If Mr. Ballmer's message to marketers falls anywhere near what he told the European advertising community in Paris last week, he'll talk about the increasingly blurry lines between software and media and advertising. He'll discuss how Microsoft itself is a huge marketer, spending $3 billion on advertising. And he'll outline how, in four to 10 years, advertising will account for as much as 25% of Microsoft's business. For those of you who are counting, based on the most recent year's revenue that would be north of $12 billion -- a couple billion more than Google made in total last year.
Of course, you could be forgiven if you thought Mr. Ballmer, Microsoft's CEO, had discovered advertising's potential before, like in March 2006 when he went nuts on stage at a client summit for now-Microsoft-owned agency Avenue A/ Razorfish. Mr. Ballmer, whose cadence veers toward notorious college basketball announcer Dick Vitale when he gets excited (which he does often) was striding across the stage shouting that while Microsoft had previously been all about "Windows, Windows, Windows, baby!" it was now all about "advertisers, advertisers, advertisers!"
This time, however, Microsoft needs to show less talk and more action. Since Mr. Ballmer's on-stage display of advertising affection, Microsoft's share of search has stagnated and its advertising division has been marginally profitable or unprofitable while Google this year will rake in about $15 billion.
"It will take establishing an emotional rapport with people," said Colleen DeCourcy, chief digital officer at TBWA/Chiat/Day, on Microsoft's renewed efforts to be a force in advertising. In a Web 2.0 world, the advertising model works because people want to share their information, she continued. "It's a model where I get something [out of the relationship] rather than just somebody selling against my eyeballs. And that's a huge cultural change."
It is, of course, an enormous task to transition a company that has dominated the software-services space for the past 20 years into a marketing-services or an audience company. Today's new marketing mind-set emphasizes targeting and optimization over size; conversation and engagement are seen as more effective than bulldozing consumers with ads. And that model is evolving at extraordinary speed -- a challenge for a company that has long based its business model on being second to markets after they develop. In the case of search, second (or third, as the case may be) might be too late.
"They're saying they're passionate about this and I believe them," said Curt Hecht, chief digital officer at GM Planworks. "They've just got to figure out the execution piece and advertising isn't their core DNA."
Though he couldn't be reached for an interview, it's hard not to believe Mr. Ballmer, the first business manager Bill Gates brought on at Microsoft in 1980, when he extols the opportunities the company has in digital advertising. But it's also hard to imagine advertising composing a quarter of Microsoft's business in as few as four years, which he suggested in Paris last week. Based on the year ending June 30, that would mean worldwide ad revenue of $12.8 billion -- somewhat more than Viacom and slightly less than CBS Corp.'s 2006 worldwide revenue. Microsoft can't do that alone.
In Zurich, Switzerland, Mr. Ballmer told the press he would not "rule out any more deals like [aQuantive]," but added it is not something Microsoft is doing every day. Acquisitions are what it will take to boost the company's ad business to where he wants to get it. A long-rumored deal for Yahoo would be a start, especially with search, a sector in which Mr. Ballmer wants to own a 30% share. Microsoft's search share is at 11.3%, according to ComScore, less than half of Yahoo's 23.3% and a fraction of Google's 56.5% share. But it's unclear whether that would simply provide a one-time boost in advertising revenue or really change the model for Microsoft. "Success often comes with a fresh sheet of paper, not with blending of brands," warned Rishad Tobaccowala, CEO of Denuo.
For its part, Microsoft counters skepticism that it can be an ad player by pointing out that the past couple of years it's been in its building phase, in which it has made acquisitions such as ad exchange AdECN, in-game ad-serving company Massive and mobile network ScreenTonic. Now, it says, it's in a place where it can begin to execute.
"This online advertising business and the online advertising platform, it really is a game of technology, which plays to our strengths," Kevin Johnson, Microsoft's president-platforms and services told analysts at a meeting last month. "We've assembled the components we need, we're doing the integration, and we are clearly in execution mode."
Advertising is surely in the DNA of Brian McAndrews, the former CEO of aQuantive and the white knight Mr. Ballmer is now betting on. Mr. McAndrews, who arguably out-negotiated Mr. Ballmer in the $6 billion acquisition and who is widely considered to be an advertising visionary (one only has to look at how many companies are trying to model their digital business after the assets aQuantive collected to understand that point). Mr. McAndrews came to aQuantive in 2000. In 2001 the company's stock was worth less than a dollar; this summer he sold it to Microsoft at $60 a share.
That Mr. McAndrews chose to stay at Microsoft after a lucrative financial windfall speaks of the trust and authority the company has chosen to give him. A Microsoft outsider, Mr. McAndrews has retained several aQuantive veterans as his deputies, including Clark Kokich as CEO of Avenue A/Razorfish, aQuantive co-founder Mike Galgon as chief advertising strategist and Karl Seibrecht as president of Atlas and leader of emerging media. Mr. McAndrews also has marketing-savvy allies within Microsoft, such as Joanne Bradford, chief media officer of MSN, and Yusef Mehdi, who was the architect of the aQuantive acquisition. The ad industry is generally bullish on Mr. McAndrews, even if it can't see how all the pieces fit into Microsoft, particularly the agency piece.
Microsoft has called Avenue A/Razorfish the "learning vessel" in its ecosystem, and rivals are quick to suggest that if you're an agency client you exist to provide insights to Microsoft. For its part, Microsoft insists it likes the agency business, though many suggest it will eventually shed the asset -- it just can't do so now because it would make the already-high price for aQuantive look even more exorbitant.
Mr. McAndrews sees Microsoft's backing as the key to turning Atlas's ad-serving technology into a multichannel powerhouse and sees anything delivered over IP as Microsoft territory. In his words, it's about having great technology, data and then scale that goes across all media.
"There won't be that many players who can invest the money and technology expertise who can do that," he said. He suggests most agencies will want to outsource that and then do what they're great at: in his words, "be a strategic partner."
But aQuantive's transitional powers are hardly guaranteed. In private meetings with ad-agency executives, Mr. Johnson, Mr. McAndrews' boss, has reportedly referred to the acquisition as a $6 billion lottery ticket, perhaps a signal that nobody really knows exactly how this whole play will pan out.
A Microsoft spokeswoman didn't confirm or deny that comment.
"The reality is they could see this coming for years, it's not surprise," said Mr. Tobaccowala, who again warns that the model for the future may not even exist today. "The future doesn't generally fit into containers of the past."