A year after first announcing plans for a homegrown ad engine, Microsoft is now using the tool for all its U.S.-based search queries.
Microsoft Corp. recently announced the launch of its online advertising platform in the United States, a milestone in the company’s struggle to catch up with Google Inc. and Yahoo Inc. in the multi-billion-dollar search advertising market.
The official announcement came when Chief Executive Steve Ballmer addresses the company’s Strategic Account Summit, a wide-ranging two-day event that included an unusual onstage interview of Chairman Bill Gates that touched on his private and professional life.
AdCenter is an online service where advertisers can buy space across Microsoft Web properties MSN and Windows Live. The ad platform lets advertisers purchase display and search ads.
For more than five years, Google has been hailed as king of Internet search and ruler of the universe of keyword advertising, towering over other tech titans who tried, and failed, to cut the increasingly powerful Mountain View Company down to size.
Over the past year, Microsoft has been slowly weaning itself from Yahoo!, a rival that it had hired to serve advertising alongside the Redmond Company’s Web search results. Now, Microsoft will be working directly with advertisers.
AdCenter will provide advertisers with tools and targeting capabilities that are similar to what is offered by Google.
Microsoft, however, is trying to go a step further by also targeting ads based on a person’s demographics.
AdCenter will give advertisers sophisticated information about consumers, including their location, age, gender and sometimes, their level of wealth. That is more than what Google and Yahoo! offer, said Joe Doran, senior director for monetization in Microsoft’s MSN ad-planning group.
The service will also allow advertisers to choose specific times of the day or week in which their ads would be displayed. "It is a clear differentiation for us," he said. AdCenter will not give any information that can allow advertisers to personally identify a person, he added.
Microsoft is banking on AdCenter as the lynchpin of its efforts to increase advertising as a source of revenue across the company.
The software maker is still struggling with the growing pains, however. Last quarter, Microsoft shifted the majority of its U.S. queries over to AdCenter. But even with an increase in the number of search queries, the MSN unit faltered as it saw its revenue per search query drop, one of several factors that pushed the unit back into the red.
Still, CEO Steve Ballmer, who is expected to announce the completion of the switch to AdCenter, has said the move is worth it, despite some pain in the near term.
"Further growth of AdCenter is a key" to taking on Google, Ballmer wrote in an employee memo earlier.
Like Google’s AdSense and Yahoo’s own ad platform, AdCenter lets advertisers bid on keywords that consumers use in searching for products and services. The price paid depends on how likely the word or phrase would be used, and determines the placement of ads on search results. All three rivals also offer analytics and reporting tools that advertisers can use to measure the effectiveness of their ads.
Microsoft earlier launched adCenter in Singapore and France, and for the past nine months it has run a pilot program in the U.S. with 6,000 customers. The company will begin a similar pilot in the U.K. next month, Doran said.
The software maker says that most, but not all, of its clients who have been part of the pilot program for AdCenter have seen better "conversion rates," a measure of how many search ads turn into sales.
In launching AdCenter to deliver "100 percent" of advertising on its online services, Microsoft is apparently ending its partnership with Yahoo, which had administered search advertising on MSN. The contract between the two companies is set to expire next month.
Search is not the only place where adCenter will place advertising. In the future, Microsoft said, it expects to launch ads in e-mail, the Spaces blogging program, on mobile applications, in Office and on the Xbox.com Web site.
The rapidly expanding market for Internet advertising is at stake. According to eMarketer, a research firm, Internet advertising is expected to reach nearly $16 billion by the end of the year.
While Microsoft’s plans look good on paper, its biggest hurdle in matching the success of its rivals will be in closing the gap on usage. Microsoft’s MSN search engine lags far behind Google and Yahoo, with the former the clear favorite of the U.S. online population.
The new software could be crucial to Microsoft’s efforts to expand into new markets and, in the long term, maintain its dominance.
“Ad-supported software services are an integral part of Microsoft’s plan to give consumers access to a broader variety of digital media, whenever they want and on whatever device they prefer,” Ballmer said in a statement.
In addition, advertisers would be less likely to pay premium prices on AdCenter, if Microsoft cannot deliver results. The company, however, is expected to see a spike in ad sales initially, since prices will be low until the number of bidders for keywords reaches a threshold where demand drives prices higher, experts say.
Yahoo is expected to unveil an overhaul of Overture, in an attempt to compete more effectively with Google, according to a person familiar with Yahoo’s plans. But analysts say improving advertising software may not be enough for Microsoft and Yahoo to catch up with Google.
Google handles nearly half of all search queries and is widely perceived to return more relevant results. The Mountain View Company raked in $6.1 billion in Internet ad sales in 2005, nearly half of the $12.5 billion in total spending. In comparison, Yahoo, which holds 22 percent of the search market, took in about $4.6 billion. MSN, which has 11 percent, took in $2.3 billion.
While Google’s and Yahoo’s advertising growth has been robust, MSN’s has been anemic, expanding only 7 percent in the last quarter compared with 34 percent for Yahoo and 79 percent for Google, Microsoft is hoping adCenter will change that.
Samir Patel, president of SearchForce, a San Mateo company that helps advertisers manage large-scale online campaigns, said clients who have tested adCenter saw “pretty much higher profitability overall.” More people who clicked on their online ads were converted to paying customers than on Google or Yahoo, Patel said.
Ellen Siminoff, chief executive of Efficient Frontier, an Internet-focused advertising agency that manages campaigns for large online advertisers, praised adCenter’s design and functionality, but said what her clients are asking for is “more volume, more volume, and more volume.”
Besides search advertising, Microsoft believes online video will become a major source of ad revenue. During the summit, the company unveiled MSN Originals, an initiative to partner with Hollywood production companies in creating content specifically for the Web.
Microsoft is aiming to create a one-stop shop for contextual, search and display advertising.
Microsoft expects to launch search-related ads on MSN in the U.S. this summer. In the near future, it will also launch ads on Windows Live Mail, Windows Live Spaces, Windows Live Safety Center, Windows Live for Mobile, Office Live and Office Online, and the Xbox Web site Xbox.com.
Meanwhile, Microsoft announced at the summit that it has acquired DeepMetrix Corp., a privately held provider of Web analytics and business intelligence tools for online marketers and publishers. Microsoft said it would integrate DeepMetrix technologies into AdCenter. Financial terms of the deal were not disclosed.