Microsoft Squeezed by Search Market Struggles

Single-digit market share figures to limit the scope of its aQuantive buy.
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Microsoft's

(MSFT) - Get Report

relatively tiny footprint in the Internet search market doesn't necessarily jeopardize its plans to be relevant in the online advertising business.

But it does narrow the realm of possibilities that one could normally expect from buying a

digital advertising company that makes a lot of purchases in search.

Microsoft's MSN division has lost search share to

Google

(GOOG) - Get Report

since March, when Microsoft had 10.1%, to 8.4% in May, a drop of 111.6 million search requests, according to figures announced by Nielsen/NetRatings Wednesday.

Over the same period, Google's share rose to 56.3%, from 53.7%. For the first time, Google turned out over 4 billion searches in a single month.

"I'd attribute most of that

loss to the work and announcements around Google's improvements to its own search product," says Gartner analyst Andrew Frank.

Reasons for rating shifts aren't easy to nail down, he said. But in this case, Google is benefiting from a number of upgrades to its

universal search. "They gained on everyone."

While Microsoft treads water in search, its plan to buy digital marketing firm

aQuantive

(AQNT)

"shows how serious they are" about the online advertising market, Frank says.

"Whether they can make good on a promise to be a single stop for advertisers remains to be seen," according to Frank.

Of aQuantive's three business units, its Atlas operations would be affected by being connected to a declining search engine, but not significantly, he says. As a tool for publishers to manage their search programs, Atlas doesn't need search hits. It focuses on management of rich media and on-demand video.

"The success of platforms like Atlas and

DoubleClick

is to serve ads on anyone's sites," Frank says.

He concedes there's still revenue in search, but Frank discounts the importance of Microsoft's dwindling search market share to its plans to integrate aQuantive. "I don't think there's a great deal of synergy to be had from owning both an ad-serving platform and being in the media sales business," he says.

But Atlas' own research points to how critical search is to effective online display advertising. A recent report by the company, written by Esco Strong, shows that search clicks bring more than three "conversions" -- meaning sales or other actions, like filling out a Web form -- for every single conversion produced by clicks on display ads only.

Looking for the synergy between display and sponsored search results, Strong suggested that display ads likely drive brand searches. Analyzing 2006 data from 11 advertisers who gathered 10.8 million "impressions," or views, by 1.8 million users, Atlas found a conversion rate of four-to-one (for display ads only) for consumers exposed to both display and targeted search ads for a brand.

He also saw that conversion rates for both displays and searches climbed significantly for consumers who had also seen three or more impressions of online display ads for a brand, although the conversion rate varied considerably from advertiser to advertiser.

Google has been

on the fence about whether it will link search terms with display ads because of concerns for consumer privacy. Yet given the pairing that already exists between search terms and paid links, connecting the dots between display ads and word searches seems inevitable.

So, unless Microsoft is happy to have its aQuantive clients place their search advertising with Google, market share is critical for Microsoft to wring the most out of its aQuantive deal. As a large buyer of Web media and search, aQuantive's Avenue A/Razorfish unit presumably will be buying search from the domain with the most searchers -- money that's best spent in house.