MSN's Ad Tab Adds Up

Microsoft outspends rivals Google and Yahoo!, to no apparent effect.
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Microsoft

(MSFT) - Get Report

isn't getting much bang for its advertising buck when it comes to the struggling MSN Web operation.

Redmond, Wash.-based Microsoft spent $68.6 million to advertise MSN last year. That's more than rivals

Google

(GOOG) - Get Report

and

Yahoo!

(YHOO)

spent combined, according to TNS Media Intelligence. Yet MSN remains a distant also-ran to the two most popular search engines.

This year the advertising blitz will only intensify as the largest software company ramps up spending to catch Google and Yahoo!, which TNS estimates spent a combined $45 million. Figures for 2006 aren't yet available. TNS monitors ad spending both on the Internet and in traditional media, but doesn't include paid search in its calculations. A Microsoft spokesman says the company doesn't discuss advertising spending.

Microsoft shocked Wall Street last week by unveiling its plans to boost capital spending this fiscal year by $2 billion. That will cover a range of projects including the launch of Vista, the new version of its flagship Windows system, Xbox 360 product costs, and accelerated hiring. Wall Street, though, seems most concerned about how much of that money will go for MSN.

"As a long-term shareholder of Microsoft, we are obviously concerned with the accelerated rate of spending, and that would include areas like search where, at least in the past, their increased efforts in that area have not been rewarded," says Pat Becker Jr., who helps manage $2.6 billion for Becker Capital Management in Portland.

This spending blitz comes as Google is trying to muscle in on Microsoft's stronghold on the desktop through features like its new digital calendar. Meanwhile, Yahoo!, which also leads MSN in search, is expected to disclose improvements to its engine that investors say may help improve its market position.

Last month, Microsoft hired Ask.com head Steve Berkowitz to run MSN. Berkowitz is credited with turning around the

IAC/InterActiveCorp

(IACI)

business. The company has also won kudos from search industry observers for its AdCenter product, which lets companies target their marketing messages to audiences of specific demographic groups.

Microsoft isn't stopping there.

The New York Times

reports that MSN signed a deal to develop original content, including a possible sitcom pilot with actor Tom Arnold. The software giant has also held talks with Yahoo! about acquiring a stake in the most popular Web site,

The Wall Street Journal

reported.

Nonetheless, evidence of the growing rivalry between the three net titans abounds. They have even been advertising themselves on each other's Web sites. For example, people who type the word

toolbar on Yahoo!'s search engine saw ads for Google's toolbar. Conversely, Yahoo! plugged its

search marketing business on Google and MSN.

This practice underscores how different Internet media is from traditional media. It's doubtful that

Walt Disney's

(DIS) - Get Report

ABC would advertise its hit "Desperate Housewives" on

General Electric's

(GE) - Get Report

NBC, or that either company would plug their shows on

CBS'

(CBS) - Get Report

namesake network. Google, Yahoo! and Microsoft can't wait for consumers to come to them as they increase the number of products that they are trying to sell.

"They are going to sell on each other's sites as long as it's good business," says Harrison Magun of

Aquantive's

(AQNT)

Avenue A/Razorfish. "Media companies are recognizing that the consumer is in control."

It's difficult to say how often the engines buy ads with each other or how long the practice has been going on. A Google spokeswoman said there was nothing unusual about the company buying ads on Yahoo!. Officials from Yahoo! and MSN declined to comment.

Shares of Microsoft fell 28 cents to $23.73, Google rose $1.31 to $396.11 and Yahoo! rose $1.11 to $32.96.