Contrary to previously expressed plans, MSN will begin selling paid search listings through an auction-based keyword system, rather than relying primarily on licensed listings from Yahoo's Overture division. MSN will sell search keywords through a new advertising platform that will provide features not offered by competitors, such as detailed demographic information about users and suggestions for more effective keyword targeting. The move could help MSN capture a bigger share of the lucrative and fast-growing paid search market, but it doesn't guarantee success: MSN will still need to excel in delivering accurate search results to attract users from Google and Yahoo.

The Other Shoe Drops

When MSN first announced plans to invest in Internet search in spring 2003, it said it was focusing exclusively on algorithmic search—that is, a search engine that returns results to users based on machine-calculated relevance—and said that it would replace Inktomi (now owned by Yahoo) as its algorithmic search provider. However, the division denied plans to enter the paid search market, in which advertisers pay for placement in a separately designated area of a search results page. Instead, MSN said it would continue to rely on partners, particularly Overture, to provide paid search listings.

Under a deal initiated in 2001, Microsoft and Overture split revenues from paid search listings on MSN. Although the companies never disclosed exactly how much they earned, MSN has cited rapid growth in paid search revenue as a major reason for its turn to profitability beginning in the Sept. 2003 quarter, and Overture's last financial filing as an independent company revealed that 65% (approximately US$145 million) of its revenue in the quarter ending Mar. 31, 2003 came from agreements with MSN and Yahoo.

According to MSN Director Joe Doran, who oversees revenue opportunities for MSN Search, MSN's thinking on the subject of paid search began to shift with Yahoo's July 2003 acquisition of Overture. Instead of splitting revenue with a major competitor, MSN reasoned it could build its own paid search platform and capture a bigger share of the paid search market, expected to grow from US$5 billion in 2005 to US$9 billion by 2009, according to Jupiter Research. In Oct. 2003, the effort—code-named Moonshot—got under way. Publicly, however, the company continued to emphasize its partnership with Yahoo and remained vague about its own paid search intentions.

Tools to Help Advertisers

At the Mar. 2005 MSN Strategic Account Summit (an annual event for major MSN advertisers), MSN previewed its forthcoming adCenter platform for advertisers, which will include an auction-based system for advertisers to bid on keywords on MSN Search.

Today, MSN sells a handful of paid search listings to major advertisers as part of larger advertising packages, then fills the remainder of its paid search advertising spots with auction-based listings from Yahoo. In auction-based systems (also used by the other major player in paid search, Google), advertisers place bids on particular keywords in terms of dollars per click-through. The highest bidder at any given moment gets top placement, with lower bidders displayed in descending order. Although popular keywords command a premium, smaller advertisers can also participate—for instance, Yahoo requires advertisers to spend a minimum of only US$20 per month to retain a paid listing. This provides a rare opportunity for smaller businesses to purchase advertising on some of the most popular pages on the Web and is a major reason for the strong growth in paid search.

MSN plans to distinguish its paid search system by incorporating business intelligence features that let advertisers better target their keywords, such as the following:

Demographic information. While Google and Yahoo currently show paid search advertisers only how many clicks each listing received over a particular time period, MSN will offer aggregate information about the respondents, such as their age, gender, and demographic subgroups (e.g., young professionals in inner cities; rural retirees). MSN collects this information when users sign up for services, such as Hotmail, MSN Music, and the MSN Zone gaming site, as well as when users customize their MyMSN home page; the company is also purchasing some demographic data from credit bureau Experian. The same system will display similar information for other types of advertisements, such as banner ads, giving larger advertisers deeper insight into the performance of their complete MSN advertising campaigns.

Suggestions. AdCenter will suggest new keywords and phrases to advertisers based on analysis of user habits. For example, MSN might discover that two distinct subsets of users conduct searches that include the word "flowers": one group looking for gifts, another looking for gardening supplies. AdCenter will be able to use this information to suggest other keywords to reach the appropriate subset of customers: a florist might also purchase keywords such as "delivery" and "mother's day," while a gardening store might purchase keywords such as "trees" and "soil."

Day parting. AdCenter will support day parting, enabling advertisers to adjust their keyword purchases automatically depending on the time of day. For example, a pizza delivery company might want to have its highest bids appear near meal times.

MSN will release adCenter in France and Singapore in a pilot program over the next six months, and will eventually offer it to advertisers in all regions. Until the transition is complete—which may be as late as the end of 2006—MSN will continue to use Yahoo's auction-based system.

The Battle for Customers

Although Google and Yahoo will not welcome Microsoft's competition in one of their most lucrative business areas, MSN's success is far from certain. That's because, although Internet search engines make their money from paid search, they attract customers (who attract paid search advertisers) by the quality of their algorithmic search results.

After years of relying on Inktomi (which Yahoo bought in Dec. 2002) for algorithmic search results, MSN rolled out its own algorithmic search engine in Jan. 2005. However, early statistics suggest that it has a steep climb to match the popularity and user loyalty of both Google and Yahoo. Nielsen/NetRatings reports that MSN Search had 40.4 million unique visitors in Feb. 2005 (a decrease from 43.4 million in the previous year), compared with 47.5 million for Yahoo Search (up from 46.2 million) and 64.3 million for Google Search (up from 56.3 million). Other Nielsen/NetRatings statistics suggest that the race is not even that close: MSN Search had far fewer page views and less total time per user than either of its competitors in Feb. 2005, suggesting that individuals may conduct the occasional search on MSN, but are using Google or Yahoo for the majority of their searches.

However, MSN's introduction of more sophisticated demographic analysis and campaign-planning tools might affect search-engine marketing specialists, such as iProspect and Marchex, which offer tools to help advertisers optimize and automatically submit bids for paid search keywords—especially if Google and Yahoo follow suit with similar tools of their own.

In addition, CEO Steve Ballmer said that Microsoft might eventually use similar technology to track audience behavior on IPTV, the company's proposed system for delivering television broadcasts over IP networks. Although IPTV is still in early testing, Microsoft's interest in this area could have implications for the current TV advertising model, in which advertisers and TV broadcasters rely on third parties such as Nielsen to track audience characteristics.

Resources

Advertisers can register to receive more information about adCenter at advertising.msn.com/searchadv. That page also has a video of the keynote speech for the 2005 MSN Strategic Account Summit, in which Microsoft CEO Steve Ballmer and MSN Vice President Yusuf Mehdi introduce adCenter.

The launch of MSN's algorithmic search engine is covered in "MSN Launches Search Tools" on page 22 of the Jan. 2005 Update.