The Long Goodbye?

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

There was a time not so long ago when Microsoft threw the biggest digital media event of the year. In 2006, at the company’s once-annual but now-defunct Strategic Account Summit, Donny Deutsch recorded his CNBC show The Big Idea live on stage, rapping with a mellow Jay-Z and then with the visionary himself, Bill Gates. At night, the gathering would feature a live concert with the likes of Soundgarden frontman Chris Cornell or a private VIP show with performers such as Dave Matthews. One year, everybody even walked out with a free Microsoft Zune (R.I.P.).

It was at the 2006 event that an amped Steve Ballmer, CEO of Microsoft, threw down the gauntlet against Google as it introduced adCenter, the ad-targeting and delivery platform that promised to transform online advertising as we know it.

For Microsoft veterans, that must seem like an awfully long time ago. Fast-forward to this May, when the house that Gates built hosted a presentation during the Digital Content NewFronts in its sleek New York office—one of 20 or so dog-and-pony shows by major digital players heralding the arrival of top-notch video content on the Web. Downstairs, a 100-deep line of agency execs waited impatiently for ID badges and then the elevator. Upstairs, the presentation took place in a low-ceiling room with not nearly enough seating. If there’s any truism in the ad world, it is don’t promise an associate media buyer a free bagel, a place to sit and a great show—and then not deliver. As one attendee recalls, “Theirs was the only [event] that got worse as the week went on.”

To give credit where it’s due, Microsoft was hosting digital showcases way before it was cool. But this year’s event fell flat in every way. Yes, there were appearances by Web star Felicia Day and Olympian Dominique Dawes, but there was no Jay-Z, no Bill Gates and, perhaps not surprisingly but very telling, no Ballmer.

For years, industry watchers have questioned Microsoft’s commitment to advertising. Those doubts have only grown since the company’s recent broad-based retrenchment. In past months, the company pulled out of and closed its TV division, mobile ads group and much-respected Branded Entertainment and Experiences Team (BEET). On top of all that, Microsoft recently jettisoned several top sales execs, including Richard Dunmall, Mari Kim Novak and Marc Bresseel. And many attributed the company’s $6.2 billion write-down in July to the much-maligned acquisition of aQuantive for $6 billion in 2007.

The talent drain has only continued of late. Adweek has learned that Todd Dunlap, who was vp & COO of Microsoft Advertising, has left the company to become managing director and president of Jason Scott, gm, Microsoft Advertising Asia, resigned last week. 

According to interviews with a dozen current and former Microsoft executives and others, this may be the beginning of the end for Microsoft Advertising.

“They are irrelevant,” says a digital media recruiter. “All I have is resumes from Microsoft ad execs looking to get out.”

“They shouldn’t be in the business,” agrees a former Microsoft ad executive.

“If I were a betting man, I’d say they’re out of the business within a year or a year and a half,” predicts a top buyer.

Within Microsoft, management emphatically denies any wish to exit advertising—though the online ad group lost $8 billion last fiscal year, for a company whose total revenue topped $73 billion. In fact, those in the Microsoft Advertising unit make the boldest of claims: With the launch of highly anticipated Windows 8 software (due Oct. 26), they maintain Microsoft will accomplish nothing less than a reinvention of computing, the Internet and the online ad business.

Can a company with this history really pull that off? “We are absolutely committed,” says Frank Holland, vp of the company’s advertising and online business. “We are very serious about advertising.”

What about the executive bloodletting and retrenchment? “This is simply refocus,” says Rik van der Kooi, vp of Microsoft Advertising Business Group, who calls the recent maneuvers “loose, disconnected events.”

Meanwhile, expansion is afoot. Microsoft plans to open an 18,000-square-foot space in San Francisco called Solution Studio 415 where brands and Microsoft staffers will brainstorm new ideas. Meantime, a second New York location is in the works. “We wouldn’t do that if we weren’t serious,” van der Kooi insists.

