MSN vs. Google and Yahoo, Round 3

Microsoft CEO Steve Ballmer is expected to show off a new paid-search service on Wednesday that will eventually go toe-to-toe with rival Google and supplant partner Yahoo's advertising.

As previously reported, Microsoft's Internet group is developing a pay-per-click ad-bidding system that pairs search results with sponsored text messages from advertisers. Yahoo's Overture Services currently supplies MSN with sponsored search links, which complement MSN-sold "featured sites."

But the new MSN service, called AdCenter and set to roll out in Singapore and France in the coming months, will bump Overture ads in the long run and let MSN own a major source of its advertising revenue. (Microsoft splits fees collected from marketers with Overture.)

Microsoft does not have a specific date for a U.S. launch, but it envisions operating the ad network globally, said Adam Sohn, an MSN spokesman.

"Call this the third leg of the search stool," said Sohn. "First, we introduced algorithmic search, then desktop (search), which is still in beta, and now the advertising platform."

With the product, Microsoft will move into the mother lode of a multibillion-dollar ad business dominated by Google and Yahoo. Search-engine marketing is expected to be worth as much as $5 billion this year, and nearly $9 billion annually within four years, according to Jupiter Research. Microsoft's piece of the pie is smaller than the shares enjoyed by market leaders Yahoo and Google, and the software giant is hungry for more.

Google fields 35.1 percent of the searches online, followed by Yahoo at 31.8 percent and MSN at 16 percent, according to ComScore QSearch. If the number of searches translates to the percentage of the ad market, MSN generates roughly $1.6 billion annually from search, minus the portion shared with Overture.

MSN's product is far from fully baked, according to Sohn, but it could eventually crowd rivals, search engine watchers say. Given that there is a finite number of searches conducted on the Internet, and hence a limited number of opportunities to display search-related ads, MSN will grab ad dollars away from Yahoo and Google, they say. According to data from ComScore QSearch, there were roughly 4.9 billion search queries in the United States during the month of January.

"The big pie of searches out there isn't getting any bigger" because of MSN's ad platform, said industry expert Danny Sullivan. "All that's

happening is that the larger slice Yahoo had is now smaller, because some has to go to MSN."

A Yahoo spokeswoman said that though the company's Overture Services relationship with MSN is set to expire at the end of June 2006, Yahoo had financially accounted for potential account shifts, and MSN's licensing deal was "gravy."

Other analysts say the search pie could, in fact, get bigger. They say MSN, Yahoo and others are working hard to expand the universe of online searches by integrating advanced search everywhere they can--desktops, toolbars and wireless phones, for example.

"The way people are expanding inventory is basically by integrating search wherever possible," said ComScore analyst James Lamberti.

For the last two years, Microsoft has been bullish on plans to build a search network to best Google's. Already this year, the company replaced Yahoo's Inktomi search technology with its own homegrown software. But Microsoft's designs for an ad system based on bids for particular keywords had been played down in the last year while the company perfected its search technology.

The development of such a system also suffered a setback in early 2004, when Paul Ryan left. Ryan, a key hire from Overture, was in charge of building the monetary engine of MSN's emerging search engine.

Key to MSN's strategy is to lure Web searchers away from rivals, and then draw in advertisers. MSN's AdCenter, for example, will offer advertisers detailed information on Web surfers' responses to certain keywords, as well as demographic and psychographic profile data (in aggregate) on potential customers.

The company will also build in tools to give advertisers greater access to reporting data.

Finally, MSN envisions adding functionality that will let advertisers buy banners and other branding-styled ads, alongside keyword paid search. Sohn said MSN is interested in building in contextual advertising opportunities and ad syndication services, too.

Ballmer and MSN Chief Yusef Mehdi will outline new advertising opportunities at the company's annual advertising summit near its headquarters in Redmond, Wash.

The two executives will also talk about a new entertainment advertising division that will focus on developing a range of fresh brand advertising opportunities.

"We're investing deeply in brand advertising and direct marketing," said Sohn, who declined to disclose the amount of the investment.