Two recent deals continue Microsoft's expansion into online advertising: Microsoft has agreed to acquire online advertising exchange AdECN, and has signed a deal to sell advertisements on content-recommendation service Digg. Both deals highlight the drastic change to Microsoft's online advertising role: instead of being a publisher that sells advertising primarily on its own sites, Microsoft will provide a wide variety of tools and services for other publishers and advertisers.

AdECN Acquisition

Founded in 2003, AdECN is an online advertising exchange that attempts to make the process of buying and selling online advertisements more transparent.

With traditional online advertising campaigns, an advertiser (or, more commonly, the agency representing it) works with a particular publisher or online advertising network to create a campaign. The process is time-intensive for both parties, and advertisers can end up paying for undesirable inventory that was attached to the order to meet the publisher's business goals, while publishers spend more time taking orders and assembling packages than they do managing strategic relationships with their advertisers.

Advertising exchanges offer an automated process for publishers to place unused inventory into a pool and then accept offers from the highest bidding advertiser. Publishers are assured the highest price for their inventory, advertisers can control their expenditures and target only the inventory they know they want, and both parties save time in the process.

AdECN's best-known competitor is Right Media, which was recently acquired by Yahoo for US$650 million (Yahoo already owned a 20% stake). DoubleClick, which is in the process of being acquired by Google for US$3.1 billion, is beta-testing an exchange as well. While Microsoft's US$6 billion acquisition of aQuantive (announced in May and slated to close later in 2007) gave Microsoft many components of a complete online advertising business, it did not include an exchange. The AdECN acquisition closes this gap.

In the short-term, AdECN will help Microsoft to sell unused inventory on Microsoft sites (MSN, Windows Live) and affiliate sites (Facebook and Digg). However, Microsoft's role as one of the largest publishers on the Web could conflict with its other online advertising businesses—for example, publishers might suspect that Microsoft will offer its own inventory favorable placement on the exchange, or Microsoft could refuse to allow major competitors such as Yahoo and Google to compete for advertisers on the exchange. More generally, advertising exchanges benefit from network effects—the more inventory and advertisers on a particular exchange, the more useful it becomes—meaning that there may not be room for three major exchanges to survive.

AdECN is a privately held company with approximately 30 employees and will continue to operate out of its headquarters in Santa Barbara, CA. Terms of the acquisition were not disclosed.

Digg Syndication Deal

Microsoft has signed an advertising syndication deal with Digg, a Web service that aggregates user recommendations for written content (mainly news stories and blog entries), then displays the most highly recommended stories at the top of a list. Similar to Microsoft's fall 2006 deal with social networking service Facebook, the deal will allow Microsoft to sell advertising space on Digg, letting advertisers reach the service's approximately 17 million monthly visitors.

Microsoft will pursue more of these types of deals as it incorporates tools and services for third-party publishers from its aQuantive acquisition. According to Microsoft Platform Products and Services President Kevin Johnson, the company eventually hopes to earn more than 50% of its advertising revenue from serving advertisements on third-party sites.

AdECN is at www.adecn.com.

Digg is at www.digg.com.

For background on the aQuantive acquisition, see "AQuantive Leads Online Investments" on page 43 of the June 2007 Update.