Friday, July 27, 2007

Microsoft Swings a Late and Heavy Bat at Online Ads

CNET News chronicles Microsoft CEO Steve Ballmer's assertion that the software and services giant would be making a big noise in online advertising - an assertion that's been backed up by two short-term deals and likely to be followed by other major announcements. Forbes covers Microsoft's deal with social media portal Digg to use Microsoft for most of their online advertising, a deal that displaces John Battelle's FM publishing in large part for now - though based on John Battelle's upbeat assessment of the deal FM is gaining some inroads into Microsoft. Such a deal would be good for both partners: FM has done well with a number of major social media properties but has lacked the ability to fill available ad inventories effectively oftentimes, whereas Microsoft, ever late to the game, needs to start finding some leverage in social media as soon as possible. Both deals could presage exit plans that result in Microsoft acquisitions, but Microsoft may be learning from Google that it's more important to own the context than the content.

The other deal announced by Microsoft is the acquisition of ad auctioning technology from AdECN, a capability that should enable Microsoft to succeed more effectively against self-service ad placement services such as AdSense. AdECN is modeled after stock exchanges used in financial securities markets, requiring matching sellers' inventories against offers from advertisers, dealing only with existing ad networks as its members. So in effect demand for advertising coming in from one ad network could flow over to match inventory on another ad network, with each network receiving a portion of the buyer's ad fee proportionate to their role in the brokered transaction for the end publisher's sold inventory. AdECN takes a proportionately small piece of each transaction as a processing fee, in addition to up-front membership fees to cover basic infrastructure costs.

One can see how AdECN can be used by Microsoft to match inventory from ad networks such as FM Publishing to a greater universe of advertisers being glued together by Microsoft, giving FM-affiliated properties a broader universe of buyers without having to expand its direct sales presence. One can also see how this will enable Microsoft to enable traditional publishers and advertising agencies to gain access to a wider array of online properties without having to resort to the legwork required to cut deals with an ever-expanding universe of online niche market players and advertising networks. This will become increasingly important as more micropublishers begin to service niche markets more effectively online in B2B and consumer markets. So Microsoft can play "middle man" now with any number of media players, making easy money in the process and developing more direct sales and marketing relationships where it is most profitable for them to do so.

Given Microsoft's relatively late moves into trying to dominate online advertising a brokered market approach is a good strategic move. It enables Microsoft to gain the benefits of broad market penetration while enabling advertisers and publishers to work directly with the ad networks that make the most sense for their industry profiles. Given the increasingly niche-oriented nature of online advertising this may offer Microsoft more flexibility than a one-size-fits-all network like Google's AdSense network or its potential acquisition DoubleClick. The main weakness in this strategy is that it doesn't help Microsoft reach the "long tail" of advertisers as effectively as Google and Yahoo straight off, but in time Microsoft is likely to make inroads there as well. As its software revenues from tools that create content weaken Microsoft has little choice but to seek revenue from the content that's created by publishing tools. It's early days but expect Microsoft to develop some increasingly savvy solutions for ad buyers and sellers in search of the most premium online content markets.
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