What Microsoft's New CEO Means for Its Ads Business

Company Even Planning to Reinvest in MSN

By Published on .

Microsoft's newest CEO is not likely to kill the company's advertising business. Quite the contrary, it may receive new life.

Last week Microsoft named 22-year veteran Satya Nadella the successor to outgoing chief executive Steve Ballmer. As with the introduction of any new regime, the appointment raises questions regarding the company's focus moving forward and whether businesses not fitting that focus will be divested.

Satya Nadella
Satya Nadella

Mr. Nadella most recently oversaw Microsoft's profitable cloud-computing business and has said he will emphasize that and mobile. But what about advertising? Will he continue Mr. Ballmer's pruning of its profit-eating ads business and cut it off entirely?

Microsoft remains a player in digital advertising, but a fading one. Its global ad revenue was $2.9 billion in 2013, a shade behind Yahoo but well behind Facebook's $6.4 billion and Google's $38.62 billion. The company's share of U.S. digital ad revenues has stagnated around 6% since 2011 while Google has maintained a 40% grip, according to eMarketer.

Prior to his most recent post overseeing cloud computing services, Mr. Nadella led research and development for Microsoft's online services business -- which includes Bing, MSN and online advertising and publishing tools -- at a time when Microsoft was making a serious investment in advertising technology and trying to make a dent in Google's search advertising juggernaut.

'Good as it can get'
"From the outside looking in but as a Microsoft alum, [Satya Nadella's] appointment as CEO is about as good as it can get for Microsoft Advertising," said Jay Sampson, Microsoft's former general manager of emerging media sales and U.S. agency relations who left the company in 2011 to oversee sales at YouTube network Machinima. "If you look at his track record over 22 years, he's quite literally done a tour at every meaningful business in the company," meaning Mr. Nadella would be able to perceive advertising's place in the company's future.

"If his stated mandate is mobile and cloud, how do things like Xbox and Skype not fit into that vision," Mr. Sampson said. Advertising is one of multiple revenue streams for both products.

Mr. Nadella was very much a part of Microsoft's $6.3 billion ad tech acquisitions binge during the last decade. "When Microsoft acquired [in 2007 ad-tech conglomerate] aQuantive, I was part of the transition team, and Satya was very involved there," said Jeff Lanctot, Razorfish's former chief media officer who went on to serve as managing director of Microsoft's ad business and is now CEO of video ad firm Mixpo.

Ad-tech undone
Those deals were about building a display ad infrastructure to compete with Google. But they were were unraveled just a few years later; in 2009 Microsoft digital agency Razorfish to Publicis. Then two years later the company took a $6.2 billion writedown of Razorfish's parent company aQuantive. Microsoft sold ad server Atlas, once DoubleClick's biggest competitor, to Facebook last year.

"Not long after Microsoft acquired the company, the strategy shifted to search and Bing. A lot of resources at Microsoft went away from aQuantive and to search. As a result aQuantive's assets weren't invested in and began to atrophy to some extent," Mr. Lanctot said.

Mr. Nadella had "a pretty major impact" on the development of Bing, Mr. Sampson said, but his immediate concern was the product's technology, not its revenue. "Certainly the advertising and media sales side was not his core focus. His core focus was building and running a high quality search engine and making sure all the data hooks were in place," Mr. Sampson said.

Microsoft's Xbox One dashboard
Microsoft's Xbox One dashboard

But as part of its search deal with Yahoo, Microsoft turned over direct sales to the portal, meaning the only search ads it could sell were through a self-serve interface. "There is zero muscle memory there right now. They haven't had a search ad sales force in years," Mr. Sampson said.

Much of Microsoft's ad tech has also been outsourced. Mr. Nadella's predecessor Steve Ballmer invested in ad exchange AppNexus in 2011, and much of their technology is built on its platform.

Devices and services
Microsoft has refocused its ad businesses on a "devices and services" strategy, including Xbox, Surface, Windows Phone, Skype and Bing. As executive VP of Microsoft's cloud and enterprise division, Mr. Nadella has spent the past few years building the technology to connect the company's devices and services. That's the same type of technology that could be used to bridge advertising across those devices and services, creating a cross-screen advertising program.

"I would say a clear trend for Microsoft and the industry is cross-screen and cross-device. It's a big priority for most marketers I talk to. That's why you have to consider Microsoft a major player now and for the foreseeable future because of Xbox," Mr. Lanctot said, describing the gaming console as a "magnet for marketers" that could open their wallets to other Microsoft properties.

Lost in all of this is the long-neglected mega-portal MSN, which is still key to giving Microsoft global scale, as well as driving search traffic to Bing.

"I'm not sure the role MSN plays to be totally honest… I hate to say it, but it feels like it's lost its relevance to me," said Gian LaVecchia, a former Microsoft brand strategist who is now managing partner and digital lead at MEC.

"From 2003 through 2006, MSN was a big part of our selling motion. Homes pages were flying off the shelves at high clip. That business has largely been written down. It's still there, but it's not the premium sale that it once was," Mr. Sampson said.