SEATTLE A year ago, Microsoft gathered top agencies and marketers at its annual Strategic Account Summit to deliver a simple message from chairman Bill Gates and CEO Steve Ballmer: It was serious about catching up to Google in online advertising.
One year later, Ballmer did not attend the gathering, and Gates made no mention of Google in his address, choosing to ignore the here and now to suggest that the future of digital advertising lies not just in the Internet via computer, where Google dominates, but across many channels.
The see-no-Google, hear-no-Google tactic reflects how badly Microsoft trails in the online ad market. While Google made $1 billion last quarter, Microsoft's MSN unit lost $205 million. It outbid Microsoft to buy DoubleClick, which will give the search giant entrée into the display ad market. Google's growing domination of online advertising—it accounts for an estimated 33 percent of the market compared to Microsoft's 7 percent—has led to reports that Microsoft would either acquire or strike an alliance with Yahoo to catch up.
Microsoft executives skirted the Yahoo scuttlebutt that dominated corridor chatter at the conference, and Yahoo CEO Terry Semel did not address it during an appearance there. Yet Microsoft acknowledged the issue upfront in a e-mail message welcoming attendees.
"Some of you have asked if we remain as committed following the announcement of Google's proposed acquisition of DoubleClick," wrote Kevin Johnson, president of the company's platforms and services group. "We maintain our sharp focus on this industry and we will continue to invest heavily in innovation and partnerships in this area."
Whether by strategy or because it has little choice, Microsoft executives focused not on the Web advertising market of today, but on how it may look in five or 10 years. Gates focused in particular on two new frontiers: mobile and Internet-enabled TV. Microsoft jump-started its mobile capabilities with its acquisitions of mobile ad network ScreenTonic this month and voice-search technology TellMe two months ago. While it has been working on Internet-enabled TV for a decade, Gates said the time has come for the Web and TV to merge.
"As dramatic as things happening on the Web are, that's actually what all advertising—all these contexts where people learn about products—will be in the future," he said.
In the view of Microsoft executives, the progress they are making on these fronts has been overshadowed by its difficulty making a dent in Google's gaping lead in the Web search market. "You'd think all people did was search," said Eric Hadley, general manager of MSN marketing. "But if you look at Microsoft, the assets we have, it's unmatched."
Despite solid reviews for its year-old search platform adCenter, Microsoft has a problem: Not enough people use its search engine. According to comScore, Microsoft's U.S. search share has dropped from 13 percent last May to less than 11 percent in March, the latest month for which stats are available. Meanwhile, Google's share during that period has grown from 44 percent to 48 percent. Yusuf Mehdi, Microsoft's chief advertising strategist, said search gets more credit than it deserves for closing sales, since other forms of advertising do the heavy lifting of generating demand.
Gates also pointed out that Xbox could serve as an avenue for Microsoft to break into TV. He predicted the widespread adoption of IPTV, along with highly targeted, Web-like advertising, within five years. "Before you know it, if you broaden the definition of a [search] query, they're back in the lead," said Kevin Lee, chairman of Did-it.com, a New York search agency.
Gates was dismissive of the current Web search experience, comparing it to a treasure hunt. Putting Microsoft's stamp on search is the No. 1 task for his last 15 months before his planned retirement to focus on philanthropy. Gary Flake, a technical fellow at Microsoft, said the industry perception of search is "a little backwards" for its focus on returning mostly Web site lists. "Search is not an end of itself," he said. "It is a means towards an end. The end itself is discovery." He showed off new Microsoft technology that lets users preview sites before clicking, and another that overlays photos with three-dimensional virtual environments, creating what he dubbed "one and a half life," which could be used by advertisers for immersive user experiences.
Several agency executives agreed that Microsoft is often underappreciated, particularly in hot areas like Internet-connected gaming. Thanks to its acquisition of Massive, Microsoft has a network that serves ads in 50 video game titles, not to mention its leading game console, Xbox. "[Young men are] not searching, they're playing games," Hadley said.
But despite the heady promises from Microsoft that it will bring a flood of innovation to the market, some agency executives expressed exasperation that it has not made more headway, wondering whether the company is too software focused. "The question is, can they do it as a media company?" said Ellen Siminoff, CEO of Efficient Frontier, a search-focused agency, and a former Yahoo executive. "That's a longer-term story."
Having seen competitors like Netscape come and go, Microsoft is taking the long view. Chief media officer Joanne Bradford noted that the first marketer summit Microsoft hosted eight years ago drew about a dozen people to the company's cafeteria, as opposed the nearly 1,000 who packed a hotel in Seattle this year.
"They want to get to a multiple-device digital world," said Jeff Lanctot, vp of media at aQuantive's Avenue A/Razorfish. "But until then, they'll be mired in comparison to Google."