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Microsoft (NASDAQ:MSFT) says it will take a loss for the most recent quarter, writing off the aQuantive ad agencies to the tune of $6.2 billion.

The former Avenue A was considered a vanity buy in 2007, when it fetched $6.3 billion after Google bought Doubleclick for $3.1 billion. Microsoft dumped the Razorfish part of the aQuantive business for $530 million in 2009.

The announcement means Microsoft now considers the deal to have been more than worthless, since the write-down exceeds the net purchase price from five years ago.

All this is supposed to be very good news for Google, proof that Microsoft Bing is a non-factor outside the U.S.

But it may also mean something more.

The whole idea of these agencies was the sale of ads based on intrinsic targeting. Huge volumes of data would be collected on your web history, identifying your demographics and interests, and ads would then be sold based on the data. So if you were in Atlanta you might see Atlanta ads on the BBC site, and if you were over-50 you might even see Viagra ads on a gaming site.

The write-down seems to be an admission that this does not work. The "holy grail" of data-based advertising turns out to be worthless.

What drives sales are extrinsic targeting and an advertiser's own efforts to push people down the sales funnel. That is, you run car ads where people are reading about cars, run Atlanta ads on stories involving or datelined Atlanta. You also recognize a variety of levels of permission, both before transactions and after transactions, giving the best deals to your best customers.

This was common industry knowledge before the Web was spun, and it continues to be true. It's great news for publishers who can offer extrinsic targeting to advertisers, especially if they can demonstrate their readers represent big hunks of the markets advertisers are looking for.

Microsoft will probably take this lesson to heart, offering gaming ads alongside Xbox services, and focusing its energies on software, hardware and services rather than the chimera of online advertising.

The question investors need to ask is what this really means for Google (NASDAQ:GOOG). Is it good that its big rival is out of the game, or will that attract the attention of antitrust authorities? And does it mean that the intrinsic advertising pie might actually be smaller than Google thinks?

Source: The Real Lesson In Microsoft's Big Ad Loss