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MSN Ad Growth Lags Online Market

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NEW YORK Microsoft reported ad revenue at its MSN unit badly trailed the overall growth in online advertising.

Reporting its fiscal-year third quarter, the Redmond, Wash.-based company said ad revenue at MSN was $357 million, a 7 percent increase from 2005. The modest growth pales in comparison to the 80 percent rise in ad revenue at Google and 36 percent at Yahoo, noted investment bank Piper Jaffray.

Microsoft executives blamed the sluggish performance on lower search revenue due to its ongoing migration from Yahoo-provided search ads to those from its homegrown MSN adCenter platform.

Overall, revenue at MSN, including subscriber fees to MSN's Internet service, was $561 million, down 3 percent from the previous year. It posted a $13 million loss, compared to $102 million in net income in the year-ago quarter.

Despite the poor performance compared to its rivals, Microsoft indicated it is committed to catching up. It plans to rapidly increase its capital spending for a variety of areas, including MSN and the Xbox, to $2.4 billion.

Piper Jaffray analyst Safa Rashtchy wrote in a research note that he does not believe the increased spending will reverse Microsoft's market position. In search, it has about 13 percent of the market, compared to more than 45 percent for Google and 28 percent for Yahoo, per ComScore Networks.

"We believe that spending by itself is unlikely to reverse this pattern as both Yahoo and Google's positions appear to be well entrenched," Rashtchy wrote.