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Business Impact

Microsoft closes $6 billion buyout of aQuantive, wants to challenge Google for top ad spot

SEATTLE (AP) – In closing a $6 billion (euro4.4 billion) buyout of digital marketing company aQuantive on Monday, Microsoft is taking a first step in its quest to leapfrog Yahoo and challenge Google in the online advertising business.

”Our goal is to be No. 1 or No. 2,” Kevin Johnson, president of Microsoft Corp.’s platforms and services division, said in an interview last week.

It’s an ambitious plan, given that the software maker lags far behind Yahoo Inc. and Google Inc. in search traffic and advertising revenue.

Microsoft has said disruptive changes in the software industry – a shift away from desktop programs and toward applications delivered over the Internet – will touch every one of the company’s products, in ways yet to be determined.

With aQuantive Inc., Microsoft believes it has cleared away some worries about how to stay profitable during the shift. Johnson said units in the two companies are being combined and reorganized to provide an advertising platform to support new Web-based services.

A new advertising and publishing solutions group is being formed, under the plan Johnson and aQuantive Chief Executive Brian McAndrews outlined last week with The Associated Press.

The group, to be led by McAndrews, includes aQuantive’s ad-serving technologies and tools for tracking the success of online ad campaigns, and DrivePM, which extends Microsoft’s ability to sell Web ads to aQuantive’s broad network of top sites.

It will also include Microsoft’s tools for selling search and display ads across its own sites, as well as Massive Inc., a company Microsoft bought last year for inserting ads within video games, and ScreenTonic, a mobile advertising company Microsoft acquired in May.

Microsoft’s online services group, led by Steve Berkowitz, will continue to focus on expanding the company’s audience on sites like MSN and Live Search and finding new advertising partnerships like the one recently announced with the social news site Digg.com.

AQuantive’s Avenue A/Razorfish, a well-regarded Web design and online advertising agency, will operate ”at arm’s length,” McAndrews said.

That means the agency will make decisions based on marketer’s needs, not on its ownership by Microsoft. Such decisions include whether to use Microsoft’s Silverlight technology instead of Adobe Inc.’s Flash, or whether to buy ads on MSN instead of Google.

Johnson and McAndrews would not say how long it could take to integrate their technology or present a united set of tools and options to customers. They also declined to say what measures, besides the growth in online ad revenue, the company will share with investors who want to assess whether the deal is successful.

Microsoft will have to post stellar improvements in traffic, search query share and advertising revenue to soothe investors’ concerns.

Google’s dominance has come primarily from its prowess at making money from ads placed next to Web search results. Google snagged nearly half of all Web searches performed in the United States in June. Yahoo grabbed about 25 percent, while 13 percent were on Microsoft’s search sites, according to audience-measurement company comScore.

But some analysts see the search-ad market starting to stagnate and believe Microsoft’s bid for aQuantive, one of a slate of buyouts in the sector this spring, indicates a looming shift in online advertising.

”The so-called long-tail advertisers that have really propelled Google’s growth for the past four years is starting to plateau,” said Andrew Frank, an analyst at research group Gartner Inc. ”The next wave of growth is going to be big brands shifting their advertising budgets, still largely invested in newspapers and TV, into the Internet in earnest.”

Those marketers will be looking for much more than text links. Microsoft, with aQuantive, and Google, with its proposed $3.1 billion (euro2.27 billion) buyout of online ad company DoubleClick, are jockeying to put together a broad range of offerings from multimedia and display ads to mobile, video, Internet television and video games.

Microsoft also closed on Monday its purchase of AdECN Inc., a stock market-like exchange where networks representing Web sites buy and sell ad space. Yahoo recently bought another ad exchange, Right Media Inc., and Google will acquire a similar business from the DoubleClick buyout.

Such exchanges are primarily used to sell leftover advertising space, but Microsoft has said it plans to use AdECN to offer more desirable ad placements as well.

Analysts and online advertising players say Microsoft must get more people to visit its Web sites. To that end, Johnson said improved search technology and a new version of the Windows Live online services are due this fall.

But to be one of the top online advertising companies, analysts say Microsoft must also beef up technology that help marketers target advertising in a way that doesn’t stir up Web surfers’ squeamishness about giving up personal information.

The software maker will also have to provide more sophisticated tools than even aQuantive currently offers to help marketers crunch the huge amount of information about how Web surfers interacted with the ads and see if their dollars were well-spent.

Some question whether Microsoft can divert enough focus from the software and entertainment businesses to really succeed as an online advertising company.

Youssef Squali, an analyst at Jeffries & Co., recalls how Microsoft executives were talking about becoming an advertising powerhouse in 2004.

”Three years later, they’ve not been able to move the needle,” Squali said. ”Search – they have lost a fair amount of market share and they’re not really getting much traction.”

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