Microsoft's New Plan: Same as the Old

Microsoft's (MSFT) proposed bid for Yahoo (YHOO) was its fastest way to gain the scale necessary to compete against Google (GOOG) for online advertising dollars. Even before pulling the Yahoo offer, the company had begun laying the groundwork for a strategy to compete with Google in online advertising. Microsoft CEO Steve Ballmer is convinced that online advertising is crucial to its future. So much so that he sees online advertising making up as much as 25% of the company’s business within a few years. Google generates approximately US$ 22 billion versus Microsoft's US$ 3.3 billion from online advertising.

Consumers and businesses increasingly are switching from desktop software like Microsoft's to free online services that do the same things. "We are absolutely committed to be the leading player in that endeavor," Ballmer told employees at a recent gathering.

Google dominates the market, taking in 77% of the revenues from search advertising where as Microsoft has 5% of U.S. search revenue, according to search marketing firm Efficient Frontier.

Acquiring Yahoo would not have given Microsoft the revenue nor the search market share it is seeking for, as Yahoo's strength is in display advertising not search advertising.

Microsoft Seven Times Bigger Than Google In Display Ads

Microsoft's share of the display advertising market is already about 7 times larger than Google's. Although the display market is smaller than search, it's expected to grow faster over the next few years because of a surge in video ads. Market research firm IDC figures that by 2012 the display market will double, to $15.1 billion; revenue from search will reach $17.6 billion.

Microsoft makes money in the display business in two ways. It sells ads on its own popular web sites, such as MSN and Hotmail, and it acts as a broker by placing ads on other companies' web sites and then splitting the revenue with them much like Google's Adsense Program. Smaller web sites use Microsoft because they don't have a salesforce to call on advertisers and ad agencies. And even large players like media giant Viacom have found that letting Microsoft sell some of the space on sites like Comedy Central and MTV can lead to higher revenues. "They can achieve better monetization than we can on our own," says Viacom (VIA) CEO Phillipe Dauman.

It's All About Display

Microsoft's new pitch is that, in display advertising, the company has the most sophisticated technology of any company. It can help advertisers precisely target display ads and assess the value of ads even when web surfers don't click on them. Microsoft is also making the case that search advertising, Google's gold mine, is overrated. Soon the company, it plans to introduce new ad technology that it says will demonstrate that to advertisers. "We're going to win with this strategy," said Keith Lorizio, Microsoft's advertising manager. Read more here.

Image Source: Forbes

Comments

[kurt walter]

MSFT buying YHOO is a bad idea. Very few of these expensive mergers are ever worth the money.