Microsoft pulls back online ads for business software

The software giant still remains one of the largest advertisers online as it heavily promotes its Internet Explorer and MSN service, but analysts say the recent cutbacks for other products could be a sign that Microsoft is beginning to question the effectiveness of some forms of online advertising.

"Microsoft may have concluded that for these large, monolithic products that you can't immediately download, (banners) are not cost-effective," said Neil MacDonald, research director for Gartner.

"There are other ways to spend the money," he said. "The majority of the people clicking on these ads are consumers, not business decision-makers."

The change in strategy for a company that has been a pioneer in online advertising--and which also sells ad on its own Web sites--comes as the entire industry suffers an identity crisis. Declining click-through rates--or the number of times someone clicks on an ad--have raised questions about the effectiveness of Web advertising.

Meanwhile, since the stock markets tumbled in April, the demise of many dot-coms has caused concerns about ad revenue growth. Fears of curtailed ad sales have haunted the earnings announcements of several online stalwarts, including Yahoo.

A Microsoft representative would not address specific questions about the apparent decline in advertising across all of its platform and business software products. But she did acknowledge that for Windows 2000, advertising is now focused on print publications.

David Grubb, Microsoft's media director, said in a statement that promoting products is a constantly changing process, often with an initial promotional blast to draw a large audience, then tailored to more effective targets thereafter.

"Because of that, we often make reallocation decisions in our media strategy as appropriate," Grubb said.

A source familiar with Microsoft's online advertising efforts said the company has cut online ad spending for fiscal 2001 for its platforms division, including Windows and Office products, TechNet and developer group MSDN. It stopped allocating online funds for these areas in late June, the end of its fiscal year.

The numbers have it
Statistics gathered by companies that track online ads reveal the dramatic shift.

Ads for Windows 2000 have tapered off from a May peak of 3.8 million impressions--or the number of times a banner ad appeared on a page--to nil in September, according to a report from measurement company AdRelevance, a division of New York-based Jupiter Media Metrix.

The drop in online advertising for this product is partly explained by the fact that the product launched in February, and the next version is expected in September 2001. But even new products, such as Microsoft's recently released Exchange 2000, have had comparatively faint exposure on the Web.

According to Leading Web Advertisers, a New York-based online ad measurement company, a trickle of ads for Exchange 2000 started appearing at the end of June on MercuryCenter.com, but then only eight or fewer ad impressions were cited per week.

"You wouldn't expect it to be zero," Gartner's MacDonald said.

Advertising for Microsoft Office declined after a small burst of banners from March to June, but it still has a muted presence, AdRelevance found.

Similarly, Windows Me is not heavily advertised online. Instead, the company has promoted it through "grassroots marketing," a Microsoft spokeswoman said.

"Microsoft seems to be placing a much higher priority on Internet promotion of their Internet-related products such as Windows Media Player, MSN Explorer and Hotmail, rather than standalone products such as Microsoft Office and Windows," said David Martin, a research analyst at AdRelevance.

"Ads for their other software products like operating systems and word processors are rather thin," Martin said. He calculated that Microsoft's standalone software advertising makes up only 11.5 percent of its total software advertising voice, which includes MSN Explorer and Windows Media Player.

Weighing ads' worth
Analysts say Microsoft may have found through its own research that unless readers are clicking for something immediately, online advertising may not be effective.

"Microsoft has been a trailblazer in online advertising. (It) historically has paid close attention to the metrics" of advertising online, said Laura Mitrovich, program manager in Internet market strategies for The Yankee Group.

"The true story may be that (Microsoft is) seeing diminishing returns and poorer and poorer action rates" on ads for these products, she said.

Microsoft spent roughly $2 million on promoting Windows 2000 online during its last fiscal year, from July 1999 to June 2000, according to AdRelevance, which based estimates on standard ad rates. This does not account for trading ads with other sites or in-house advertising.

But this online budget is minor compared with spending for Internet-based products. For example, money spent promoting Windows 2000 for the year was only a quarter of what Microsoft spent advertising on MSN Explorer in the fourth quarter.

Analysts also say that ad dollars spent promoting Windows and other business programs is unneeded when Microsoft already has an effective monopoly in the market, a ruling made by a federal judge earlier this year in the government's landmark antitrust case.

"Realistically, what choice do you have?" MacDonald said. "You don't see the water company advertise a lot, except to create good will. In the end, you don't have a significant choice in providers."

Shifting gears?
Because Redmond, Wash.-based Microsoft already owns the market for personal productivity tools and desktop operating systems, it may be making more of a push now to win over the consumer market.

The company plans to launch a $1 billion campaign Oct. 25 to promote a renewed MSN, its online service for consumers, according to a Microsoft representative. The effort is meant to win over consumers using America Online or Yahoo as their gateway to the Web. Of the $1 billion, a proposed $150 million will be spent on a global ad campaign.

Representatives for Microsoft would not say how much, if any, of that will be spent online.

Online banners that elicit a direct response--for sites and software such as MSN eShop, Hotmail and Explorer, for example--can produce valuable traffic for the Microsoft sites and their advertisers.

In the last month, online ads for the latest version of Microsoft's Web browser, MSN Explorer, and encyclopedia site, Encarta, have been in heavy rotation on the Internet, with nearly 1.3 billion impressions during September, according to AdRelevance.

Despite dire warnings about online advertising's erosion, spending in the market has continued to increase, according to a recent report from the Internet Advertising Bureau and PricewaterhouseCoopers.

And the potential will likely continue to grow when high-speed connections allow for larger and more detailed ads, thus making online branding campaigns more effective.

"Branding is about slickness--it's about experience. You can't see that on your PC right now," said Pete Petrusky, a researcher with PricewaterhouseCoopers. "When the industry addresses the bandwidth issue, you'll see another surge in growth."