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Why is Microsoft exiting online display advertising?

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Why is Microsoft exiting online display advertising?

Microsoft’s announcement that it would be handing over sales responsibilities for all its online display advertising in 9 countries to AOL, has already started rumours that Microsoft plans to completely exit the display ad market. We take a look at the reasons why.

Back in September 2014, we got a chance to speak with Adam Anger, General Manager (Advertising and Online), Asia Pacific at Microsoft. When asked specifically what Microsoft’s digital advertising roadmap was, he spoke at length about creating new digital experiences for consumers, building reach and a new advertising platform to enable brands to connect to customers in a multi-screen scenario. What was interesting was that he never mentioned display advertising or video advertising. This might be taken as an indication of where the company sees its future to be—as a technology platform rather than a direct seller of advertisement. From some of the other steps that have been taken since Satya Nadella took over at Microsoft that the company is realigning its focus into the core areas of hardware and the cloud.

One thing that the current deal with AOL does and which is perhaps the most important coup for Microsoft is that its search engine Bing is now the default search platform for all AOL properties, thus giving it a decisive victory over Google, which till now powered AOL.

Since its launch in 2009, Microsoft has been investing a lot of time and resources into Bing as it seeks to overthrow the monopoly of Google in the search domain. Shunting off display ad responsibilities to AOL and also getting one of the largest publisher networks in the world to adopt Bing, is a superb double whammy from the company’s perspective.

And it is not as if display advertising has been a profitable business for Microsoft either.

In the last few years, revenues from this segment have thinned as companies like Google and Facebook increase their hold on the digital advertising domain, which is growing at a breakneck speed of 22 per cent per year. According to eMarketer, Microsoft’s share in the global digital ad revenues has been steadily dropping and now stands at $0.44 billion, comprising just 1.2 per cent of the total market.

On the other hand, when it comes to just search advertising revenues, its partnership with Yahoo seems to be bearing fruits as Microsoft saw total search ad revenues at $3.45 billion, up 18.5 per cent over last year. Microsoft has been spending a lot of money in marketing for Bing but all those millions are now starting to tell as search revenues are steadily growing, though it still in the red. For example, in 2012, a year before then CEO Steve Ballmer restructured the organization of Microsoft divisions, media report stated that since 2005, Microsoft Online Services Division, which included Bing, MSN, etc., had reported losses of $10.9 billion since the first quarter of 2005.

However, clearly, Microsoft still sees this as something having a future and with the operating cost saved with the exit/downsizing of display advertising, it will give it the opportunity to focus on search advertising. On the other hand, Verizon, the parent company of AOL, has stated that it wants to grow AOL’s online display advertising business. So, handing over a division that does not fit into the company’s overall strategy and bleeds money needed elsewhere to a company that can invest time and money and does see a future in it seems like a match made in heaven.

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