Microsoft ready to spend--but on what?

Ad execs could get a hint of what the software maker will pick up in its planned spending spree. Images: MSN's AdCenter

SEATTLE--Just what does Microsoft plan to spend all those billions of dollars on?

That's the question that Wall Street has been asking since last week, when the company announced that it would pay out far more than expected in the next 15 months--roughly $2.4 billion according to estimates--as it bulks up several of its new business efforts, particularly its online services.

Investors may get some answers this week, as the Redmond, Wash., software maker hosts an annual gathering for hundreds of MSN advertisers and other ad industry notables. Microsoft is expected to give further details of its strategy and to show off some of the earliest fruits of its labors.

Much of Microsoft's focus--and spending--centers on online advertising as the company bulks up to better compete with Google and others. Its biggest bet in that area has been its decision to switch from Yahoo's ad-serving technology to its own homebrewed alternative, named AdCenter.

Over the long haul, the company hopes that AdCenter will prove more adept at targeting advertisements to the individual user, in the process sending more revenue its way. That was not the case in the past quarter, though.

That's when Microsoft shifted the majority of its U.S. search advertising over to the test version of AdCenter. However, revenue per search actually fell, as the company is still ironing out the kinks in the product and building its base of advertisers.

Credit Suisse estimates that Microsoft has moved from an ad network of 300,000 advertisers to one that, for now, stands at less than one-tenth that figure, according to a research note from the firm's analyst Jason Maynard.

"While we assume that the number of advertisers will climb substantially over the next 12 months, we are underwhelmed with the stickiness of the Microsoft Web properties," Maynard said in the research note last week.

Executives insist that the move is right for Microsoft in the long term, whatever growing pains it is feeling now.

Images: AdCenter stages

"Further growth of AdCenter is key," CEO Steve Ballmer wrote in a memo sent to employees after the company reported earnings last week. "Our goal is to create the Web's largest advertising network, giving us an engine that will enable us to monetize our services and compete against Google."

On the agenda
The software maker is expected to demonstrate an updated test version of AdCenter at this week's conference, with a final version targeted to be ready by June.

Also on tap should be a clearer explanation of where Microsoft is headed with MSN, its online property. Many of MSN's existing services, such as Messenger and Hotmail, are being re-fitted with the Windows Live banner. However, the company is pushing ahead with a dual-brand strategy. At the meeting, it is expected to make its case to advertisers as to why both outlets make sense for their marketing bucks.

And it's not just Web sites that Microsoft may be looking to fill with ads.

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