Make Way for Microsoft

Yesterday was the Microsoft Analyst Day and if you needed any more proof that the Redmond Giant was serious about taking the lead in online advertising just note CFO Chris Liddell’s observation that MSFT spent more acquiring aQuantive than they have ever spent on R&D. 

The $6b deal was steep relative to a potential early take-out of display leader DoubleClick, but after GOOG snatched DC away for $3b, it was a damned-if-you-don’t situation for MSFT, especially given tie-ups between Yahoo-Right Media and WPP-24/7.  Yet there is strong potential to grow the display category and justify not just aQuant’s hefty pricetag but the high multiples paid for DC and RM too.   

With MSFT’s additional purchase of AdECN yesterday, The Big 3 now all have the ad exchange technology plus the established relationships with market makers to reverse the revenue per impression decline and overall slowdown in display growth.  According to RM’s CEO, the growth of user generated content and web-based email have created a “glut of inventory” that monetization technology and services have struggled to keep up with.  Now, the ad exchanges promise to improve efficiency through transparency, buyer/seller disintermediation and easier access to targeting technology, raising the revenue per impression and overall market size.  Like Google’s search auction tweeks that ignited search in 2002, the auction model could supercharge display.  

Interestingly, ContextWeb’s ADSDAQ was not picked up in the M&A frenzy, perhaps because the exchange focuses on premium publishers?  (There is a shortage of premium inventory versus the overhang of UGC, etc…) 

So now MSFT has a stake in the increasingly important display category and the ability to cross-sell a value-added package with Live Search.  By the way, to mitigate conflicts-of-interest, expect MSFT to spin-off AA||RF and, for that matter, GOOG to jettison Performics.  (That is, if GOOG-DC overcomes MSFT-backed Antitrust scrutiny.)

 MSFT can also extend aQuant into new markets like video games, as seen in the announcement of major partnerships with EA and in-game ad network Massive on Analyst Day.   But perhaps the surest sign of a sea change in online advertising comes not from Wall St. or Madison Ave but Silicon Valley.  By signing Digg, Microsoft has effectively proven that Google can no longer get away with its dual image as rowdy, idealistic startup that also happens to have a $160b market cap.  Only a few years ago, the industry tacitly approved when Google scored the default search box in Mozilla’s Firefox, a deal worth reportedly $50MM to the open-source nonprofit.  Today, we might expect to hear some concerns about Google’s privacy policies. 

That’s an issue where Google is increasingly sensitive to Microsoft and the other top search engines, which recently banded together to announce opt-out tracking search and shortened record retention periods.  To be sure, Google still dominates search with 65% market share in June (after weeding out Live Search Club). 

So Microsoft has made some major inroads in search and display, but the fight has really just begun.  As Kevin Johnson, president at Platform and Services Division said, “We think there will be few significant players in the advertising platform business and intend to be one of the top two.”