• Sidebar: Products for Advertisers and Publishers

The Advertiser and Publisher Solutions (APS) Group at Microsoft is focused on helping advertisers and publishers make the most of Web pages that individually get few viewers, but collectively account for about 80% of total Web traffic. Microsoft claims that its tools will help advertisers and publishers measure the impact of advertising campaigns across many types of online properties and show that search advertising—the main engine of online advertising growth for the last five years—is overvalued. While this claim deserves skepticism, looking beyond search may be Microsoft's only choice.

The APS Group

Microsoft's APS Group consists primarily of people and products Microsoft gained in its US$6 billion acquisition of aQuantive in 2007 and is led by former aQuantive CEO Brian McAndrews. It now oversees nearly all of Microsoft's advertising-related businesses, including advertising sales on Microsoft properties (a responsibility recently moved from departing vice president Steve Berkowitz's former Online Business Group).

However, this group's primary focus is a set of tools and services, gained in the aQuantive acquisition, that helps advertisers improve the effectiveness of their online campaigns and help publishers sell advertising space more effectively. (For an overview of these tools, see the sidebar "Products for Advertisers and Publishers".)

View of Online Ad Future

As part of its sales pitch for its products for advertisers and publishers, the APS Group is promoting a view of the online advertising future in which nonpremium inventory—the huge number of Web pages that individually get very little traffic but that collectively account for about 80% of user activity online—becomes critical.

In general, advertisers are increasing the amount of money they spend online to make up for declining audiences in other media, such as network TV and newspapers. The current disparity between how advertising budgets are spent and audience behavior suggests this shift will continue: today, about 20% of media consumption is done online, while less than 10% of advertising dollars are spent online.

For the last six years, search advertising—and particularly Google's search advertising business—has been the main beneficiary of this shift. However, there might be a limit to how much search advertising can continue to grow, because advertisers will pay no more for a particular search advertisement than they could reasonably expect to earn from consumers clicking that advertisement and making a purchase. Some data suggests that advertisers are approaching this maximum and are adjusting their budgets accordingly. For example, annual revenue growth from Google's own sites (mainly search advertising) has slowed dramatically in the last year, from nearly 90% in 2006 to about 60% (year-to-year) in the last quarter of 2007 (although 60% growth might still strike many businesses as healthy).

Microsoft Corporate Vice President and Chief Advertising Strategist Mike Galgon (formerly of aQuantive) predicts a similar price limit will soon affect "premium" display advertising—advertisements sold on high-traffic pages, such as index pages on popular sites (e.g., MSN.com). This slowdown will be exacerbated by the relative scarcity of such pages.

As search and premium display advertising reach these price limits, Microsoft believes that advertisers will begin to spend more money on nonpremium inventory. Examples of such inventory include e-mail inboxes on Web-based mail programs (such as Hotmail, Yahoo Mail, and Google's Gmail), individual users' profile pages on social networking sites (such as Facebook, in which Microsoft has a small stake, and YouTube, on which Google serves advertisements), and desktop software with online connectivity (such as Microsoft's Windows Live Mail or Google Earth).

Engagement Mapping

Microsoft's APS Group claims that its products can help advertisers and publishers capitalize on nonpremium inventory by helping them understand user behavior over longer periods of time, a concept that the group calls engagement mapping.

For example, the Atlas Advertiser Suite lets advertisers create campaigns that span multiple sites, using browser cookies and other techniques to keep track of individual users, and then target advertisements to those users based on their demographic groups or past behavior; it can even ensure that a series of advertisements is shown in sequence (a process called storyboarding). When a user who has been tracked in this fashion clicks on a search advertisement that's tracked through the same tools, the advertiser can go back to see whether other advertisements might have influenced this decision and then allocate more budget to those prior advertisements and less to search advertising. This type of budget reallocation could also help publishers, the vast majority of whom have limited premium inventory and no search site on which to sell advertisements.

Google's acquisition of DoubleClick will give it similar tools for advertisers to track their campaigns. However, Microsoft points out, Google has a vested interest in keeping search advertising rates as high as possible, given its huge market share advantage in search. (The converse is also true: Microsoft has a vested interest in making search advertising seem less relevant than it actually is, given its market share disadvantage.)

Microsoft's Only Chance?

Microsoft's analysis of the online advertising market serves its own needs and therefore should be treated with some skepticism.

Microsoft's own search site has achieved almost no growth since launching in early 2005, with U.S. market share at less than 10% and global market share even lower, and premium inventory on MSN and other Microsoft properties is generally sold out. Conveniently for Microsoft, however, the company owns a lot of nonpremium inventory on which it would like to sell more advertising, and it is one of a handful of companies that sells products that can help publishers and advertisers take better advantage of such inventory.

In fact, this strategy may be Microsoft's only chance to accelerate its growth in online advertising, given its lack of traction in search and limits on premium inventory. Acquiring Yahoo—the number-two search provider and a huge source of premium inventory—could also help, but that proposed acquisition faces stiff resistance from Yahoo's current leadership and other potential problems, such as antitrust regulation and a complicated and politically fraught integration process.

Companies considering Microsoft's advertising platform should press the company for empirical data, evaluate Microsoft's claims against their own experience with online advertising, including search advertising, and ensure that Microsoft's offerings match the return on investment of those from competitors.

Resources

The home page for Atlas products and services is www.atlassolutions.com.

Microsoft's bid for Yahoo is analyzed in "Yahoo Acquisition Proposed" on page 24 of the Mar. 2008 Update.