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Digital Island blasts off on Microsoft deal

A deal with Microsoft worked wonders for the struggling Web hosting company, sending its shares skyrocketing.

A deal with Microsoft worked wonders for struggling Web hosting company Digital Island, sending its shares skyrocketing Thursday.

As earlier reported, Digital Island has struck a significant new alliance with the software giant, in which it will host Microsoft Network's advertising.

Digital Island stock nearly doubled in trading Thursday before settling to $3.69, or about 85 percent growth, at the 1 p.m. PDT close of regular trading. Microsoft closed down 40 cents at $70.

Although the alliance affects a relatively small part of the pages that Microsoft delivers, the company said the deal will amount to 860 million ads per day, a large stream of traffic by any Web standard.

The deal comes at a critical time for Digital Island, which posted huge losses last quarter and is in the middle of a cost-cutting process that includes layoffs and delayed construction of new facilities.

Digital Island and other hosting facilities have said that new business has been scarce in recent months, as even the biggest companies have slowed or stopped new spending on Internet projects. However, executives said last week that spending had picked up marginally at the end of last quarter. Microsoft's agreement may help brighten that glimmer of financial light.

"By outsourcing to Digital Island, we have the ability to scale when necessary very easily and are saving a significant amount of money on infrastructure and maintenance costs," said MSN Senior Operations Manager David Walters.

No financial details on the deal were available. Digital Island will be delivering the ads for Hotmail.com, MSNBC.com and the MSN Instant Messenger service, among other sites.

Digital Island also announced this week that it would use software from Novell, a Microsoft competitor, for some of its internal operations.