Microsoft is taking solid aim at a business that is arguably outside its core competence: advertising.
Now, Microsoft is taking solid aim at a business that is arguably outside its core competence: advertising. And it is deliberately facing off against a specialist, Google.
The general in charge of part of Microsoft's assault, Brian McAndrews, joined the company just last month and is still learning its way of doing things. But he does know the Internet ad business, having run Aquantive, the advertising company that Microsoft acquired for $6 billion last month.
Aquantive's main competitor in technology is DoubleClick, the ad company that Google announced it would buy for $3.1 billion in April, so the competition will be face to face. Google, the dominant force in Internet advertising, has a running start, but Microsoft has a leg up: its deal for Aquantive is done, while Google's bid for DoubleClick still faces scrutiny from the Federal Trade Commission and the European Commission. Microsoft and others call the deal anticompetitive.
McAndrews has a long-term strategy that boils down to divorcing online advertising from Internet searches. The two have been viewed as a couple, because so many people use portals and search engines as their home base on the Web, but McAndrews says that model shortchanges advertisers and Web publishers.
McAndrews's proposed system, called "conversion attribution," would track all of the online places where consumers see ads and give advertisers a fuller picture of the various ways that consumers reach them. Tracking is important, because the site that gets credit for prompting a user's visit is the one that gets paid for it.
McAndrews contends that search engines, which long have claimed credit for sending people to companies' Web sites, do not deserve it all.
"Google gets all the credit, and in fact, you might have just gone to Google to type in the URL," McAndrews said, pointing out that people often search for companies' names after seeing their ads elsewhere.
Using technology from Aquantive's Atlas division, Microsoft will be able to provide advertisers with a log of all the places on the Internet where people see ads before going to the advertisers' Web sites. The data is based on individual computers' electronic signatures, not individual people.
Atlas, which delivers online ads to Web sites, has been working on such a system for more than a year and is running pilot tests with it. DoubleClick introduced a similar technology in July.
But Atlas contends that the system will be expensive to deploy without Microsoft, because it requires vast server capacity to analyze billions of ad impressions each day, said Young-Bean Song, a vice president of Atlas. He said that Microsoft would be able to use the new tracking capability to prove the value of its ad space, much of which is unrelated to search.
"Microsoft recognizes that in order to get TV dollars and traditional advertising dollars, you need this type of measurement to really show this value; otherwise the answer over and over again is: ?buy more search,'" Song said. "All the portals, including MSN, have a lot to gain from this."
While this system is still a work in progress, Microsoft today will announce a more modest advance: changes to the MSN Video site that are supposed to make the ads there less intrusive and more ubiquitous. This development is a response to Google's announcement in August that its YouTube site would overlay advertisements on the bottom of some online videos.
MSN Video will play fewer video ads in a session, but increase the reach of the ads by showing them once every three minutes. Until now, video ads have appeared at the start of every two clips, even if those clips were only 10 seconds long. The change is also meant to make sharing videos easier, which MSN hopes will encourage more online video watching.
Since announcing the deal to buy aQuantive, Microsoft has been expressing its online advertising ambitions more loudly. "We are hell-bent and determined to allocate the talent, the resources, the money, the innovation, to absolutely become a powerhouse in the ad business," said Steve Ballmer, Microsoft's chief executive, at the company's financial analyst meeting in July.
He pointed to aQuantive as a crucial piece of the plan during his speech. "We're emerging, but we're also looking to redefine the way online advertising gets done, because we have so much smaller a footprint than the two market leaders," he said, referring to Google and Yahoo. "This is a chance to invest in, or to reinvent and rethink the whole business model of online advertising," he said.
Microsoft has signed up more than 80,000 advertisers since introducing its Ad Center hub in May 2006. The company wants to offer advertising throughout its product line, and says it has technology to predict many details about Web users, ranging from where they come from to whether they intend to make a purchase. This summer, Microsoft opened a research center dedicated to online advertising.
The company also named McAndrews the senior vice president of a new advertising unit, the advertiser and publisher solutions group. His assignment will be to build what Microsoft calls its advertising "monetization engine," and his group will oversee advertising products across some of Microsoft's own Web sites, cellphone and game platforms as well as on thousands of other publishers' sites.
Both Aquantive and DoubleClick have built pipelines that send ads to Web sites each time someone logs on. The companies serve as middlemen between advertisers and Web site owners, exporting banner ads, videos and text ads to land on the right Web sites at the right times.
"We've been competing with DoubleClick for years," McAndrews said. "Google, if that deal closes, is obviously an industry leader, a formidable player."
But, he said, "it's a long game. We're not going to, you know, count this by the number of outs in the first inning. We're going to look at this as a nine-inning game."
Unlike DoubleClick, which does not own an advertising agency, Aquantive owns Avenue A Razorfish, the agency where the technology for Atlas was incubated. When Atlas was made into a separate business unit in 2001, it was a controversial decision, McAndrews said, because some people within the agency feared that the technology was a "secret sauce" that should not be shared. But Atlas became successful in its own right, and Avenue A Razorfish now makes up less than 10 percent of its revenues, he said.
The Atlas technology was a big attraction for Microsoft, and people in the online ad business suggest that Avenue A Razorfish may be sold. But McAndrews said that the agency business was important to retain because it provided firsthand insight about the needs of advertisers.