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Microsoft's LinkExchange plan

Microsoft has learned some tough lessons about publishing but retains a key advantage: its enormous cash horde.

    Not so long ago, Microsoft's Web strategy was fairly typical: create some content sites, sell ads, and hope folks would treat the Net the way they do television or magazines.

    But general-content plays on the Web have been generally unsuccessful, a lesson that most online publishers have learned by now. So too has Microsoft, though it has one distinct advantage--an enormous cash horde to help it transform its strategy.

    That's what is behind Microsoft's announcement today that it will buy ad network LinkExchange for about $250 million in stock. The whopping price compares to a market value at today's close of $524 million for DoubleClick, the best-known ad network, and $252 million for 24/7 Media, the other publicly traded ad network.

    The software giant has learned that establishing long-term customer relationships on the Web is far more lucrative than just creating content. And one way to expand that base is through the acquisition of firms such as LinkExchange.

    "This is a customer-acquisition play, pure and simple," said Evan Neufeld, advertising analyst for Jupiter Communications. "It's the usual for Microsoft: the landslide effect. They're throwing out tons of money to get what they want."

    Most LinkExchange members are small and medium-sized Web-based businesses that have provided all kinds of information about themselves, making it much easier to sell targeted ads and products. Member Web sites trade free ad banners among themselves and let LinkExchange sell ads on their pages to bigger advertisers.

    Microsoft Network, the division that bought LinkExchange, says it wasn't interested in the 100-employee firm for its advertising reach. Instead, MSN vice president Laura Jennings said, Microsoft's main reasoning for the deal is to "advance our end-user mission"--meaning that the company can sell its software and services to the 400,000 Web sites that are part of the LinkExchange network.

    Jennings said Microsoft already enjoyed a 40 percent reach with its existing Web properties, but none offered advertisers the combination of vast numbers and opportunities for targeting.

    LinkExchange claims that its member sites reach 42 percent of Internet users, a total 22 million per month, according to tracking service RelevantKnowledge's latest report. That surpasses DoubleClick, which has more revenue.

    "Microsoft is getting a highly qualified opt-in community," Neufield said. "It's not just my mother with a Web page--it's my mother who is selling stuff from her Web page."

    The purchase is the latest in a series of changes in Microsoft's online strategy. It has consolidated its Web properties under the MSN and is aiming to join Yahoo and America Online in the top tier of portal sites.

    In February, it dropped most of its homegrown content sites, such as @WaterCooler, Getworking, and Mauny's Kitchen. And last month, Microsoft transformed its Sidewalk sites from editorial-focused and cash-draining city guides into more transaction-oriented regional shopping guides.

    MSN is concentrating on creating sites such as the popular Expedia, a travel information and services site, and CarPoint, a service for car buyers.