Software Notebook: Microsoft tries for bigger piece of online ad market

Microsoft's latest acquisition continues a remarkable run of deal making by the major players in the online advertising industry.

And the trend can be explained by one number: $80 billion.

That's how big Microsoft expects the overall online advertising industry to become in three or four years, doubling its current size, according to a presentation at the company's annual meeting with financial analysts in Redmond last week.

Microsoft's agreement last week to acquire AdECN, an online ad exchange with 30 employees, doesn't by itself qualify as a blockbuster deal. The company declined to say how much it's paying.

But it's part of a broader trend that includes Microsoft's earlier agreement to buy Seattle-based ad firm aQuantive for $6 billion, Google's planned $3.1 billion acquisition of online ad company DoubleClick, and Yahoo's $650 million purchase of the portion of online ad exchange Right Media that it didn't already own.

"What's driving the consolidation is the massive financial opportunity in terms of advertising dollars shifting online, to follow the customers," said Jay Sears, a senior vice president at New York-based ContextWeb, which runs the ADSDAQ online advertising exchange.

Ad exchange operators say the concept is like a stock exchange for advertising, creating a market between advertisers and publishers.

ContextWeb says ADSDAQ deals in premium advertising space, in contrast with other advertising exchanges that focus on remnants, unsold space that goes for a discount. Sears declined to comment when asked if ContextWeb has been entertaining acquisition offers for ADSDAQ.

For Microsoft, the fundamental question is how much of the broader advertising market the company will be able to capture in the long run.

Microsoft posted $1.8 billion in online ad revenue in its recently completed fiscal year. That was up 20 percent from the prior year but behind Yahoo and Google, which had $5.8 billion and $13.3 billion in ad revenue, respectively, in the same period.

Microsoft's pending acquisition of Seattle-based aQuantive is expected to help, but the company also will need to boost usage of its online services and Live Search engine, said Kevin Johnson, president of Microsoft's Platforms and Services division, speaking to financial analysts last week.

The more usage, the bigger the audience the company can offer to online advertisers, and the larger its revenue potential.

Microsoft has attempted some elements of the strategy in the past, with mixed results.

For example, Johnson said the company will try to get more people using Live ID, the successor to the Microsoft Passport system. Live ID offers centralized features such as a common contact list meant to make it advantageous to use multiple Microsoft services.

At the same time, Microsoft will be seeking to take advantage of the large usage of the Windows operating system by calling the next set of Windows Live programs, such as a photo management program, "upgrades" for existing Windows features. It's hoping that will motivate Windows users to try them.

The company also is trying to expand its advertising revenue through deals with non-Microsoft sites. Last week, for example, the company reached a deal to provide advertising on the popular Digg.com site.

In a broader sense, Microsoft is looking to online advertising, mobile phones and other areas as ways of expanding its business beyond Windows and its other traditional PC programs.

Microsoft CEO Steve Ballmer told analysts, "We are going to be an advertising company, and we are going to be a devices company."

ONLINE AD DEALS

• Google reached a deal in April to buy DoubleClick for $3.1 billion. It faces regulatory and congressional scrutiny.

• Microsoft agreed in May to buy Seattle-based aQuantive for $6 billion. U.S. regulatory approval has been received, and the acquisition is due for completion in mid-August, following a vote by aQuantive shareholders.

• Yahoo, which owned 20 percent of Right Media Exchange, bought the remainder for about $650 million. The company completed the deal July 12.

• Advertising company WPP Group completed its $649 million acquisition of 24/7 Real Media July 13.

• AOL announced plans last week to acquire behavioral ad targeting company Tacoda for undisclosed terms.

• Microsoft announced plans last week to acquire AdECN, an online advertising exchange, for undisclosed terms.