That depends on how one connects the dots. Most of the Microsoft Advertising unit isn’t found on the company’s famed Redmond, Wash., campus. Rather, most of the group works from offices an eight-mile shuttle ride away in Bellevue, a bustling exurb across the lake from downtown Seattle, tucked inside an office park amid fountains, seafood restaurants and high-end shopping.

It is quiet the week before Labor Day. A slight flavor of startup-ness fills the wood-paneled offices divided by floor-to-ceiling glass walls. A Connect Four game sits at a conference table, half-played. One by one, Microsoft ad leaders emphasize their goal of setting the agenda for the ad industry, while clearly weary of questions about the group’s commitment and ability to do so.

“The dawn of Windows 8 is really going to redefine the way consumers interact with brands,” says Holland, standing next to a whiteboard beside a wooden conference table as he sketches out the company’s ad strategy. Holland sees the online ad market splitting three ways: premium placements, traditional IAB ad units, and ad inventory that can sold by machines.

Later, at the same table, Jennifer Creegan, gm of display advertising experiences, articulates Microsoft’s plan to lead, not follow, regardless of recent history. “There is a wave we could ride in terms of the way the display market is going or we could create the wave,” she says. “We want to take the uncomfortable position of saying, this is where the market should go. We want to elevate the value of digital media.”

Creegan is talking about Windows 8, of course. But what does that have to do with advertising? Will we be seeing banner ads in PowerPoint, pre-rolls on the Windows startup menu?

Not exactly. Windows 8 revamps the traditional interface. Rather than the current program layers, a Windows 8 machine hosts large, uneven rectangular icons called tiles that cover the entire computer screen. (Imagine a cross between Apple’s iPad and Flipboard icons.) The tiles are live, meaning they are updated automatically with news, headlines, tweets and posts without requiring the user to hit refresh. If you’ve seen a Windows Phone, you get the idea.

There’s no question that Windows 8 looks gorgeous. And if users take to it—and that’s a big if—the new operating system could well make browser-based surfing and banner ads look obsolete. Even though 400 million machines are expected to be sold with Windows 8, the world has seen how Microsoft can stumble with a Windows rollout. (See Vista.)

In terms of how brands fit into the Windows 8 redesign, Holland sees a future in which advertisers build custom apps alongside Microsoft’s own apps for travel, news, weather and the like. In other words, an advertiser can buy its own tile, placing its messaging front and center in the operating system. And, of course, Windows 8’s own apps will themselves feature beautiful, non-banner-type ads. Five pilot advertisers have already signed on, though Microsoft declined to name them. “Ads are part of Windows 8, which is pretty big for us,” says Creegan, a 15-year Microsoft veteran, adding, “You think Ballmer doesn’t care about this?” (Ballmer declined to be interviewed for this story.)

Microsoft’s CEO might care about Windows 8, but few industry experts believe he cares much for display ads. And as former Microsoft employees tell it, that lack of interest lies behind some of the recent cuts in the advertising division.

“We’re definitely seeing a de-emphasis on the core display business,” says Sean Kegelman, evp, partnerships and ventures at Publicis digital shop VivaKi. One example of the downshift is the largely outsourced content of MSN, a property Ballmer has considered killing for years but one that is still a crucial traffic driver for Bing.

While the vultures anticipate the death of the ad unit, Kegelman is not among them. “I wouldn’t count them out of the ad game,” he says. “Windows 8 is the great unknown. But if they can execute, they’ve got a great start [given their huge footprint].”

Whether or not Microsoft wants to be in the display business long term, the company is definitely pulling back on media offerings. Where the BEET team had created custom ads and original Web series for clients like Kraft before the group was jettisoned, Microsoft aims to entice outside creative agencies to use Windows 8.

"We see this as a whole new way of experiencing brands," said Stephen Kim gm of Microsoft's Global Creative Solutions team. "Those questions about whether we are committed to the ad business—that perception is so far from reality. We want to inspire the creative community to generate ideas we haven't even thought of." 

