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Weekend Read: Microsoft 2.0 is All About Advertising

Authored by Jay Baage on October 6, 2006 - 7:19pm.
Microsoft adCenter DiagramIt is clear that Microsoft is at a crisis point in its 30-year history. Rival products based on free open-source software, such as Linux, are threatening the dominance it has enjoyed for so long in the computer software market. Moreover, PCs are transforming into entertainment centers and that has opened up for a whole new competitive situation. Microsoft's reaction has been to slowly get out of the office software market and into the leisure advertising market, in essence becoming more and more of a media company. While Apple and Google are clear inspirations, there is more to Microsoft's new plan for world domination. Reports about interest in a purchase of YouTube and the Zune digital music player concept gives us a hint of what Microsoft 2.0 is all about.

YouTube Siren Song

On Friday, Wall Street Journal gave more substance to the rumors of that Google is in serious talks with video-sharing website YouTube about an acquisition. The price tag is said to be as high as $1.6 billion. According to The New York Times, Microsoft is one of the companies that has paid a visit to YouTube's headquarters in San Mateo, California, to inquire about buying the company. That Google would be interested in YouTube seems natural. Though Microsoft's interest may at a first glimpse seem less plausible, but it, too, makes sense.

Microsoft Network (MSN) Video is already one of the largest video streaming services on the Web, drawing more than 11 million unique users per month, according to Microsoft. Its online channel streams news, entertainment, and sports video clips from 45 content partners, including the sister cable channel MSNBC. Microsoft recently launched the beta release of Soapbox, which is a video service similar to YouTube's site that lets users upload their own videos. Soapbox is offered to only a limited number of users during an invitation-only beta phase, designed to work out the bugs before a public launch. But it should be made widely available within six months, according to Microsoft.

Software May Want to be Free

If Google manages to close a deal and purchase YouTube, it will be another blow to Microsoft. Google products like Google Spreadsheet and Google Word are an emerging challenge to Microsoft's core dominance in the office market. Google's products resemble classic disruptive technologies: cheaper, more convenient, no-frills solutions aimed at products with huge product margins whose complexity and usefulness have overshot the mainstream. History suggests that, if such products take hold, Microsoft will have an extremely difficult time competing. The company will be driven to the high end of the market, and, ultimately, displaced.

However, Microsoft is not unaware of these trends and is expanding from its traditional office desktop market. The central pillar of Bill Gates' strategy is Microsoft's Media Center software. This allows consumers to share video music and photos across a variety of devices and comes pre-installed on many of the latest laptops and PCs or as a stand-alone box that can be connected to a television screen. However, innovative advertising solutions to go along with Microsoft Media Center Software are surprisingly still in short supply.

Enter adCenter

Microsoft announced the creation of adCenter Labs in January of this year. It is the place where the business models for the 21st century Microsoft are going to be invented with advertising at its base. At Microsoft’s annual MSN Strategic Account Summit, CEO Steve Ballmer shared Microsoft's plans to spend $1.1 billion in research and development for MSN and advertising-related products this year. Ballmer pointed to the work that the company is doing to improve customer experiences in interactive TV, mobile, and gaming, among others.

Basically, the idea of adCenter is to make it easier for advertisers to buy advertising from Microsoft by having one place to go to for buying search, contextual and display ads on Windows Live Mail, Windows Live Spaces, Windows Live Safety Center, Windows Live for Mobile, Office Live and Office Online, and Xbox.com. Already the principal profit driver for MSN, advertising is emerging as a critical revenue source for Microsoft, for years to come. Indeed, paid search and display advertising have proven very lucrative for both MSN and its competitors and it is the form of advertising that has made Google into the advertising giant that it is.

Bill Gates and Jay-Z at the 2006 Strategic Account Summit


Microsoft Chairman and Chief Software Architect Bill Gates (L) meets Shawn "Jay-Z" Carter, president and CEO of Def Jam Recordings, at the MSN Strategic Account Summit. Redmond, Wash., May 3, 2006





"Ad-supported software services are an integral part of Microsoft's plans to give consumers access to a broader variety of digital media, whenever they want and on whatever device they prefer," said Ballmer. "Our close partnership with the ad community is extremely important to us as we evolve Microsoft from a software company into the world's largest, most attractive provider of online media through MSN, Windows Live and adCenter."

Microsoft wants to use its software programming knowledge to develop a way to buy advertising that is more effective and more targeted than anything that is out there today, including anything Google has to offer. It is quite an undertaking, but so far the results look promising. A group of advertisers assembled for a roundtable discussion in Microsoft's New York headquarters in the end of September said they were happy with the results they have seen from adCenter so far, but all agreed that they would like to get more traffic, as long as the returns do not go down.

"We're finding that the traffic is very good traffic. It's consistently performing in a way that allows us to increase our spend in search," said David Hughes, CEO of The Search Agency, to ClickZ News.

Hughes said that traffic is still not at the level of other search engines, but that his clients have seen as much as 400 percent growth in traffic on their campaigns since adCenter launched fully in May.

Microsoft 2.0 = (Games + Music + Video) X Advertising

So, with the digital entertainment revolution predicted to really happen in 2007, Microsoft is gearing up to profit from it and once again become the most powerful company in the world. With Xbox as a global challenger to Sony's Playstation in games, Zune as a challenger to Apple's iPod in music and the global portal MSN video in digital television and film, Microsoft is in the pole position for the digital entertainment race. Microsoft is hoping that adCenter will be its trump card as a one-stop-shop and the most effective way for advertisers to buy cross-platform advertising.

The company still has a long way to go, but it seems like Microsoft 2.0 is finally shaping up to be a very interesting new company, with or without YouTube. Eric Hadley, General Manager of Global Marketing for Microsoft, conveyed this sentiment well in a recent interview:

"You know with Microsoft - we don't always get it right from the start, but we feel we're going in the right direction by aligning all the company assets behind advertising".

Joakim Baage

Related Links:
AdCenter Advertisers Like Returns, Want More (ClickZ)
Microsoft Aligns Ad Strategy Across Company (IDG)
tags: Internet | Video | Marketing | Advertising | Tech | Microsoft | Investing | Google | Software | Portals | Jay |



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