which launched in a separate window and remained on the screen when users closed their main browser window. However, these types of advertisements are extremely unpopular among users and are now blocked by many applications, including MSN Premium and the free MSN Toolbar (which attaches to Internet Explorer). Moreover, the next version of Internet Explorer, which will ship with Windows XP Service Pack 2 later in 2004, will block pop-ups and leave-behinds by default. Therefore, in summer 2004, MSN stopped selling these advertisements. This was a relatively minor sacrifice, however, as these advertisements accounted for less than 1% of MSN's advertising inventory and were purchased by a handful of companies, according to Joanne Bradford, who oversees MSN's advertising programs. Moreover, MSN continues to sell so-called rich media advertisements that use technologies such as Macromedia's Flash to create interactive or animated commercials. (Advertisers generally work with a third party, such as Eyeblaster, Pointroll, or Unicast, to create such advertisements in a format that MSN accepts.) Like pop-ups and leave-behinds, these advertisements are difficult for users to bypass or ignore, but are almost impossible to block—for example, users can uninstall Flash, but unless they manually edit the Registry, they will continue to receive prompts in Internet Explorer every time they come across a Web page with Flash. Future Directions As advertising continues to grow in importance, MSN is likely to increase its expenditures on the advertising side of its business, and may spend less effort developing new subscription-based services, such as MSN Premium. In particular, MSN is likely to focus on the following issues: Prevent user defections. MSN's advertising business relies on the audience for MSN’s free sites. But Google has built the most popular free search site on the Web in less than six years, with more than 130 million unique monthly visitors, versus only 90 million for MSN Search (according to MSN Search Vice President Christopher Payne), despite Internet Explorer's built-in links to MSN Search. MSN will continue to invest heavily in improving the relevance of its search results to try to prevent Google from drawing any more users. In addition, Google's advertising-supported Gmail (now in beta) plans to offer 1GB of storage compared with only 2MB for the free version of Hotmail. Yahoo Mail has already responded to the Gmail threat by upping its storage limit to 100MB for the free service. Hotmail must follow suit, or MSN could lose millions of daily page impressions as users switch. Promote online advertising. According to Bradford, most businesses spend 3% of their total advertising budget online. One goal of the MSN advertising sales force is to convince companies to increase their online advertising budget, so it accounts for between 8% and 12% of their total advertising expenditure. (Microsoft spends 12% of its advertising budget online, according to CEO Steve Ballmer.) Among other methods, MSN is promoting third-party research that shows the effectiveness of online advertising in reaching heavy Internet users who don't watch TV. MSN will also continue to enlist advertising agencies in this quest through programs such as Creative Connection and contests such as the Emmessennys, which awards up to US$25,000 to advertising agencies for designing innovative and effective online advertisements. Better serve advertisers. MSN will continue to improve its advertising platform to better distribute impression-based advertisements among users—for example, to ensure that a single user sees a particular advertisement only five times rather than 100 times. MSN will also look for new opportunities to sell advertisements, such as MSN Video, which launched in Jan. 2004 and consolidated video from all MSN sites into a single service with a consistent advertising model. (For background, see "Online Video Service Planned" on page 35 of the Nov. 2003 Update.) In particular, the planned MSN music store could provide new opportunities, such as targeted advertisements based on songs or artists that a user is searching for. Paid search? MSN maintains that its relationship with Overture is not in jeopardy, and invited Yahoo CEO Terry Semel to speak at the annual MSN Strategic Account Summit in May 2004 as a demonstration of the strength of the relationship. Nonetheless, if industrywide revenues from keyword search continue to skyrocket, MSN may be tempted to create its own paid search business so it will no longer have to split revenues from MSN keyword search results with Yahoo. Moreover, MSN's research into search and personalization could eventually be applied to paid search, giving MSN an advantage over Overture and Google—for example, MSN might be able to tailor paid search results based on users' geographic information or past searches, therefore delivering higher click-through rates and earning more money per advertiser. Thus, while MSN has not announced any paid search initiative, it seems like a logical area of investment for 2005 or beyond. Resources Details about MSN advertising programs and other information, including research showing the effectiveness of online advertising, are available at advertising.msn.com. A press release describing Creative Connection is at www.microsoft.com/presspass/press/2004/jun04/06-18CreativeConnectionPR.asp. MSN's site for advertising agency relations is advertising.msn.com/services/agency.asp. Overture's products and services for advertisers are described at www.content.overture.com/d/USm/ays/ps.jhtml. |
