Analysis: Microsoft should focus on strengths

Microsoft should consider putting its search-advertising endeavors on the back burner for now and attempt an end run at Google by trying to become a leader in the display-, video- and mobile-advertising markets, where no company is a clear leader yet.

Microsoft was pursuing Yahoo partly for its display advertising business, an area of the online ad market where Google is weak. Now that Microsoft has abandoned its plan to buy Yahoo—for now anyway—it might be smart for it to examine its own assets and come up with a strategy to expand not only in display advertising, but also in video and mobile advertising.

There would seem to be endless ways for Microsoft to do this, with its deep pockets, considerable technology infrastructure and extensive developer network. But the first hurdle it must overcome is to realize that in the near term, it’s not going to beat Google at its own game in search or contextual advertising.

Microsoft “can’t neglect search,” but for the moment Google has that market sewn up, said Greg Sterling, principal analyst with Sterling Market Intelligence.

Search advertising is not lost to Microsoft—or to Yahoo, for that matter. But Microsoft will have to build up its network of advertisers, most likely through careful and strategic acquisitions, to compete successfully, and this may take a while.

“It would be a mistake to go back and willy-nilly buy companies—they need to get some people in a room and really think this through,” Sterling said. “But people want alternatives to Google. They want competition. … People will use [other advertising engines] if there is enough volume and reach.”

In the meantime, Microsoft should focus on other areas of its business where it already has an advantage over Google, and which it could leverage to strengthen its advertising business. These areas include providing entertainment online or though devices like the Xbox, and leveraging its vast community of developers.

Microsoft has seen traction from selling advertisements using content shown to its Xbox Live gaming community, which has about 10 million members, and is trying to position Xbox as a set-top box through which users can watch high-definition (HD) content. Microsoft also has a platform for providing Internet protocol TV (IPTV), another investment it is leveraging for its advertising strategy. These are both areas in which Google does not currently play.

Microsoft also has been lining up content partners for its MSN site and is using its Silverlight technology to provide HD content via MSN. While MSN is not as highly trafficked as some Google sites, it remains a content destination against which Microsoft can sell video ads. The company also has struck some significant content partnerships for MSN, notably an exclusive deal with NBC to provide 2,200 hours of live event coverage from the Beijing Olympic games.

In the long term, Microsoft may find that focusing on what it does best—selling software and tools—is a better option to compete with Google than merely selling ads against content, because there are too many competitors already doing that, said Matt Rosoff, an analyst with Directions on Microsoft.

Microsoft can use its strength in software to improve its adCenter and the ad-delivery technology that it acquired with its purchase of aQuantive to chip away at Google’s contextual-search-advertising market share, Rosoff said.

“If you can get out of the publishing business and focus on tools, you can sell to 100 percent of the market,” Rosoff said. Microsoft could strike more deals like the one it did to provide advertising to social-networking site Facebook, instead of “building out a video site or a social network, which are high-cost, low-margin businesses,” he said. “Microsoft could use the platform to sell advertising on all of them,” he said.

In mobile, Microsoft not only has a more mature platform than Google with Windows Mobile, it also has a critical mass of developers that can build applications.

While Windows Mobile itself provides limited opportunities for advertising because it is not cross-platform, Microsoft could use developers to “create new, compelling content and applications” for mobile devices that would be “vehicles” for advertising, said Gartner analyst Andrew Frank.

However, Julie Ask, an analyst with JupiterResearch, said the mobile market is still “too far off the radar” to warrant heavy investment in the near term from Microsoft or any of its competitors.

Still, when all is said and done, the ultimate goal in advertising is to offer a “multichannel and multimodal” platform that customers can use to place advertisements wherever they want, Frank said.

For example, “if you have a video ad, you can traffic that against any number of channels—mobile, IPTV, Web, [or] on a social media widget,” he said. “The real battleground is who can bring all of this capability together in one simple dashboard-type interface.”

With its broad investments, Microsoft already has a lot of the pieces it needs for this, Frank said. Putting them all together and using the expertise it has gained from its enterprise software business—like knowing how to manage a multitude of products, platforms and partners—could be key to solving its advertising dilemma, Frank said.

“When you’re talking about large brands and managing lots of brands of advertisers across multiple channels, that’s the kind of problem Microsoft is good at solving,” he said.

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