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Microsoft Seeks Edge in Online Advertising

No one can quite agree on whether Microsoft Corp. held its first online advertising summit in a conference room or a cafeteria, but what everyone does remember is how little attention was paid to the field just seven years ago.

This year, Redmond-based Microsoft is expecting 700 people at its annual MSN Strategic Account Summit, which comes as even the most skeptical advertisers are realizing the potential -- some might say necessity -- of hawking their goods online.

But although the field is hot, Microsoft has plenty of work to do as it tries to persuade advertisers to go with its services, particularly when pitted against market leaders Google Inc. and Yahoo Inc.

"Microsoft has long watched sort of on the sidelines as Google has built up online advertising into a hugely profitable business," said Andrew Frank, research director with Gartner.

Frank doesn't expect Microsoft to be able to play catch up immediately, but he thinks the company has the potential to find a niche with Microsoft adCenter, the online advertising platform the company is testing in some markets and plans to roll out more broadly.

Microsoft has traditionally relied on a Yahoo subsidiary to deliver the ads that appear alongside its search results. Microsoft's own platform will replace that, although the software maker says the long-term plan is much broader.

With adCenter, Microsoft hopes to eventually allow companies to target specific audiences, such as men between ages 18 and 25 who make a certain income and live in the Northeast. Then, it hopes to be able to offer those companies the ability to create a variety of advertisements that will reach across a wide swath of mediums where it has a presence, such as its search engine, its television platform and its online videogaming service.

Eric Hadley, general manager for trade marketing with Microsoft's MSN online unit, insists he and others aren't losing sleep over the fact that it is still in the early stages of its effort, while Google and Yahoo have recently impressed Wall Street with upbeat profits.

Microsoft's MSN unit lost money in its most recent fiscal third quarter. Microsoft also conceded that its investment in adCenter will hamper its ability to make money on MSN in the coming quarter and next fiscal year ending in June 2007.

"We're not in for the sprint, we want to have the long-term play," said Eric Hadley, general manager for trade marketing with MSN.

Analysts say the hefty investment makes sense.

"Increasingly, they see that advertising is probably one of the best hopes for them for revenue growth," said David Smith, another Gartner analyst.

The online advertising business is one of several areas where Microsoft wants to significantly ramp up investments to spur growth, as the market for its flagship Windows and Office products grows saturated and the industry increasingly appears to be moving to more online software distribution.

At this week's conference, Microsoft will focus on the online content it has to offer through its MSN site and other products as a way of trying to lure advertisers to do business with it. The conference, on Microsoft's corporate campus, runs Wednesday and Thursday.

In recent months, Microsoft has devoted considerable resources to boosting online properties, including revamping its e-mail and instant messenger offerings and investing in online mapping and other search technologies.

But Microsoft still has an uphill battle with its search engine. The company only recently began using its own technology for delivering search results, and it remains substantially less popular than Google and Yahoo. Nielsen/Net Ratings reported that Google had 49 percent of the U.S. search market share in March, while Yahoo had 22.5 percent and MSN Search had 11 percent. Microsoft says it is working hard to improve the results its search engine delivers.

No one is expecting consumers or advertisers to immediately switch loyalties to MSN Search en masse.

"The advertiser doesn't suddenly say, 'I'm not going to advertise on Google or I'm not going to advertise on Yahoo because of adCenter's behavior,' but they will say, 'To reach this particular type of customer I'm going to go to MSN,'" said Shar VanBoskirk, an analyst with Forrester Research.

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