FT.com / Companies / US & Canada - Microsoft ready for a strategic upgrade

FT.com / Companies / US & Canada - Microsoft ready for a strategic upgrade

Microsoft ready for a strategic upgrade
By Chris Nuttall in San Francisco

Published: May 21 2007 03:00 | Last updated: May 21 2007 03:00

Consolation prize or prize capture? Microsoft's $6bn acquisition of online advertising company Aquantive on Friday was a secondary target, but may prove to be a source of primary growth in the future.

The software giant turned its attention to Aquantive after it lost out to Google in a bid for Aquantive's rival, DoubleClick. Google will pay $3.1bn in that deal, almost half as much as Microsoft is paying.

This is the parsimonious Redmond company's biggest ever buy - costing more than four times its previous record, the $1.45bn paid for Danish software company Navision in 2002.

But cash-rich Microsoft can easily afford the 85 per cent premium it has paid and the acquisition had become a strategic imperative - the online ad business is expected to be worth $40bn in 2007 and is growing at 20 per cent a year, a rate that makes its core software business seem becalmed.

"We have walked away from some transactions over the last few years because we have considered they haven't been strategically important enough to pay a premium for," said Chris Liddell, chief financial officer, on Friday.

The Seattle company is key in that it provides a complete advertising solution for Microsoft's ambitions to sell and profit from advertising beyond its own network of websites. It also enables it to stay in touch with market leader Google.

"Google has significantly more advantages than Microsoft," says Shahid Khan, a partner at Interactive Broadband Consulting.

"If you go back, it started selling, using its own ad-serving technology, then it built a sales force and started selling on other people's websites, and then expanded to print and radio. Now DoubleClick gives it even more technology, better integration with ad agencies and publishers and the best platform overall."

Microsoft has been way behind, admitting as much in making anti-trust complaints that Google combined with DoubleClick will have 80 per cent market share for serving online ads.

It only recently developed its own ad-serving technology and, apart from a partnership with the Facebook social networking site, has confined its business to its own network of sites such as MSN and Windows Live.

"We are new in the advertising business but we have made a lot of investment," says Yusuf Mehdi, Microsoft's chief advertising strategist. "We have the biggest audience for an ad network - half a billion users visiting our properties every month. To this point, we have really not run advertising for other companies except Facebook . . . now we will."

Mr Mehdi says Aquantive has bigger revenues and profits than DoubleClick and offers the best ad tools.

Tim Vanderhook, chief executive of the SpecificMedia online ad network, agrees Aquantive's Atlas tool for advertisers is a superior product offering. "Microsoft has paid up to catch up. I was really surprised that DoubleClick was the initial prime target, it's only an ad-serving technology, it doesn't have a division that buys or sells online media [like Aquantive]," he says.

In seeking a more complete solution through Aquantive, Microsoft is following Google in trying to build a broad platform that can serve as a one-stop shop for advertisers trying to reach specific audiences across a range of media.

Shahid Khan cites Microsoft's earlier acquisition of Massive, which serves in-game advertising, and Google's moves to sell TV advertising. He believes mobile advertising networks will be the next acquisition targets as the big players spread their offerings to advertising on cellphones.

Copyright The Financial Times Limited 2007