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Microsoft Plays Catch-Up in Online Advertising

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Microsoft Plays Catch-Up in Online Advertising

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Microsoft Plays Catch-Up in Online Advertising

Microsoft Plays Catch-Up in Online Advertising

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Lagging far behind Yahoo! and Internet leader Google, Microsoft is making a big push to attract more online advertising.

RENEE MONTAGNE, host:

Microsoft, the world's largest software company, wants to become the world's largest provider of online advertising. It's not just Google, and to a lesser extent Yahoo, that Microsoft is chasing - it's a new business model.

NPR's Wendy Kaufman reports.

WENDY KAUFMAN reporting:

Just about every time you search for something on the Internet, you're likely to see ads, as well. And on homepages, you often have to get past a sponsored commercial message before you get to the content you're looking for. Internet-based advertising has become a huge and growing business. Forrester Research estimates online advertising will be a $26 billion market by the year 2010, and Microsoft wants a chunk of it.

Earlier this month, Microsoft CEO Steve Ballmer addressed hundreds of advertising and marketing executives at the Microsoft campus. His arrival was heralded with a little videotape.

(Soundbite of Microsoft videotape)

Mr. STEVE BALLMER (CEO, Microsoft): I use to tell our people Microsoft was about one thing 20 years ago: Windows, Windows, Windows, baby! But not anymore baby! It's advertisers, advertisers, advertisers!

(Soundbite of cheering and applause)

KAUFMAN: The gregarious chief executives told the audience that only two or three companies, one of them being Microsoft, could deliver the infrastructure that advertisers need. And no company, he continued, was more committed to working with them.

Mr. BALLMER: We are patient, long-term, and committed to really having a significant footprint in the advertising arena.

KAUFMAN: The profit in advertising has been enormous. For example, every time a consumer clicks on an ad that shows up alongside search results, the ad provider, most often Google, gets paid. Fifty cents per click is fairly typical. And that turns to billions fairly quickly when you have over 400,000 advertisers, as Google apparently did last year.

In contrast, Microsoft still derives nearly all its revenue from the company's decades-old businesses, selling Windows and Office. And Kevin Werbach, of Penn's Wharton School, says that won't do anymore.

Professor KEVIN WERBACH (Professor of Legal Studies and Business Ethics, University of Pennsylvania): Software, as we know it, is dying. And Microsoft is having to change from a company that makes things that go into boxes, into a company that makes things that get displayed on screens online and get delivered over the network.

KAUFMAN: He adds that while firms like Google and Yahoo grew up in a fluid online environment, Microsoft didn't.

Prof. WERBACH: Microsoft needs to make a fundamental change in its business. It's just really difficult to turn around a company as big and entrenched and successful as Microsoft.

KAUFMAN: The software giant recently announced plans to dramatically increase its investment in search. The money, more than a billion dollars for Internet-related ventures, represents a sizeable bet, even for a company that earned nearly $3 billion in the last quarter.

Shar VanBoskirk, of Forrester Research, suggests that one primary objective of that bet is increasing traffic on Microsoft's site.

Ms. SHAR VANBOSKIRK (Analyst, Forrester Research): Microsoft has a ways to go in getting consumers to do more searches on Microsoft. So Google definitely has the lion's share of searches.

KAUFMAN: In March of this year, for example, Google reportedly had 43 percent of the search traffic, Microsoft just over 13 percent. Yahoo stood roughly in the middle. But Yahoo's share was big enough that Microsoft approached Yahoo about buying a stake in the company's search business. Yahoo said no. Now clearly on its own, Microsoft says it believes it can catch Google in search within five years.

But Mary Jo Foley, a long-time observer of the company and the editor of the online newsletter, Microsoft Watch, is more skeptical.

Ms. MARY JO FOLEY (Editor, Microsoft Watch): Google and Yahoo aren't going to just stay sitting where they are right now. They're going to still be advancing. And I'm not totally convinced Microsoft can catch Google and Yahoo.

KAUFMAN: Foley believes that Microsoft is in the most precarious position it's been in two-decades. And late last month, Wall Street gave the company a thumbs down when it announced dramatically increase spending for 2007. Some are now questioning whether the company is more scared about its future than it's letting on.

Wendy Kaufman, NPR News, Seattle.

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