The Long Goodbye?

Despite the missteps, Microsoft insists it's still serious about advertising. The ad world has doubts

Despite their avowed devotion, Ballmer and his team have a funny way of showing their commitment to advertising.

After much internal debate, the company recently decided to include a default ad-blocking option in the latest Internet Explorer update. How could a company supposedly serious about online ads give the masses a tool to block them? The move appears to have blindsided the ad side. “They had absolutely no idea it was coming,” says one ad seller.

But the writing was on the wall. According to multiple sources, Windows president Steve Sinofksy tried to include a Do Not Track (DNT) default in an Explorer update back in 2007, but the ad unit’s then-leader Brian McAndrews raised hell before temporarily putting the kibosh on the plan.

As one insider put it, “Sinofsky has absolutely no love for advertising.” Van der Kooi dismisses such talk as “gossip.”

"Of course there is discussion and debate about these things," he said. "But in the end we decided to side with the consumer."

Microsoft insiders say the DNT fiasco was the result of a culture in which engineers rule decisions about advertising products in a stifling, hypercompetitive bureaucracy well-documented in a recent Vanity Fair cover story. The challenges are even more intense for those on the ad side. As one Microsoft exec says, “Most Windows guys loathe display ads. They don’t know what advertising is or how it works, and they look at us like we’re strange.”

"It's the kind of place where they try to put an ROI number on throwing a party at Cannes," said another insider.

Another former Microsoft exec explained the philosophical divide as such: "With products like Windows you innovate every four years. With online advertising you really should be innovating every four weeks."

That divide was perhaps best exemplified by McAndrews tenure. Following the aQuantive deal, the highly-respected McAndrews was made the public face of Microsoft's ad business. Yet instead of reporting directly to Ballmer, McAndrews instead reported to Kevin Johnson, who then headed Microsoft's platforms and services division. A year after the acquistion, McAndrews was gone.

The man in charge of the ad group today is certainly no media executive. Before taking over the unit, Holland served as a Microsoft middle manager for more than a decade, working in operations positions in departments such as IT. “When they hired him, I thought, you must be kidding—he’s here to cut back,” says a former seller.

Many point to the ad group’s geographic isolation and rigid hierarchy as deeply inhibiting. “These people have nowhere else to go,” says an insider. “It’s not a place to make waves, and it’s a place where you protect your middle management job.”

Yet there’s one product involving media and advertising where Microsoft appears to be killing it, almost by accident: the Xbox.

With 67 million Xbox units sold since its debut in 2001, today more than 40 TV companies produce apps for the platform. In a recent milestone, users began spending more hours per day watching shows than gaming on the console that’s fast becoming a mainstay of American living rooms. New partnerships with Comcast and Verizon even aim to have the device double as a cable set-top box.

Still more promising is a cutting-edge twist called NUads that makes the traditional TV commercial interactive by way of Xbox’s gesture-based Kinect technology. With NUads, a viewer can opt in for more information on an advertised product with a flick of the wrist. In the future, ad spots produced using Kinect technology might even allow the user to test drive a virtual car. “Xbox has so much potential, it’s mind-boggling,” says Susan Thomson, director of media, social media and CRM at Chrysler Group.

With such breathtaking possibilities, Xbox is getting serious about becoming an original-content engine. A few weeks ago, the company hired former CBS entertainment exec Nancy Tellem to lead the new Xbox studio, and another big name will soon follow, sources say. Understandably, the doubters question why NUads took a year to roll out and why they aren’t more interactive yet. Still, demand could be huge. “Advertisers are pounding on the door,” says Ross Honey, gm, entertainment and advertising for Xbox Live. “The industry has been dying for innovation in the 30-second spot. We’ve got a lot of growth in our plan. We are all in.”

Insiders estimate that Xbox ads rake in some $100 million—a nice chunk of change, but is it enough to get noticed in a company where Windows products earn billions? Xbox could go after serious TV money that has so far eluded the online world, but NUads might also require high-tech hand-holding since the console was never conceived as an ad platform like adCenter. In the end, though, they’ll still have to woo brands, meaning traditional ad selling­—not exactly Ballmer’s big love.

“Yes, they’re investing in Xbox,” says one former ad exec. “But its profit margins are still short of everything else in the company. So the question is, is it ever going to matter?”

There’s little doubt Windows 8 matters to the top brass, seeing as the company’s future depends on it. As for advertising, it also matters—for now.­