When the tech blogosphere turns into Wall Street investment, M&A geniuses in addition to the usual everything Microsoft does is stupid all we get is noise. When Microsoft announced the $6B aQuantive writedown I skipped pretty much every major website’s coverage since there was less analysis and more Ballmer doesn’t know anything undertone. Now that they’ve all moved on, here’s a couple of things I find intriguing and would love to know more about.
The story behind Microsoft’s advertising business is complicated, it has several pieces to it:
MSN is Microsoft’s digital content juggernaut and the company displayed ads on their MSN properties. These ads came from a company called Overture. As it turns out, Yahoo acquired Overture back in 2003, which means these ads came from Yahoo. In 2004, Microsoft & Yahoo extended the Overture deal till 2006.
During 2005, in a parallel development, Microsoft was working on their own advertisement delivering technology. This was being under the MSN division and known as MSN adcenter.
As a result till 2006, ads on MSN were now coming from Overture (Yahoo) & MSN adcenter. The Overture/Yahoo & Microsoft deal was not renewed in 2006, as a result, starting 2006, ads on MSN came from MSN adcenter. This was the time when Google’s ad business was picking up with the company announcing several new features. Microsoft knew there was a market. In 2007 things got interesting with Google acquiring DoubleClick and Yahoo losing to Google—this meant Microsoft could make a move to become get second position. aQuantive happened.
2 years later, Yahoo search engine results were from Bing but what about the ads? According to Mashable here’s what happened:
- Self-serve ads on both would go through Microsoft Adcenter (at some point, MSN Adcenter became Microsoft Adcenter)
- Both companies would have separate digital display ads and Yahoo would maintain autonomy over their clients
This meant Microsoft was not able to tap into their one time competitor’s clientele in one swoop—not so good for Microsoft Adcenter. We’re in mid-2009. In a parallel universe, Apple’s iPhone is destroying the smartphone market and Google’s Android is just getting started.
The developers were flocking to mobile app advertising and Ads in apps were a popular option, so much so that:
- Google acquired Admob
- Apple introduced iAds in 2010—the same year when Windows Phone 7 came out
Now in a positively surprising move, app devs could use Microsoft Adcenter to display ads in their apps with Microsoft Advertising announcing SDK support—in 2010 itself. This meant, if Windows Phone did succeed for the developers, Microsoft Adcenter/Microsoft Advertising had a shot at competing with Google Admob and iAds.
In mid-2011 Google Admobs brought an ad SDK for Windows Phone and in Dec 2011, Forbes called iAds a failure. Which meant:
- Google saw an ad market & probably even Windows Phone devs wanted Admob support—either case Microsoft Advertising had a market
- Apple failed at something
Come 2012. Microsoft has announced a tablet OS—Windows RT, and Windows Phone 8 will share code with Windows 8. Microsoft is serious about tablets and phones which means they need developers and believe developers will build tablet and mobile phone apps, this means there will be ads displayed in these mobile (tab+phone) apps—the end result, Microsoft Advertising has a potential market bigger than what they had just with Windows Phone.
But Microsoft has taken a writedown on their aQuantive acquisition. Guardian tech editor Charles Arthur says:
@manan @maryjofoley writedown means “long-term, we don’t think it’s going to bring in more than $100m of profit”.
— Charles Arthur (@charlesarthur) July 6, 2012
In all this, the one thing that didn’t help Microsoft Adcenter was advertisements embedded by bloggers & websites, Google Adsense won this battle not just taking marketshare but even mindshare.
- Yahoo To Buy Overture
- Microsoft Enters Search Advertising Mix With MSN Keywords
- MSN adCenter Joins Yahoo and Google in Search Advertising
- MSN To Launch Its Own Paid Listings Program
So here’s what I’m unclear about when it comes to the deal and writedown:
Now, Admob was “nearing” $100 Million in 3 years and Microsoft believes they can’t reach that number with Windows 8 & Windows Phone 8 is very intriguing to me. Do they believe their advertising product sucks and hence devs won’t use it or do they’re uncertain about getting a lot of devs?
Or is this just a financial decision dumping all the losses the online division has been making so that starting from the next quarters Microsoft can show some profits due to advertising that will increase with Windows 8 & Windows Phone 8?
Microsoft Advertising has been quite active. The division has announced a few new products recently in addition to the several advertising patents that I keep coming across—it doesn’t look like Microsoft is planning to shut the division down. So if Microsoft isn’t exiting the business and as Charles Arthur says Microsoft doesn’t see a profit more than $100 Million, what does the writedown mean? Is it a tax thing as Simon Bisson suggests?
Or is Microsoft going to exit the advertising business? That takes me back to my question regarding Windows 8/WP8’s success.
Obviously there’s more to this story than slamming Steve Ballmer and calling it a failure.
PS: Microsoft ADvertising GM recently quit the company. This makes me wonder if he felt Microsoft Advertising isn’t all that exciting looking forward.