In introducing two Web-based advertising products early this month-Windows Live and Office Live-the technology giant acknowledged that its future lies in its ability to monetize the Internet.
Referring to the products at a shareholder meeting, CEO Steve Ballmer called them "a revolution in software."
It's a revolution Microsoft desperately needs to be a part of. In e-mail memos to key staffers leaked to the press, Chairman Bill Gates and Ray Ozzie, chief technical officer, admitted that Microsoft must change its direction away from the closed-network software that has been the backbone of its business.
One of the e-mails, "The Internet Services Disruption," attributed to Mr. Ozzie, said that it's time to embrace the "power of the advertising-supported economic model. Online advertising has emerged as a significant new means by which to directly and indirectly fund the creation and delivery of software and services."
A separate e-mail, signed by Mr. Gates, read: "The broad and rich foundation of the Internet will unleash a `services wave' of applications and experiences available instantly over the Internet to millions of users ... the next sea change is upon us. We must recognize this change as an opportunity to take our offerings to the next level."
Windows Live and Office Live, released in beta Nov. 1, are Web sites offering a variety of services that are still being built out. Office Live focuses on the small-business customer. Windows Live will feature ways for consumers to customize their own Web programming (rather than relying on programming developed by, say, MSN.com) with software tools to build their own home page with updates on weather, stock prices and other information; receive RSS feeds; access their favorite Web sites through Explorer; do personalized searches; send e-mail and instant messages; be involved in a number of social-networking activities; maintain blogs and run content on mobile devices.
Ads will be sold on all these features, and will be packaged across all Microsoft properties, including MSN and Live on a CPM basis, said Eric Hadley, senior director-advertising and marketing at MSN. Live "is for people who prefer to get their own content," he said.
Advertising will include all ad units, and Mr. Hadley said, "We are very committed to getting more video into this." Through subscription data (there are 9.4 million subscribers for MSN products now) the company will target consumers for ads based on demographic and geographic data. One experimental ad feature will inform consumers why they are getting a particular ad based on their data.
The services are being tested by a number of advertisers, Mr. Hadley said. Most of the offerings will be rolled out throughout 2006.
Media buyers are watching the new offerings closely. "With Live they are creating the next generation of MyMSN or MyYahoo and trying to leapfrog a little bit what's out there," said Eric Valk Peterson, VP-media director, Agency.com.
The company is meanwhile rushing to put other advertising and Internet services in place. Although Microsoft and MSN were rated by Nielsen/NetRatings as No. 2 and 3 among Top 10 Web brands for traffic in September, acquiring a piece of America Online would give Microsoft a needed boost in content and in snatching search dollars from Google, which powers AOL search. Another counterstrike at Google is MSN's search engine, which is slowly rolling out. The search service will eventually give advertisers the same sort of targeting it is offering through all its ad products.
But Live, with its connection to the consumer-centric Web, is clearly Microsoft's stock in trade. And while Google captures 23.5% of online ad spending with search alone and chugs ahead learning to monetize the world's information, Microsoft desperately needs the Live services to fly.
The challenge is not just that Microsoft competes against Yahoo and Google, but that "they share another competitor-offline advertising, particularly TV," said Microsoft specialist Joe Wilcox, senior analyst at Jupiter Research. "Will [the Live products] be sufficient to solve these problems? Microsoft is off to a rocky start." He added that Live's advertisers are only in beta, and all the services have not been rolled out yet.