In other words, Microsoft wants to serve up beautiful brand messages—it just doesn’t want to make them. “Media requires custom-based solutions,” says one Microsoft media exec. “But things [like custom Web series] that aren’t scalable were really hard for Microsoft’s tech teams to support.”

Another challenge: While Microsoft ad execs in Bellevue demo Windows 8 on stripped-down Samsung tablets, most people will first see Windows 8 on their PCs, where the tiles are still unfamiliar and where mouse clicks rather than touchscreens rule navigation. Microsoft counters, naturally, that Windows 8 will really pop on the company’s forthcoming Surface tablet. But for the time being, Apple dominates the market with 84 million iPads—and not one of them runs Windows.

Then, there’s the widely held belief that portals are dying, meaning that Web users who live on social networks and blogs won’t unplug to surf to freestanding apps for weather and travel, for example. The same might be said for Windows’ ad apps in that they may look pretty but could struggle to draw visitors to what is essentially a microsite.

It remains a question exactly how many charter Windows 8 advertisers will sign on. One former Microsoft exec—one who agrees that Windows 8 will revolutionize computing—still doubts the product’s impact on the advertising side. “I don’t see how it gets any scale for advertisers,” he says, adding, “And I really don’t see the company investing in this brand business.”

Essentially, Microsoft is betting its entire ad business on devices and software that hardly anyone uses yet, rather than say MSN, which has 123 million users, per comScore. (though MSN is expected to be relaunched to look like Windows 8.)

Veteran Microsoft execs all say the same thing: Ballmer got into the ad business only because Google launched its own Windows-threatening, ad-supported business software under the Google Apps umbrella in 2007. Also, the search giant offered free alternatives to Microsoft products with Google Docs and Google Spreadsheets. Amid shrinking profits for Windows, Google was said to have earned $1,500 to $2,000 per PC based on some internal Microsoft estimates, and its search side drove greater ad conversions than Microsoft. "There was this deck floating around back then warning that Google was going to monetize pretty much everything with advertising," recalls one former Microsoft ad official. "That got a lot of attention."

Back in Bellevue, Holland acknowledges the faded hopes for adCenter as the ultimate, industrywide ad-targeting and decision-making engine—not to mention pubCenter, which promised to handle Web publishing’s technical needs but which went nowhere. (In a sense downgraded several weeks ago, Microsoft adCenter was rebranded Bing Ads to reflect its diminished role as the ad monetization technology for Microsoft’s search engine—and not much else.

However, to be fair to the adCenter saga, "it is a billion dollar business," argues one former Microsoft executive.

And for now at least, Microsoft seems to have abandoned its quest for ad tech players. From 2006 to 2010, the company spent at least $7 billion on the companies Massive Inc., ScreenTonic, Rapt, Powerset, AdECN and, of course, aQuantive.

The $6 billion aQuantive purchase “was a completely defensive move, and they paid a crazy premium,” says one longtime Microsoft exec who laments that the investment stopped there. “We put it in a drawer. We had been screaming, ‘Let’s buy DoubleClick!’ Instead, we bought aQuantive. Remember, Microsoft had a lead over Google in display at the time.”

Still, van der Kooi downplays the inflated purchase price. “This write-down was really just an accounting position,” he says.

These days, Microsoft is handling things differently, investing in companies like AppNexus rather than getting mixed up in wholesale acquisitions; some wonder whether the company might even look to sell Atlas to AppNexus. And while it may look from the outside as though Microsoft remains committed to the still-struggling Bing, insiders commonly theorize that Ballmer supports it as a diversionary tactic, to keep Google from deploying an army of engineers to take down Windows.

“We take a very long view on the business,” argues David Pann, gm of Microsoft’s search network. “The pace at which we are innovating is just amazing. We’re making huge strides on the monetization gap [with Google].” Pann sees product like Windows Phone and even Skype helping increase Bing's share. Perhaps, but Google still commands over 60 percent of the search market, per comScore, a position that Bing has never come close to threatening.

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.­