New Program Consolidates Ad Offerings

The new Digital Advertising Solutions program will help advertisers buy commercials on Microsoft products, including MSN and Windows Live Web sites and Xbox games. By expanding display advertising, which has been the fastest-growing source of revenue for MSN over the past several years, Microsoft could counter its lack of progress in paid search.

Display Advertising Driving Revenue

Advertising is the main source of revenue for Microsoft’s Online Services (formerly MSN) business segment. In fiscal year 2006 (which ended June 30, 2006), revenue from advertising grew 9% to approximately US$1.40 billion. In the same period, MSN’s Internet access revenue declined 28%, to about US$700 million, as users transitioned to broadband service from other providers (MSN does not offer broadband Internet access), while revenue from other subscription services, such as Hotmail Plus, accounted for only about US$250 million.

Although Microsoft does not break out MSN’s finances in more detail, the company acknowledged that its revenue from paid search, in which advertisers pay for placement next to search results, declined during the fiscal year. Paid search has been a major source of revenue and growth for Google and Yahoo and will account for 40% of all online advertising spending in 2006 (according to eMarketer), but Microsoft is apparently lagging behind the market. This is partly because the company began to roll out its own paid search platform, adCenter, only in late 2005, after years of outsourcing paid search to Yahoo’s Overture division. Another reason: Microsoft’s online search engine has less than 13% of market share of all searches in the United States, compared with about 29% for Yahoo and 44% for Google (according to July 2006 statistics from comScore).