Microsoft’s exit from the world of online ad sales is tempered by the volume and market share gains it stands to make for its search business through AOL in what could be the last throw of the dice for the technology giant in the world of advertising.
It forms the crux of a shakeup that sees Microsoft hand over much of its advertising operations to companies it does not own. AOL will run all the direct ad deals in the Bing owner’s nine top markets, while in its other 10 core markets everything like ad buys and media insertions will go programmatic.
But instead of Microsoft retreating from online ad sales, the setup suggests it has settled on a strategy that can extract more money from its ads within its own limitations and without spending millions on acquisition. Advertising just doesn’t seem to be a priority for Microsoft bosses, who are more concerned with other parts of the business to make major investments to revive its loss-making ads.
The company’s display business is grinding to a halt, according to eMarketer, and will fall to just 1.2 per cent of the global display ad pie this year, down from 1.4 per cent in 2013. Its lack of skin in the game is made even clearer given the global display ad market expanded 22.4 per cent in 2014, while Microsoft’s display ad revenues plummeted 15.5 per cent, revealed eMarketer.
For a software company that employs hundreds of sales staff, the dwindling returns from display ads just didn’t compute. All of Microsoft Advertising’s 1,200 employees will receive offers to join AOL as part of the 10-year partnership. A spokeswoman told The Drum: “We expect to transition our sales and trade marketing employees in these nine markets to AOL, subject to compliance with local law and employee consultation obligations.”
By focusing on self-service Bing ads, it makes the search engine far more competitive with Google, which has seen its share of desktop search whittled down to 60 per cent in the US. And while the company dominates mobile search with over 90 per cent of the market, its value is declining as more traffic shifts to apps where Facebook is becoming increasingly bigger.
Paul Mead, founder and managing director of VCCP Media, said Microsoft “haven’t ever been at the races in terms of programmatic” and that the refocus on Bing had the hallmarks of a last-ditch push for relevancy with its ads. The business, despite owning a sprawling digital ecosystem, does not have the owned technology stack of its contemporaries to make a proper go of programmatic and instead is bound to the AppNexus stack.
“The AOL partnership signals the start of new focus on building their distribution network to drive more volume and market share for their search business,” Mead continued. “It feels like the last throw of the dice for Microsoft in the world of advertising. It’s a good deal for AOL. They have more premium inventory for their experienced digital ad sales team plus a stronger commercial cut of revenues from Bing powering their search functionality rather than Google.”
Microsoft’s union with AOL is the latest example of consolidation in a digital media space where the likes of Google, Facebook and AOL are at pressure to deliver increasingly data-driven automated advertising.
Ben Wood, global president of iProspect, agreed: “While it’s an interesting move, it’s important to look at the rest of the industry and realise that this kind of consolidation isn’t new. It’s commonplace within the TV industry, for example, and makes a great deal of sense within an online ad environment where sales are increasingly data-driven.
"What we’ll see is a greater efficiency in selling inventory, as well as Microsoft gaining a much-needed jump in its share of the search market. It may be 1 or 2 per cent, but alongside the combined sales team it should contribute significantly to its business. What will be crucial is ensuring that knowledge of Microsoft’s ability to offer creative, integrated solutions across the likes of Xbox and MSN isn’t lost within the newly integrated teams – as this creativity will afford them the edge in an increasingly competitive market where simply selling inventory isn’t enough.”
Despite leaning out of the display ad business, Microsoft was quick to call the shake-up an “evolution” rather than an exit that would focus on search through Bing. “Today’s news is evidence of Microsoft’s increased focus on our strengths: in this case, search and search advertising and building great content and consumer services,” said the spokeswoman. “This evolution in our approach to display advertising allows us to keep this focus, while working with industry leaders to market our services.”
The deal comes just months after Microsoft amended its search alliance with Yahoo, that means just half of the latter’s desktop search traffic has to carry Bing ads when before it was 100 per cent. The renewed terms, which seem to favour Yahoo, put pressure on Microsoft to find ways to monetise Bing, particularly on mobile. Its search advertising revenue rose 21 per cent in its most recent quarter due to higher search volume and revenue per search. The gains helped secure Bing a 20.1 per cent share of the market.
Microsoft’s share of global search ad revenues is expected to drop 18.5 per cent in 2015 to $3.45bn and account for just 4.2 per cent of its total ad business, according to eMarketer. Comparatively, Google is tipped to hit $44.46bn in the period, up 15.7 per cent.