October 24, 2002 6:37 AM PDT

Microsoft: Online ads 'on a monster roll'

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Weakness in the online advertising market has been greatly exaggerated, Microsoft said Wednesday, on the eve of a major overhaul of its MSN Internet service.

Learn more about MSN
"We're on a monster roll," said Yusuf Mehdi, the corporate vice president overseeing Microsoft's MSN division. "This is the best-kept secret in the industry, which is that the online ad industry is alive and well and actually kicking butt for a number of companies out there."

For the 2002 fiscal year, which ended June 30, MSN's online ad revenue grew $40 million, he said. Between June 30 and Sept. 30, it jumped 40 percent.

Mehdi spoke with CNET News.com one day before the scheduled launch of Internet access software MSN 8 in New York.

On Thursday, Microsoft unveiled MSN 8 with a marketing blitz to play up new features and guaranteed pricing. The campaign will be supported by "taste tests" against rival software from America Online and by a national tour featuring a traveling, 11,000-square-foot dome.

Industry studies contradict Mehdi's conclusions about the overall health of the online ad market. The Interactive Advertising Bureau and consultancy PricewaterhouseCoopers found that online advertising sales dropped 20 percent during the first six months of the year compared with the same period in 2001.

Research firm CMR, by contrast, reported about a 2 percent gain for the same period. Online ad spending topped $1.5 billion for the first six months of the year, according to CMR. Advertisers spent $211 million on AOL Time Warner's America Online division, $204 million on Yahoo and a little more than $201 million on MSN, the market researcher concluded.

Certainly, MSN rivals AOL and Yahoo have had their troubles. Yahoo saw ad revenue drop by about $200 million last year. On Wednesday, AOL reported that third-quarter advertising and commerce revenue plummeted 48 percent year over year to $267 million.

The benefits of being late
But owners of major Web sites, such as AOL Time Warner and Yahoo, had "done a bunch of terrible deals" that "masked" the real situation in the market, Mehdi said. He pointed to long-term deals made during the Internet boom days that are weighing down both companies and the overall online advertising market.

"These guys signed long-term deals that were not justified by any common sense or logic," Mehdi said. "The year-over-year comparisons for the industry look bad because the top two players account for two-thirds of all the online ads dollars."

In other words, MSN's tardiness in jumping on the dot-com boom may have been a blessing in disguise.

During the Internet bubble years, start-ups flush with venture capital commonly struck multiyear, multimillion-dollar agreements for exclusive carriage on Web portals. Many of these deals, however, collapsed when the start-ups collapsed due to the market downturn. The ripple effect pulled the rug out from under beneficiaries such as AOL and Yahoo.

Microsoft has not experienced the same revenue collapse as its competitors because it didn't strike these long-term commitments, Mehdi said.

There have been some signs of an advertising rebound, despite a generally gloomy mood.

Yahoo posted recent gains in online ad revenue suggesting a growing, or at least, reviving market. The company's marketing services revenue, which is mostly from online ads, rose 22 percent year over year to $147.4 million in the third quarter. AOL also saw new ads in the third quarter, although long-term deals accounted for the majority of revenue.

One bright spot has been in the area of paid search services, where market leader Overture Services has posted triple-digit revenue growth over last year. That's helped Web portals that subscribe to its syndicated advertising service, including Yahoo and MSN.

Overture, which charges advertisers for placement on its Web search engine, reported $172.7 million in revenue on Tuesday. The company pays its affiliates a percentage of the revenue it receives from advertisers bidding to be listed on its search results. It has offered a significant financial windfall for big players, most notably Yahoo.

"Overture is an important part of our revenue flow, so in the same way that they offer Yahoo, they offer (MSN) as well," Mehdi said. "There's nothing wrong with that, actually." He said MSN's revenue from the relationship was in the "ball park" of the estimated $30 million Overture added to Yahoo's cash flow.

MSN reported total revenue of $427 million during its first fiscal quarter ending Sept. 30, including advertising, online access and other service fees.

Unlike AOL, MSN does not book in-house ads for other Microsoft divisions as ad revenue.

Separately, Mehdi dispelled rumors that Microsoft on Thursday would announce a cable deal with AT&T or Comcast. But Mehdi did not dismiss future deals.

"To go and get a distribution offer, I think if you look at what AOL got (with AT&T Comcast). I think...we'll be able to do that as well," he said. "The question is, do we want to do anything deeper or more significant?"

Dome across America
Microsoft Chairman Bill Gates will officiate at the MSN 8 launch event, which will take place at Wollman Rink in New York's Central Park. The software giant is constructing an 11,000-foot dome that seats 600 for the festivities. Microsoft also plans to stream the event live on the Web, but not the Lenny Kravitz concert that follows afterward. Kravitz's "Fly Away" is the theme song for Microsoft's $300 million ad campaign for MSN 8.

Microsoft plans to leave the dome set up in New York over the weekend, before the company takes the structure on an eight-city tour, with destinations that include Boston, Atlanta, Dallas, Los Angeles, San Francisco and Seattle.

Besides showcasing the new version of the online service, Microsoft will conduct "taste tests" between MSN 8 and AOL 8.0, said Bob Visse, MSN's director of marketing. He likened them to the "Coke and Pepsi taste tests" of the 1970s.

Thursday's launch pits MSN 8 against AOL 8.0, which America Online released last week. MSN--whose 9 million subscribers leave it lagging AOL's 35 million subscribers--hopes to get a lift from its completely revamped online service client.

Microsoft has added many new features, some of which will be available only to paying customers. The Redmond, Wash.-based company is trying to differentiate features and services offered for free on MSN.com from those available to MSN 8 subscribers.

"The parental controls are nice for families with a home network and, the integrated services are nice features converting to broadband," said Gartner analyst Paul-Jon McNealy.

Like AOL 8.0, MSN 8 eliminates pop-up ads, those from first and third parties. But the no-pop-up feature works only on MSN.com Web sites. Subscribers visiting other Web sites using MSN 8 could still be subjected to unwanted pop-up ads.

Microsoft on Thursday also plans to announce that it is freezing the monthly access fee for MSN dial-up access at $21.95 for 12 months. AOL currently charges $23.95 for the same service. MSN broadband access will cost $39.95 or $49.95 a month, depending on the access speed.

Customers using another Internet service provider (ISP) will have to pay extra if they want to use MSN 8. Earlier versions of MSN were usable with another ISP for free. Microsoft charges $9.95 a month or $79.95 a year.

Mehdi said he expects MSN to get many bring-your-own-access (BYOA) broadband customers.

But Gartner's McNealy disagreed. "I don't think they're going to get many customers through BYOA," he said.

 

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