Microsoft's ad pitch underpins Net moves

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.

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.

"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."

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.

But analysts have wondered whether Microsoft will take the notion far enough. Add-ons such as Windows Live and Office Live are one thing, but some have questioned whether it's a good idea for Microsoft to also prepare ad-supported versions of existing software.

"To us, it is clear that Microsoft understands the need for software as a service using AdCenter for monetization. But how quickly the company can respond is unclear, and how far it is prepared to drive this approach is also unclear," Goldman Sachs analyst Rick Sherlund said in a report earlier this week.

On the marketing front, Bradford says the next step is making the ads more palatable to the consumers that are viewing them. All of this ad-supported stuff won't work if people feel overwhelmed.

"We don't want people to 'put up' with the ads," Bradford said. Instead, the goal is that the ads are so targeted that people see the ads as a relevant part of what they are doing. "We don't want anybody to feel bad about the ads they are getting. Today sometimes you do," she said.

Today's search ads make no distinction of who is doing the searching. "Right now, we're just firehosing everybody," Bradford said. She pointed to how much more useful it might be for a cell phone carrier, say, to know who is searching for "cell phone." If the person is in their 20s, a ringtone ad might be a good idea, while for a 40-year-old, a pitch for a new rate plan might be a better bet.

Winfield said that Microsoft's demographic abilities are far from perfect, but says even information that is 25 percent accurate is useful.

"I'd still rather that, than the zero percent Google is giving," he said.

The added feature would not be enough for Whitfield to switch all his marketing dollars away, however. "That doesn't mean I am going to stop advertising on Google or Yahoo. They have the ad reach," he said.

Personalization or privacy invasion?
Yahoo, for its part, has some targeted options when it comes to display and banner advertising, but a representative said the company is still weighing the privacy concerns of offering something similar to what Microsoft is doing.

"Audience intelligence may be something that's of value to our advertisers, and we're testing a number of ways to look into that," the Yahoo representative said.

Google said it is sticking with its approach of targeting its ads based on the context of the search query, rather than using demographic information of the person doing the searching.

"We believe the targeting capabilities we offer today provide advertisers with the greatest return and result in the highest quality user experience," Google spokesman Michael Mayzel said.

Although rivalry with Google is often cited as the main impetus behind Microsoft's ad push, Yahoo is the most likely to feel the first impact from Microsoft's AdCenter. Yahoo currently supplies most of the keyword-related search ads to Microsoft's MSN Web portal under a deal that runs through next June.

Microsoft has said its goal with the current trial of AdCenter is to generate up to a quarter of those MSN results using its own tool, and it expects to reach that capacity soon, Bradford said. "We have a long line of people that want to get in the pilot," Bradford said.

Yahoo, for its part, has seen the writing on the wall. The company is looking to areas outside its MSN relationship, such as an expansion of its Yahoo Publisher Network program, in which it delivers self-serve ads to small and mid-size publishers. That program, a rival to Google's AdSense, has been in limited beta testing since August.

"We see significant growth opportunities next year regardless of any particular relationships," the Yahoo representative said.

Bradford, meanwhile, is looking beyond search. The next goal for AdCenter will be to serve up display ads for Windows Live and Office Live. From there, Microsoft has its eyes set on sending ads to mobile devices and Xboxes.

"It's not just about in your PC with your browser open," Bradford said.