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Originally published May 7, 2007 at 12:00 AM | Page modified May 9, 2007 at 3:23 PM

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Corrected version

Microsoft's sophisticated ad system has some catching up to do

Microsoft has been pouring money and employee time into its new adCenter system, hoping to grab a bigger chunk of the quickly growing $17...

Seattle Times technology reporter

Microsoft has been pouring money and employee time into its new adCenter system, hoping to grab a bigger chunk of the quickly growing $17 billion online-advertising industry.

But despite all the company's efforts, advertisers say the system's biggest problem has little to do with adCenter. It's Google — and all the traffic the search leader is getting.

AdCenter, which turns a year old this month, is a key component of Microsoft's growing immersion in the advertising business, a business whose importance was highlighted last week in the frenzy surrounding reports that Microsoft had been discussing a merger or other relationship with Yahoo!

AdCenter itself is a sophisticated system that targets advertising to Microsoft users and can tell a user's location, age, gender and level of wealth. But it mainly places ads among the results listings in Microsoft's search engine, which trails far behind Google in users.

As a result, advertisers say, working with adCenter is like selling wares at an upscale boutique while customers swarm the big mall down the street. "It's the volume of traffic which is a major concern with adCenter," said Navneet Kaushal, chief executive of search-engine marketing firm Page Traffic. "Lack of popularity of [Microsoft's] Live Search has affected adCenter adversely. This is something that adCenter has to grow out of, sooner than later."

Google topped the search charts in March, grabbing nearly 54 percent of all search-engine queries, and Yahoo! was second with 22 percent, according to research firm Nielsen//NetRatings. Microsoft's Live Search took just 10 percent.

The significance of those numbers is that search-engine ads have been the superstar in the online-advertising business for at least three years, bringing in more money than any other type of ads.

At Google, for example, 99 percent of its $10.6 billion in sales last year came from advertising, with most of it coming from search-related ads.

So it's no surprise that Microsoft is moving quickly and deeply into this business, recognizing a new revenue stream as it becomes more difficult to see big sales growth in operating systems and other core areas.

Launch problems

Like many Microsoft products, adCenter didn't have the smoothest launch. A bug in its system in February caused it to accidentally overcharge customers — some by hundreds of dollars.

Other advertisers were upset when Microsoft moved their ads outside the search engine to its MSN Web sites. Microsoft should have asked permission before doing that, they said.

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Still others say adCenter's software, while indeed sophisticated, is slow and wonky.

And adCenter's top management has seen significant turnover. Departed executives include Blake Irving, who oversaw online-ad operations.

The search-engine side, which is closely tied to adCenter, has said goodbye to corporate Vice President Christopher Payne and general manager Dane Glasgow.

Despite initial stumbles, adCenter is a Microsoft priority. Chief Executive Steve Ballmer has repeatedly said how much he regrets the company's late entry into the online-advertising business.

Microsoft won't say how many work on adCenter and the search group, but there are at least a dozen teams in different areas.

"It's enormous and there's a lot of us," said Doug Stotland, director of product management for adCenter. "We have an opportunity to have a big impact on Microsoft's business."

Microsoft is expanding adCenter's reach beyond Live Search. Already, some ads that used to exist only in the search engine are appearing on Microsoft's MSN sites.

About 46 million people use Microsoft's search engine each month, according to Nielsen//NetRatings. That compares with 96 million who view an MSN site.

The financial numbers, meanwhile, continue to grow. In the company's online services business, which oversees adCenter, ad revenue soared by 23 percent to $456 million for the quarter ended March 31.

The business had $623 million in overall revenue, up from $562 million for the same period the previous year, but it showed an operating loss of $200 million, compared with a loss of $24 million a year ago.

Advertisers use adCenter to create a campaign and write short, text-based advertisements. Similar to Google's AdWords system, these advertisers decide what keywords to hook the ads to (a local florist might want the keywords "Seattle" and "flowers," for example) and how much money they're willing to spend to have those ads appear in search results for those keywords.

And search is just the beginning. Microsoft's vision is to make adCenter a one-stop shop where advertisers can reach all of its customers, including the ones playing the Xbox 360 game system or listening to the Zune music player.

Microsoft is nowhere near that point, and getting there means sewing together a lot of pieces. One advantage of building adCenter from the ground up is having the ability to integrate those segments from the beginning.

Microsoft will have more to say about adCenter's progress this week at its annual Strategic Account Summit, a two-day forum about the ad industry.

For all these efforts, many advertisers say Google is still their go-to site for faster sales.

"Because there are so many clicks it'll take less time to get results," said Mike Ebert, director of site development for an Internet marketing firm in Orrin, Utah. And up-to-the-minute results mean everything in this business.

Yahoo! has been shoring up its ad capabilities as well, and earlier this year unveiled a new technology called Panama that is designed to show better and more relevant ads next to search-engine results.

The service launched to good reviews, but its financial impact on Yahoo! won't be known until the second quarter, the company said.

AdCenter is slower to use than Yahoo! and Google, said Gordon Choi, a senior campaign manager at search-marketing company Clicks2Customers. Other advertisers complain that adCenter's user interface doesn't make it easy to launch campaigns, pull reports or do research on how specific keywords are performing.

High investment return

But despite the negatives, advertisers seem to universally praise adCenter's high return on investment. In other words, they say, Microsoft users are more likely to click on ads and then make a purchase or sign up for a mailing list.

"Pay-per-click advertising through adCenter tends to convert at a much higher rate when compared to other competitors," said independent search-marketing consultant Jennifer Slegg. "But the lack of search and content traffic is the biggest challenge for those advertisers."

Microsoft brags about that high conversion rate at industry conferences. About 59 percent of Microsoft users have made a purchase online, the company says, and that quality audience equals good clicks.

"I think it's the demographic," Stotland said. "It's how comfortable they are with technology and the amount of disposable income that they have."

Google has some big advantages in search marketing, but Microsoft is making a name for itself, said Andrew Frank, research vice president at analyst firm Gartner.

AdCenter is "leading the pack" in terms of integrating advertising across multiple platforms, such as mobile, video games, search and display, he said.

"There's no question that Google is the incumbent in the lead," Frank said. "Both Microsoft and Yahoo! are impressive organizations that are committed to growth in this area. We're still really at the early days of this race."

Kim Peterson: 206-464-2360 or kpeterson@seattletimes.com

Information in this article, originally published May 7, 2007, was corrected May 7, 2007. A previous version of this story incorrectly stated that Microsoft's adCenter system was similar to Google's AdSense system in that advertisers could write short, text-based advertisements. AdSense is Google's advertisement serving program. The article should have said that adCenter was similar to Google's AdWords program, which lets people create their own advertisements.

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