Google proved that there is a lot of money to be made from improving the effectiveness (and measurability of) Internet advertising. Ever the imitator, Microsoft has now embarked on a "fundamental shift in strategy" to claim some of those dollars for itself.
With adCenter, Microsoft Bids For Web-Search Bonanza
May 4, 2006
Microsoft Corp. today showed off the auction system it hopes to use to tap into the gusher of advertising dollars flowing online. The system, called adCenter, was introduced at a conference the software maker is holding for hundreds of advertisers in Seattle. It's Microsoft's most ambitious effort yet to catch Google Inc., whose own system has been key to that company's runaway revenue growth.
The auction services let advertisers bid against each other online to have their ads displayed alongside search results. Each time an Internet user searches for specific keywords, such as "digital camera," the system displays a related ad for, say, a camera retailer. Advertisers pay if a consumer clicks on the ad, with prices per click averaging around 50 cents.
Companies spent $5.1 billion on search-related ads in the U.S. last year, up 31% from the year before, according to the Interactive Advertising Bureau trade group and PricewaterhouseCoopers LLP.
For Microsoft, adCenter is a critical part of a fundamental shift in strategy as the company tries to combine advertising with its traditional software business. AdCenter is "the next big revenue engine for the company," says Tarek Najm, general manager of adCenter and Microsoft's lead engineer on the project.
But it's also a huge bet that demands a new set of skills that Microsoft is learning on the fly. First among Microsoft's challenges: winning support among advertisers already devoted to Google's system. Meanwhile, the competition is heating up: This month Yahoo Inc. will unveil long-awaited improvements to its auction system, and Google continues to improve and expand its approach.
For Microsoft, the advertising push isn't just about growth. Over the past year, the company has come to realize what a risk the advertising model -- which provides software and services free over the Internet, accompanied by ads -- can pose to its traditional software business. Companies such as Google are offering the same types of programs -- including word processors, calendars and email -- for free that are major sources of Microsoft's revenue and profits....
Among the big challenges now, particularly for Microsoft: getting more advertisers to use its systems, increasing search market share and syndicating ads, or recruiting other sites to display advertising purchased through the system.
Search advertising is a game of scale. The more places on the Web the ads are distributed, the more chances a consumer will click on them. The more that consumers click, the more advertisers the ad system attracts. The more advertisers the system attracts, the more they can wind up paying for each click as they bid against each other in an auction system. An internal document released by Google last year as part of a lawsuit indicated that the company had well over 400,000 advertisers.
