Microsoft Loses $6.2B USD on Internet Advertising Bet

Microsoft logoIt started off simple -- "beat Google". We'll transform Microsoft into an "industry leading, Internet-wide advertising platform" pitched Kevin Johnson.

Today Mr. Johnson is no longer with Microsoft. He's CEO of Juniper Networks. But his $6.2B USD gamble into display advertising firm aQuantive is back in the headlines after Microsoft took a $6.2B USD writeoff on the struggling pet project.

Microsoft spent the $6.2B USD to acquire aQuantive in 2007, a bold bid that greatly expanded its small stable of search-tied online ad-offerings. Since the acquisition, though, the road has been nothing but rocky.

To be fair, Microsoft has grown Bing from an 8.4 percent market share to a 15.4 percent share, according to ComScore. But the problem is that gain has been less of a grab and more of a resource transfer, as it came at the expense of Yahoo!, the floundering search veteran who Microsoft paired with back in 2009.

The problem is that Microsoft needs to reach a "tipping point" in order to lure large advertising clients to its service. Analysts have speculated that the magic number is around 25 to 30 percent of the market. But that would likely require Microsoft to scoop double digits of market share away from Google which has hardly budged from its 60+ percent dominant position.

Search in theory works something like a toll road. You pay a certain amount to route traffic to you -- expenses which range from the cost of server farms to the cost of advertising to build customer awareness of your brand name. You're repaid when people visit your search homepage and click on ads -- text or graphics -- that are displayed amongst the search results. Those clicks are compensated on a unit basis by advertising clients either directly (as in Microsoft's case) or through third parties.

The idea is to make your advertising dollars outweigh your "traffic acquisition" and hosting costs, generating a net profit. Google is the master of that game. Microsoft, is unfortunately on the wrong end of the equation.

Search is hurting Microsoft financially, burning away the windfall profits of its operating system division. Losses hit $1B USD per quarter last year, but have slowed to a slower bleed of $2B USD in the last 12 months.

The company glumly surmises, "While the aQuantive acquisition continues to provide tools for Microsoft's online advertising efforts, the acquisition did not accelerate growth to the degree anticipated."

Search is an expensive hobby, but Microsoft plans to stick with it for now, in hopes of reaching that ever elusive profit cloud. But one has to wonder how profitable Microsoft might be, if it just swallowed its pride and dumped the search baggage.

Source: DailyTech

Tags: adv, Microsoft

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