Has Microsoft Stopped The Online Advertising Bleeding?

| About: Microsoft Corporation (MSFT)

Lost in the barrage of metrics included in Microsoft's (NASDAQ:MSFT) fiscal third quarter results was this nugget: The software giant has apparently stabilized its online advertising business, even though it's still losing money.

The big question: Will it last? Chances are pretty good that Microsoft can show advertising monetization gains largely because the market is moving toward the company's relative strength–display advertising.

For the fiscal third quarter ending March 31 (news story, statement, Mary Jo Foley, Techmeme), Microsoft's online services business generated advertising revenue growth of 23 percent. Overall, revenue for the online services increased 11 percent to $6.2 million. Much of these gains were due to "continued improvement in our advertising platform monetization," said Colleen Healy, head of Microsoft investor relations, on the company's earnings conference call.

Notably, Microsoft said its AdCenter platform was monetizing more effectively in the U.S. than it was a year ago under Yahoo's (NASDAQ:YHOO) Overture platform. Revenue per search also improved. As a result, Microsoft CFO Chris Liddell said the company was looking toward advertising growth topping 20 percent in the June quarter.

Lidell said:

"The benefits now of AdCenter are coming on stream. So we have talked with you about this a lot. We said that we would lap our previous monetization rate on AdCenter at some stage in this fiscal year. Well, we did that in that third quarter. So we're a little ahead of ourselves. We were expecting more like fourth quarter, but we did it in the third quarter. So we are ahead of where we were on the Overture platform of a year ago now and obviously on an appreciating trend. When you look at the number of advertisers that we are getting on the platform, we're getting at or above the rates that we were expecting and with considerably less advertisers than on the Overture platform, we're getting a higher monetization.

So we are feeling very good about the rates that we are seeing in terms of Ad Center overall. That is feeding through to the revenue growth numbers that you see."

Lidell also noted that Microsoft would continue to invest in the advertising business and is happy with growth on display ads. He even held out hope that Microsoft could eventually monetize the Hotmail and Messenger services. It better, since the online services unit lost $2 billion in the March quarter.

For context, Microsoft's online services unit is dwarfed by its other businesses. In fact, online services is the smallest unit reported in Microsoft's results. But strategically Microsoft's online business may become more important in the long run. If Microsoft can turn its online services business into a threat it may be able to distract Google (NASDAQ:GOOG) from encroaching on its core software business