Most people still see Microsoft primarily as a software company, but on Oct. 2 at a media event in Paris, Chief Executive Steve Ballmer painted a surprisingly different picture of the company's future: Over the next 4 to 10 years, he said, as much as 25% of Microsoft's revenues are likely to come from advertising.
Microsoft, the media company? That's right. As growth slows in Microsoft's core operating systems and desktop applications businesses—and as the threat grows from free software and applications offered over the Internet by the likes of Google (GOOG)—the software giant is scrambling for new sources of revenue and growth. Microsoft (MSFT) aims to stitch together its software, ad serving, and media properties to become a formidable online power with many of the marketing pieces that advertisers look for as they embark on Internet ad campaigns. "All marketing will be digital sometime in the next 10 years," predicts Ballmer.
Microsoft intends to go after that business big-time. In May, the company made its biggest acquisition ever (BusinessWeek.com, 5/18/07), a $6 billion purchase of online marketing powerhouse aQuantive. The deal gave Microsoft an online marketing base for selling ads, placing them, and giving advertisers tools to measure ad performance. The same month, Microsoft also purchased ScreenTonic, a French mobile-phone advertising venture, for an undisclosed amount. And earlier this year it bought another French company, MotionBridge, which specializes in mobile search.
Online Ad Market Growing Fast
That's important because going forward Ballmer says he sees Microsoft's fastest growth coming from advertising and mobile—and now the company is able to combine both. The Oct. 2 conference in Paris was a chance to pitch Microsoft's digital advertising strategy to more than 500 advertising clients from 17 European countries. While Microsoft has held similar such conferences in Seattle for several years this is the first time it has arranged one in Europe.
To be sure, online advertising still lags somewhat in Europe. Market tracker JupiterResearch figures it will amount to some $8.4 billion this year, vs. $19.9 billion in the U.S. Still, Europe's online ad market is growing fast, and it's an important opportunity for Microsoft if it wants to become a serious player in the global advertising market, which is worth about $550 billion annually, says Chris Dobson, vice-president of global sales for Microsoft's Digital Advertising Solutions Div.
The pitch to clients in the audience was that Microsoft can now deliver advertising to new platforms such as in-game promotions and mobile-phone campaigns. Marc-Henri Magdelenat, chief marketing officer and a co-founder of ScreenTonic, was on hand to talk about recent successful mobile advertising campaigns in some of the four European countries ScreenTonic now serves, such as one in Britain that allowed consumers to click on their mobiles if they wanted to test-drive a car, and another in France launched by Coke (KO) around the World Rugby match. There are plans to expand ScreenTonic's reach globally but rollout dates are not being disclosed yet, Dobson says.
Advertising Is Everywhere
Customers in the audience told BusinessWeek they are interested in the new advertising avenues presented by Microsoft but still undecided about how much they are willing to spend on new media such as mobile advertising.
Conference attendee Thomas Egede Kragh, who buys Internet advertising for Nykredit, a Danish financial-services conglomerate with interests in banking, pensions, real estate, and insurance, says his company "is not quite ready to put a lot of effort into mobile yet." Microsoft's Dobson concedes that it is still early days. "We have all the components we need for the platform, but it will take us years to build the ecosystem," he says.
Once that ecosystem is in place, Microsoft thinks it will be able to target consumers anywhere, anytime with advertising. Ballmer said he went for a jog in Paris the morning of the conference and wondered why it was not possible for a message to be piped to his watch that would say "Bonjour, have you bought breakfast yet?" and then suggest where he could go.
"Our digital devices are with us 16 to 17 hours per day, and they are also a place for targeted messages and appropriate and relevant advertising," Ballmer says. Soon, he promises, Microsoft "will know about you, we will know where you are, and we will know what you are doing, and we will service you appropriately."
Yahoo Joins Telefònica
But Microsoft will have plenty of competition trying to meet that goal. "Microsoft now has a strong presence in games, mobile, ad serving, and media," says Nate Elliot, a senior analyst in the Berlin office of technology consultancy JupiterResearch. "But Google does have offerings in most of those categories and Yahoo! (YHOO) does as well, and both of those companies have some of the same expertise Microsoft is bringing in."
Indeed, on Oct. 1, Yahoo announced a global agreement with Telefònica (TEF) to extend Yahoo's mobile Internet reach to more than 100 million subscribers in Britain, Ireland, and Latin America, a move it described as one that would help increase its drive into mobile advertising.
Finnish handset maker Nokia (NOK) is another potential rival. In August it announced its intention to move into mobile Internet services and advertising, and on Oct. 1 announced that it had agreed to buy Chicago-based Navteq for $8.1 billion (BusinessWeek.com, 10/1/07), as part of its move into mobile search. If Nokia and other industry players can perfect a business model, the content will be crucial to a future when people use their phones to navigate their way around as well as get information about stores and other services along the way.
Competing with Murdoch
"It's going to be interesting to see what is more important: Nokia's knowledge of the mobile sector or Microsoft's strengths in media and marketing," says JupiterResearch analyst Elliot.
Media companies also could be formidable rivals. Ivan Pollard, a partner at British ad agency Naked Communications, says he sees Rupert Murdoch as a major competitor to Microsoft, should the media mogul successfully stitch together all of his media properties. There are also a host of smaller rivals in each of the digital advertising segments that Microsoft is targeting.
But Google is clearly the one that Microsoft is trying to catch. Ballmer put it this way on Oct. 2: "Today we are No. 2," he says. "That is a big differentiator because it makes us hungrier, more flexible, more open. We want partners, we want more participants, and that helps us a lot on the advertising side."
Restoring Consumer Trust
As for search, Ballmer was frank about Microsoft's lag behind Google, admitting that the company will have to spend billions simply to "stay in the game." He hinted Microsoft may have some surprises in store. "We are going to have to put a few game changers out there, and when we are prepared to talk about them publicly we will," he says.
But technology alone won't carry the day. More than 7,000 consumers in Europe were asked in 2006 to rank the brands of 27 major technology companies in a survey released Sept. 28 by the Amsterdam office of technology consultancy Forrester Research (FORR). Microsoft scored far worse than rivals on brand trust: On a scale of 1 to 100 Nokia was ranked 86 and Google 57. Microsoft's score: 4. Restoring consumer trust will be a vital step if Microsoft aims to be a major venue for advertising.