So long and thanks for all the ads! Here's why Microsoft is exiting the display advertising business
To summarize, here's what's going on, according to a blog post from Microsoft:
- Up to 1,200 Microsoft Advertising employees will be shifting over to AOL, which will absorb the direct sales of ads across Microsoft's content sites including MSN in its nine biggest markets, which includes the US and the UK.
- Adtech company AppNexus will expand its role in selling ads programmatically for Microsoft to 39 markets worldwide.
- As part of the deal, Microsoft's Bing will replace Google Search across AOL's sites.
- The blog post appears to signal that not everybody is leaving Microsoft Advertising just yet. Senior staff including the company's corporate vice president of advertising and consumer monetization Rik van der Kooi and corporate vice president of advertising and online Frank Holland will likely remain to steer through the transition and to accelerate its ad sales focus over to Bing.
Microsoft's exit from the display ad business has been a long time coming. It has slowly been shuttering ad products, while placing an increased focus on search. Here's why the company finally decided to essentially pull the plug on display advertising this week.
A long, slow goodbye
Microsoft's share of the $74 billion global display advertising market has been eroding over recent years. EMarketer predicts its share of the sector will decline to 1.2% this year, down from a 1.4% share in 2014 and a 2.1% share in 2013.
And while the global display ad market grew 22.4% last year, Microsoft's display revenues dropped 15.5% in 2014, according to eMarketer.
Despite clearly struggling to attract a sizeable chunk of marketers' online budgets over to its platform, the company had been pro-active in the trade marketing space. Microsoft often had a huge presence at advertising trade shows like Dmexco in Germany and Cannes Lions in France - including at this year's event just last week where the company showed off its HoloLens virtual reality technology, and it invited pop band Walk the Moon to play its well-attended Wednesday night beach party. In previous years, Microsoft has tried to stand out from competitors with bespoke targeting tools and creative ad formats.
However, rumors of an exit from advertising have been looming for some time. In 2012, Microsoft took a $6.2 billion write-down on aQuantive, the company it acquired in 2007 in the hope of taking on Google. Microsoft ended up selling off the remnant parts of that business, the Atlas ad server, to Facebook last year. In the US, Facebook is the biggest seller of display advertising, estimated by eMarketer to take a 25% share of the market in 2015. Google will have a 15% share, eMarketer predicts.
Soon after Microsoft's current CEO Satya Nadella came on board in 2014, he outlined a turnaround strategy to transform the company from a devices and services business to "the productivity and platform company for the mobile-first and cloud-first world."
Advertising, it seems, doesn't play to Microsoft's strengths and is incongruous to that approach. More divisions began shutting down and downsizing. In July, Microsoft shuttered its Xbox Entertainment Studios content division, which the Wall Street Journal said sparked "trust issues with advertisers."
Then, late last year, Microsoft laid off swathes of its global advertising sales team. Earlier this year, there was also an internal power struggle between the Windows group and MSN over which would become the default home page on the Internet Explorer browser. Nadella chose Windows, moving MSN under Windows leader Terry Myerson.
Now AOL will be selling ads against MSN and it will become even less of a priority of Microsoft. In November, Business Insider reported Microsoft changed the way comScore reports site visitors to MSN, essentially hiding a major traffic collapse following a redesign. Back then, a source close to Microsoft suggested that "Microsoft really doesn't care about [MSN]" and that rumors keep persisting that it will be shut down. Microsoft denies those suggestions.
A senior adtech company executive and investor who has previously been a customer of Microsoft told Business Insider: "I think they're definitely going to exit that ad business. They've gradually dismantled their ad sales teams over the past couple of years."
"Nadella has been vocal about transitioning to a software company and that largely means how they will spend their R&D - ad products are not as good an investment as higher margin SaaS (software as a service) and licenses - and sales focus. With the massive install base Microsoft has, advertising is incongruous with their growth opportunities," our source added.
The renewed push on Bing is the big story
Indeed, the new 10-year deal means Bing takes over from Google to power search listings and ads for all AOL owned and operated properties - including The Huffington Post, TechCrunch, and AOL.com - from next year, which will add a modest increase to Microsoft's share of the search market.
Bing has a 20% share of search in the US, according to comScore data for March, while Google has a 64% share. AOL's network of sites only has a 1% share of search queries, but it will still be a welcome addition for Bing. And it follows Microsoft's renegotiated search deal with Yahoo - first formed in 2009 - for Bing to continue power Yahoo-branded search. The deal also saw Bing reclaim sales responsibilities for Bing ads returned back to Microsoft.
In an e-mailed statement to Business Insider in response to a question about whether Microsoft Advertising will now cease to exist, a Microsoft spokesperson said: "Today's news is evidence of Microsoft's increased focus on our strengths: in this case, search and search advertising and building great content and consumer services. This evolution in our approach to display advertising allows us to keep this focus, while working with industry leaders to market our services. For more information please visit our Blog."
An additional statement from Microsoft, when questioned further on how the Microsoft Advertising business will now be structured, said: "Our commitment to advertising remains strong. We believe these partnerships underscore the importance of advertising to Microsoft and our developers."
There are several advantages for Microsoft switching focus almost solely to Bing. There are fewer search operators out there than display advertising companies (despite the fact that search ads make up around half of the ads sold online). Microsoft Bing is the clear number two when it comes to search (Yahoo, in third place, has a 12.7% share, according to comScore,) whereas it is leagues behind many other larger players (not just Google and Facebook - but Twitter, Yahoo, AOL, and Amazon) when it comes to display advertising reach and revenue.
Bing can also operate with fewer sales and support staff. Ads on Bing are largely bought through a self-serve software platform, while most of Microsoft's display business required legions of support staff, dealing with insertion orders from agencies and setting up direct deals with clients.
Our adtech source told us: "Products such as Bing have a different - and largely self-serve - ad sales model from MSN and their other properties, which would indicate to me that their cost of sales is very high because there's not a lot of synergy."
He continued: "It's a multibillion dollar business, and it does pay for itself right now. Our commitment to Bing is very deep and therefore critical for us to continue to monetize that business."
One ad tech market observer suggested to Business Insider that Microsoft's agreement to hand over display ad sales to AOL could even just be a "sweetener" for the search deal.
Naomi Hands, strategic partnership manager, at mobile marketing and technology agency Somo, told Business Insider the Bing search deal with AOL could "move the needle" when it comes to Microsoft's mobile search revenues.
Hands added: "The deal with Verizon will be key in this as due to market share of handset distribution in the US they can default browsers and search engines on mobile devices, moving away from Google here too. This could help streamline the advertising opportunities across Microsoft's properties, reducing the fragmentation and clunkiness of its offering and provide a much more seamless experience."
As Stefan Bardega, chief digital officer of media agency ZenithOptimedia, neatly summarized on Twitter earlier on Tuesday: