Could Microsoft Exit Media Business?

Giant Increasingly Puts Bucks Into Ad Systems Rather Than Ad Content

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NEW YORK (AdAge.com) -- Microsoft is, without a doubt, a giant in the world of online advertising, but lately it's been about assembling the platforms that power advertising -- both display and search -- rather than building the media properties that attract eyeballs in the first place.

Which begs the question: Does Microsoft need media anymore?

Last week the Redmond, Wash., giant pulled the wraps off a redesign of MSN, the first top-to-bottom remake in more than a decade. Like Yahoo five months earlier, MSN did away with the '90s-era clutter, adding white space and removing 50% of the links and all text ads. Also like Yahoo, MSN added Facebook, Twitter, Pandora and other social tools and services right into the home page. The hope here is that MSN can hang on to its slice of the market in a world increasingly owned by Facebook.

That won't be easy. In the past five years, Facebook has gone from nothing to dominating 11% of all time spent in the U.S. on the web, according to Nielsen. Meanwhile the big three portals -- MSN, Yahoo and AOL -- together account for just 17%, down from 25%. Though on a global basis, Microsoft sites -- including Microsoft.com, MSN and Bing.com -- account for 14.5% of all time spent on the internet, according to ComScore. That's quite a bit more than Google (9.3%), Yahoo (6.3%) or Facebook (5.1%).

Further, media itself continues to be a money-suck for Microsoft. The company doesn't break out MSN, but its online division, which includes MSN and Bing, lost $480 million in the last quarter on just $490 million revenue, marking 15 straight money-losing quarters. Chalk most of that up to investment in search, but online services is Microsoft's smallest division by a long shot, and accounted for just 4% of Microsoft's revenue.

So why do it? Well, CEO Steve Ballmer sees advertising -- search, display and the enabling technologies -- as an area of potential future growth, if it can beat back Google. But there's a more important reason: MSN has historically been a major distributor of Microsoft products and technologies, such as IE, Hotmail, Silverlight and Bing.

The importance of MSN
As the world moves to more cloud or web-based applications, a technology company must also be an audience company, making MSN even more important than when Microsoft was mostly selling shrink-wrapped boxes. MSN is key to building search and is Bing's second-biggest source of referrals (next to Internet Explorer).

"If you ask the people that work [at Microsoft] on operating systems and productivity suites, they will tell you they are a software development company moving into a web-based and cloud-based computing environment," said Joe Doran, former head of MSN and then all of Microsoft's advertising solutions. "The people at MSN and the portal think of themselves as a media company."

But that's not where the investment is going. Rather, it has gone to cobbling together systems buying aQuantive and with it ad server Atlas, ad network Drive PM and Avenue A/ Razorfish. Separately, it bought ad exchange AdECN. It has spent billions on search, including the relaunch of Live Search as Bing.com earlier this year. Services like Hotmail and instant messaging, once branded MSN, are now Windows Live.

Just where does, then, that leave Microsoft's original vessels for advertising, its media properties? Former Microsoft ad chief Bill Shaughnessey, who left the company in March, said that while the emphasis has shifted, the importance of MSN to other Microsoft businesses hasn't.

"They have to maintain those assets to create bigger assets," he said. "MSN plays a very important role as an aggregator of traffic for our ability to monetize other assets like search, but no one is going to confuse Microsoft as world-beaters in content."

Others' content
Over the years, MSN was built from a confederation of websites and verticals, and investment in it has waxed and waned. Today, Microsoft has abandoned splashy content plays, and is taking a cheaper approach by distributing content from partners such as Delish, with Hearst, Fox Sports, MSNBC or Wonderwall, a celebrity news site produced by former Yahoo content chief Lloyd Braun.

Microsoft became as adept as anyone at playing a media company on TV; holding "upfronts" for advertisers, dazzling them with technology merging the PC and TV, and hiring a crack group of old-media veterans to sell the package in New York. Their current pitch is that they're a one-stop shop for web, mobile, video game and interactive TV advertising. In short, they're putting all the trimmings on a media play that isn't. But that doesn't mean they're not selling advertising.

"Microsoft has a fairly detailed and deep series of relationships with marketers and the companies that serve them," said Rob Norman, CEO of Group M Interaction.

Scott Moore, GM of MSN, said the company is in media to make it a business on its own, even if the endgame is to build other businesses. "We're not confused about profitability," he said. "On the search side of the business, there are only two companies investing, and one has 65% of the market. If you are in that kind of battle, you are not optimizing for short-term results, you are making a long-term play."

Changing definitions
For many, the definition of a "media company" has become "sells advertising." Increasingly, though, that inventory will be the free software and services that are ad-supported. In an ad-supported future, to be a technology company, in a sense, you have to be an advertising company. You also have to be an audience company to drive adoption of new services and technologies.

"The web is blurring and distorting all of these classical definitions; a company like Google is all about technology but 99% of its revenue comes from advertising," said Tim Cadogan, CEO of leading ad technology firm OpenX and the former senior VP-global advertising marketplaces at Yahoo.

Indeed, Microsoft.com is an enormous platform for the dissemination of Microsoft products and services, with more than twice the web traffic of Apple.com.

Microsoft also has a track record of investing in things for years, like gaming platform XBox, in hopes it will bear fruit. It is also more intertwined in the ad ecosystem than ever before. Want to buy an ad on Facebook? Microsoft is selling that. Doing business with Publicis? You'll probably get some Microsoft inventory, part of the $530 million sale of Razorfish to Publicis earlier this year.

So Microsoft still cares about media for now, Mr. Shaughnessy said. "But the underlying asset is based on building software at scale for the media industry -- that's the overriding approach."

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