November 16, 2005 4:00 AM PST
Microsoft eyes ads as consumers close wallets
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Microsoft has been building its own engine for targeted ads, known as AdCenter. The product, originally code-named Moonshot, combines context of what a user is searching for with demographic information about who is doing the searching. Initially, Microsoft is using AdCenter to serve up keyword-based search ads. However, the company has said its ambitions go much further.
"Today, it's keyword," Joanne Bradford, Microsoft's chief media revenue officer, said in an interview last week. "We believe in the future it will be about display (ads), video and all that is advertising."
Top Microsoft executives, such as Gates and Chief Technical Officer Ray Ozzie have also been calling for the company broadly to get more revenue from online advertising. Microsoft has already outlined two new ad-driven services: the consumer-oriented Windows Live and Office Live, which is aimed at small businesses.
Goldman Sachs analyst Rick Sherlund said Microsoft needs to consider a wide array of new models, including both advertising and subscriptions.
Candidates for freedom
Works, he agrees, is a good candidate to be offered for free and supported by ads. "They could deliver this as a service and get minimal ads and be money ahead," Sherlund said in an e-mail interview. "This would be market expanding."
Microsoft would likely see similar benefits if it offered Money, its personal finance software, as free and ad-funded, he said.
But other software is better suited to being hosted on a server and offered up by subscription, Sherlund said. Still, other users, particularly business users, are likely to want software that they can run on their local PC, ad-free and without having to be connected to the Internet.
"I think (Microsoft) should not be afraid of offering most of their products in all three modes," said Sherlund, whose analyst firm has done banking work for Microsoft. "Better to cannibalize yourself and block competitors than have others step into the market unopposed."
The OneNote note-taking program represents an interesting example of, at the extreme, the types of products that could be funded by advertising. In one of the papers, Microsoft notes that it is trying to create a whole new category of software, something that is "not easy to do."
As a purely desktop application, it is maybe not in the first category of software likely to be thought of as suited for ad-based conversion. But, the Microsoft workers noted, it is also one of the Office application that users keep open longest (second only to Outlook e-amil).
"Since advertising revenue depends roughly on time used, this means OneNote has substantial potential," the paper posits. Plus, the authors noted: "OneNote's low sales to date?mean that so far, there's little risk of cannibalization."
But Pang isn't sure advertising is the answer. There are already so many Internet ads, that he thinks computer users will just get overloaded if their desktop software starts spitting out solicitations as well.
Pang has a different idea. He suggests Microsoft and others should partner with service providers, who could underwrite some of the cost of software and integrate it into what they do. For example, your bank might bundle Microsoft Money with its own online account tools. Or perhaps Comcast Cable might pick up some of the cost of software for managing digital photos and bundle that product with its TV and Internet services.
There have been some examples of such pairings, as many Internet service providers have in antivirus software. That has a double benefit of adding to the perceived value of the subscription and helping to keep bugs out of their networks.
There have been other online examples. SBC Communications, for example, has its partnership with Yahoo, in which high-speed and dial-up subscribers get additional Yahoo features and services as part of their monthly fee.
"I see that type of bundling much more effective and palatable to the users," Pang said.
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