The software giant purchases an advertising company, pouring more money than imaginable into Xbox and web services… No one knows what “secret plot” Microsoft is brewing.
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Steve Ballmer, CEO of Microsoft believes that Microsoft has made “rapid progress” in online search and advertising over the past two years. Source: AP |
Just as Microsoft investors began to “digest” the company’s sluggish growth and expansion, they were hit with a series of shocks. First were the financial results that aligned with expectations, followed by an extraordinarily bold and, one might say, unusually generous budget plan.
Too Many Goals
In the fiscal year 2007, Microsoft, under CEO Steve Ballmer, will invest $2 billion more than Wall Street’s predictions. “We decided to invest heavily in several areas,” said CFO Chris Liddell.
The areas Liddell referred to include: 1. increasing the production of Xbox 360 gaming consoles; 2. pouring more money into the nascent Windows Live service to provide software applications via the web; and 3. continuing acquisitions of other companies.
While this was the intent, many investors were still scratching their heads, wondering why and how Microsoft’s additional investments were so significant. “It’s as if they are building a Google or Yahoo in their own backyard!” exclaimed Rick Sherlund, an analyst at Goldman Sachs & Co.
First is MSN
Yesterday, CEO Steve Ballmer announced the details of the budget expansion plan to boost the Internet services business.
The amount of $1.1 billion will be allocated to MSN in the upcoming fiscal year, mainly for research and development, which left investors astounded. This can be considered a “jumping” investment compared to the $700 million budget of this year and $500 million from last year. Furthermore, MSN plans to allocate up to $500 million for capital expenses in fiscal year 2007, increasing fivefold from 2005.
“We told our R&D staff that web services are our number one priority,” Ballmer stated. He promised that Microsoft would spend as aggressively as any giant in the advertising field. “I believe that only (at best) two or three companies can provide a strong enough infrastructure to compete,” Ballmer confidently asserted.
Too Brief an Explanation
Liddell firmly stated that Microsoft is not hiding anything with this unusual investment plan, but investors were not satisfied with that answer. Microsoft’s stock dropped by 6.3% to $25.57 by the end of trading.
Analysts expressed dissatisfaction with the severe lack of information. “Where is the money going? No one knows the answer,” commented another analyst. “It feels like the money has all been dumped into a black hole.”
What lies behind this angry reaction? At least, part of the reason is that analysts and investors have long viewed Microsoft as a “value ladder” rather than a source of stock profits. Therefore, they would rather accept slow growth than have stocks that rise but are unstable.
Recently, the growth in Windows release sales has been somewhat sluggish, primarily because most Windows revenue comes from computer manufacturers – who buy the operating system at wholesale prices and in bulk.
Massive Acquisition
Another anticipated move from Microsoft is the acquisition of Massive Inc., a company specializing in embedding advertisements into video games. Of course, Massive’s technology will be reused by Microsoft in its other online products.
Microsoft’s trend of acquiring smaller companies instead of investing from scratch in new business divisions is no stranger to the tech industry. This time, the goal is none other than to revitalize the online advertising division and increase competitiveness against Google.
Speaking of Massive, advertising has long been present in video games, but mainly in the form of static ads. Once embedded into a game, these ads are essentially “set in stone” and cannot be changed.
However, Massive’s technology allows advertisers to insert completely fresh ads into games and game consoles via an internet connection. In games that integrate Massive technology, advertisers can change the ad content as they like: introducing a new movie today and then advertising a new soda tomorrow. Moreover, they can also tailor ads to different geographical locations.
In its announcement, Microsoft stated that it hopes to integrate these features into its existing products, with the most urgent being MSN online. Certainly, Massive’s technology will also be a part of Microsoft’s upcoming AdCenter advertising tool.
The Ace in the Hole: AdCenter
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Steve Ballmer beside the MSN logo. Source: AP |
Recently, Microsoft also unveiled its AdCenter, a tool currently being used for 100% of search advertising contracts in the U.S. At one point, Microsoft had relied on Yahoo’s paid search technology, and in fact, Yahoo’s search engine is still used by Microsoft in many international markets.
Yesterday, the Wall Street Journal shockingly reported that many officials within Microsoft want the software giant to buy shares of Yahoo and collaborate to combat Google.
Commenting on this article, Ballmer stated that the relationship between Microsoft and Yahoo has been very complex over the years, both cooperative and competitive, “both a friend and a foe”; however, he remained tight-lipped about the scenario depicted by the Wall Street Journal.
Yusuf Mehdi, Senior Vice President in charge of Microsoft’s advertising strategy, also announced the future version of AdCenter – which could handle both contextual advertising and paid search. Mehdi indicated that Microsoft plans to test contextual advertising tools this summer.
Additionally, Mehdi introduced two projects from Microsoft Research, where over 50 of the company’s experts are diligently researching new advertising technologies. One project attempts to predict user demographics based on the context of a website. The other project aims to address users’ tendency to fast-forward through ads by incorporating mini 5-second ads. Whenever the main ad is skipped, the mini ad will pop up, ensuring that users “can’t escape.”
Search is Also the Utmost Priority
Two years after admitting that Microsoft failed to develop its own search tool, yesterday, Steve Ballmer proudly declared that the giant has made significant “progress” in the battle against Google and Yahoo.
In a relatively short time, Microsoft has achieved impressive results in two key areas: creating a search engine and establishing its own online advertising platform. However, Ballmer also acknowledged that there is still much work to be done at Microsoft and that “if only Microsoft had started sooner.”
Above all, Microsoft understands the cost of being a “slow-moving ox drinking muddy water.” Only recently has the company begun to use its own technology in 100% of search contracts in the U.S., facing a significantly smaller market share compared to both Google and Yahoo (Google 49%, Yahoo 22.5%, and MSN 11%).
Even Chairman Bill Gates admitted that Google has “done something miraculous and excellent” in building its search engine and web advertising platform. However, Gates still tried to salvage the notion that Microsoft’s efforts are “not any less strong.” – “I think this is one of the rare times we’ve been slightly underestimated,” Gates said.
Big Ambitions
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| Source: AFP |
To attract more users to its search engine and, in turn, increase advertising revenue, Microsoft is embarking on a journey with its new online advertising platform, adCenter. However, CEO Steve Ballmer stated that the search engine is merely “a small part” of their strategy.
The real ambition of the software giant is to integrate advertising across all Microsoft products, from television to online gaming. Therefore, Ballmer believes that bringing more users to the MSN portal, as well as the company’s email and instant messaging services, will be a significant achievement.
It can be said that the fastest-growing and most fiercely competitive area today is the web services sector, where applications like email, photo sharing, and productivity suites like Office are accessible online.
While Google has rapidly succeeded in this space, Microsoft has primarily continued to distribute traditional CD-based software. Nonetheless, Ballmer remains optimistic, asserting that Microsoft is not falling behind its competitors due to its high technological capabilities and a loyal customer base.
The remaining challenge is how Ballmer can convince investors to share his optimism.
Thien Yi (Compiled from CNET, BusinessWeek, AP, AFP, Reuters)
