Microsoft takes on Yahoo, Google for Web ad dollars

By Reuters

Published: March 12, 2006, 8:30 PM PST

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Microsoft's top saleswoman for Web advertising, Joanne Bradford, spent her first few years on the job secretly wondering if the software giant was serious about cashing in on the Internet.

When she joined Microsoft in 2001, the company lacked a search engine of its own and had no clear Web advertising strategy. Google and Yahoo made multibillion-dollar businesses of search-related advertising while Microsoft waited.

"I wasn't sure the first couple of years that we were here to stay," said Bradford, Microsoft's corporate vice president for global sales and marketing. "I thank Yahoo and Google for proving that a software company can be a media company and a media company can be a software company."

These days, Microsoft is very serious about grabbing a larger piece of the $15 billion U.S. market for Internet advertising with a revamped search engine and a new system called AdCenter to sell pay-per-click ads across the company's Web content and services.

Microsoft plans to overhaul its Web presence, consolidating e-mail, instant messaging, online PC security and search at its Windows Live site along with new offerings like an online marketplace in order to increase traffic and create valuable space for advertisers.

However, the company faces an uphill climb.

Microsoft's MSN Internet unit generated $1.4 billion in online advertising revenue in its past fiscal year, while Google pulled in $6 billion in sales and Yahoo racked up $4.6 billion in 2005.

The company's strategic push combined with a steadily growing Internet advertising market--expected to reach $26 billion in 2009, according to Forrester Research--should boost Microsoft's online advertising sales.

"I wouldn't be surprised if Microsoft could double (its online advertising revenue) in three to five years," said Matt Rosoff, an analyst at independent research firm Directions on Microsoft based in Kirkland, Washington.

Analysts caution Microsoft trails Google and Yahoo in producing relevant results from its search engine and unless it can close that gap, it will be difficult to gain market share in search, the largest segment for online advertising.

Like Google and Yahoo, Microsoft lets advertisers, through AdCenter, bid how much they will pay each time a user clicks on their ad. Until recently, all the ads on Microsoft's search service were sold by Yahoo.

Yahoo still sells three-quarters of Microsoft's paid search ads, while the company tests AdCenter in the United States. It plans a full switch to AdCenter in the next few months.

Microsoft officials said AdCenter provides advertisers with demographic data to better target customers with projections about the search user's age, sex and location. Eventually, the company wants to integrate projections about the user's wealth, preferences and online behavior patterns.

Backed by registration information obtained from 230 million e-mail accounts and 205 million instant messaging users, Microsoft said that database allows it to provide more accurate projections than Google or Yahoo.

Microsoft envisions AdCenter to one day be a one-stop shop for advertisers to gather information then buy ads on search results, Microsoft-related sites and services, non-Microsoft sites, mobile phone software or even online.

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"We're really starting to see Microsoft gear up. Of course, the company was asleep at the wheel for a long time," said independent search engine analyst Chris Winfield.

One major hurdle is that ads placed on Microsoft's search results reach only a fraction of those from Google and Yahoo.

Google finished January with 48 percent of the U.S. search market, trailed by Yahoo at 22 percent and MSN at 11 percent, according to Nielsen//Net Ratings. Microsoft stressed that online advertising is not a zero-sum game.

"The online advertising market is growing at such a rapid pace and we want to participate in some of that," Microsoft's Bradford said. "This isn't a winner-take-all proposition."