August 14th, 2007

Microsoft: The Ad Agency

By Benjamin J. Romano
Seattle Times

Microsoft Chief Executive Steve Ballmer said last month the Redmond software giant is “going to be an advertising company.”

Brian McAndrews’ new job is to make that vision a reality.

Monday, Microsoft completed its $6 billion acquisition of Seattle-based digital-advertising leader aQuantive, which McAndrews has guided since January 2000.

At the same time, the tall, 48-year-old former broadcasting executive was installed as the head of a new Microsoft business group that’s at the forefront of efforts to win a greater share of the fast-growing, $30 billion digital-ad business dominated by Google and Yahoo.

The Advertiser and Publisher Solutions Group incorporates all 2,600 aQuantive employees — roughly 650 of whom are in Seattle — plus about 400 Microsoft employees focused on the company’s adCenter advertising platform.

McAndrews’ group will also include recent Microsoft acquisitions Massive, which runs a network to sell advertising inside video games; and ScreenTonic, which provides advertising on mobile devices.

In an interview Monday, McAndrews, now a Microsoft senior vice president, acknowledged his new employer’s come-from-behind position.

While Microsoft bought a share of the lead with technologies such as Atlas, aQuantive’s tool to help advertisers manage and track the effectiveness for digital marketing, it still trails in other areas, including Internet search, the top generator of online-ad revenue.

“Work to do”

“So we have work to do,” McAndrews said. “But I think we now have both the people assets — combining what Microsoft brings to the party and what aQuantive does — and the technology assets to really be a formidable force.”

McAndrews, whose background includes nine years in the executive suites of ABC and a stint in the 1980s as a product manager with General Mills, presided last week over an aQuantive shareholder meeting at which the company’s owners overwhelmingly approved the sale.

They got an 85 percent premium, more than $30 a share, over the company’s share price when the acquisition was announced in May.

McAndrews himself stood to gain about $150 million from his aQuantive shares.

The $6 billion price tag makes this the largest acquisition in Microsoft history.

It came at the end of a string of high-profile deals in the digital-ad industry and prompted some critics to say Microsoft had overpaid. The companies acknowledged other suitors were bidding for aQuantive.

As more media are delivered digitally, companies are making money connecting publishers — which attract large audiences to services such as Internet search and social networking, online videos and a growing array of interactive digital content — with advertisers who want to reach those viewers.

With the aQuantive acquisition, Microsoft has an offering in virtually every stage of that digital supply chain, including Avenue A | Razorfish, a leading interactive-ad agency.

While that complete package will appeal to some large advertisers — and McAndrews said all of aQuantive’s customers, including 25 percent of the Fortune 100, are staying — others in the industry are watching Microsoft closely to see how it handles potential conflicts of interest.

The fear is that as a major content publisher through MSN and Windows Live, Microsoft would favor its own content and technologies over those of competitors.

McAndrews said Microsoft will keep the advertising agency separate, just as aQuantive did.

“Avenue A | Razorfish’s highest-order priority, and the reason they continue to succeed and exist, is because they have to do what’s right for their clients,” he said. “And, if that ever changes, that would do serious damage to their business, as it would to any other agency’s business.”

Andrew Frank, a research vice president at Gartner, said the ad industry’s reaction thus far has been muted.

“One of the things that Microsoft has done very effectively is to try to divert a lot of the attention — the competitive concerns — away from themselves and toward some of their competitors, especially Google,” Frank said.

Tech benefits

Microsoft’s efforts in digital advertising will benefit in another way from owning the advertising agency: Its work with Nike, Coca-Cola, Disney and other top brands yields insights on the direction of the industry that in turn should help Microsoft make better technology investments, McAndrews said.

That follows Microsoft’s pattern for entering new markets, said Matt Rosoff, an analyst with Directions on Microsoft.

“They get in, learn as much as possible and then they focus on the areas where they can make the most revenue,” he said.

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