Microsoft Joins Search-Ad Stakes With AdCenter

Redmond reaches for more of the $5 billion online market.
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After years of lagging far behind

Google

(GOOG) - Get Report

and

Yahoo!

(YHOO)

,

Microsoft

(MSFT) - Get Report

has unveiled its strongest weapon in the war to win online advertising dollars.

It's not a battle Microsoft necessarily has to win -- but the software giant badly needs to grab a larger share of the estimated $5 billion businesses spent on search-related ads. Last week, the

company shocked Wall Street, saying it will increase fiscal 2007 spending by some $2 billion as it focuses on high-growth areas beyond its traditional desktop bailiwick.

Unveiled Thursday, Microsoft's adCenter is essentially an auction system that allows advertisers to bid for space next to search results. A business selling sporting goods that won the auction could, for example, decide to display its ads anytime an MSN user types "baseball bat" in a search box.

During his speech announcing adCenter, CEO Steve Ballmer said his company plans to more than double R&D spending at MSN to $1.1 billion in fiscal 2007.

And because Microsoft has enormous databases stuffed with information gleaned from MSN and other sites, the company says it has the ability to help advertisers target specific demographic segments.

That sporting goods store could, for instance, use that information to target young men between the ages of 15 and 30 who live on the coast and are interested in scuba diving.

Microsoft has been testing adCenter with 6,000 companies for some time, but this week marks the system's commercial debut. It also marks the end of Microsoft's use of Yahoo! to handle similar, if less robust, ad-related functions.

Although MSN lags Google and Yahoo!, adCenter's potential appeal is huge because its audience of more than 465 million unique users worldwide per month is too large to ignore. The company is hoping that new content and better technology will bring in more users.

"The demographic targeting still needs to be proven more, it definitely isnot the killer feature that brings people in, but it is nice to have,'' says Danny Jackson, editor-in-chief of

Search Engine Watch

. "The killer feature remains the traffic -- as long as MSN has it, people will come -- and they have it.''

However, succeeding in this game doesn't necessarily mean defeating Google, says Goldman Sachs analyst Rick Sherlund. "To be big it may not be necessary to beat Google. Perhaps the view is that Microsoft will be broader in directing ads than Google or Yahoo! by leveraging a broader array of services including video games with Xbox directed advertising, mobile, small business hosted services (Office Live), and third party generated content built with Microsoft's tools," he wrote in a note to clients.

Goldman Sachs has an investment banking relationship with Microsoft.