Microsoft's ad pitch underpins Net moves

The company is betting on its AdCenter tool to help it realize its grand ambition to deliver free software over the Internet.

Microsoft's grand ambitions for free services rest on one thing: its ability to get to know you better.

The company has outlined a whole host of things it would like to offer as part of its "Live" services effort. But it needs to make more money selling ads to make the push pay off.

To do this, it's betting on personalization as the way to boost its online ad sales. The centerpiece of the strategy is something called AdCenter--a tool that Microsoft has been developing for more than a year as a way to serve up ads tailor made for the user that is receiving them.

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What's new:
Microsoft's ambitious plan to provide free software and services over the Internet rests on generating enough ad revenue to pay for it.

Bottom line:
The software maker is betting that its AdCenter tool, still in development, can help it catch up with Google and Yahoo by delivering ads targeted by gender, age and other characteristics.

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While Google and Yahoo have made millions dishing up ads based on the context of what is being searched for or read, Microsoft is hoping it can leapfrog its rivals by combining that information with demographic details on who is doing the searching.

Right now, AdCenter is somewhat limited. For one thing, it's still in beta testing--in Singapore and France since September, and on a limited basis in the U.S. since last month. In addition, the tool, formerly known as MSN AdCenter, can only serve up the kinds of keyword-based, search-related text advertising offered by Google's AdWords and Yahoo's Search Marketing unit.

"Today, it's keyword," said Joanne Bradford, Microsoft's chief media revenue officer. "We believe in the future it will be about display (ads), video and all that is advertising."

The company will need to both grab market share and significantly grow the overall online ad market if it hopes to shift a significant part of its $40 billion business over to an ad-supported model.

"There is a significant growth opportunity for us, as we tap into the growing market for online advertising," CEO Steve Ballmer said at this week's shareholder meeting at Microsoft's Redmond, Wash., headquarters. "There will really only be a few big players in the online advertising market, and our company aims to be, and will be, one of them."

Catching up
First, though, Microsoft has to be able to match Google and Yahoo, Web companies that have built huge businesses selling keyword-based ads that bring vast numbers of users to Internet sites. Google, for example, generated $885 million in revenue last quarter from ads on its own site, along with $675 million in revenue from ads on partner sites through its AdSense program.

A search/ad mismatch

"I will admit we were late," Microsoft's Bradford said. "If we are going to catch up in any meaningful way, differentiating and adding value was critical."

Microsoft's effort to outflank its main rivals is centered on giving advertisers more targeted information about the people it is serving up advertising to--things like age, gender and ZIP code, as well as the time an ad will be delivered, and other data.

Chris Winfield, president of 10e20, a New York-based search marketing and advertising firm, said such targeted information is the key advance of AdCenter.

"If it wasn't for that, then it would be (Google's) AdWords 'lite,'" Winfield said. "But that makes it a really powerful thing and something that we are excited about."

"I'm willing to pay more if I know that I am getting a demographic."
--Chris Winfield, president, 10e20

In a pitch to a consumer goods company this week, Bradford pointed out the difference between what Microsoft is offering and today's keyword search. Buying the keyword "bleach," she said, would seem to be a targeted purchase for someone that makes the household product. But, Bradford said, two-thirds of the people who query on that term are men aged 18 to 34. It turns out that many of the searchers are looking for a popular form of Japanese animation that also goes by the term "bleach."

Simply being able to target the ad to women could make it a lot more effective, assuming the gender-based stereotypes of who buys bleach are true.

Such demographic information is something that Winfield said is appealing to his clients.

"I'm willing to pay more if I know that I am getting a demographic," Winfield said. "This is where paid search is going--it's getting more personalized and more localized. With that will come higher prices."

That's critical, if Microsoft is to be able to offer a broader array of services and software that are entirely supported by advertising revenue.

"It's one of the highest priorities for the company," Bradford said.

Microsoft's first foray into new ad-supported services are the Windows Live and Office Live products it announced last week. Of key importance, both services are highly personalized and thus well suited to delivering the kind of targeted ads that AdCenter is intended to deliver.

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