How Does Microsoft Benefit From Exiting Display Ads Business?

July 6th, 2015 by Trefis Team
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Microsoft (NASDAQ:MSFT) announced on 29th June that it was handing over reins of its display ads business to AOL. [1] Transfer of the display ads business to AOL signifies the struggle Microsoft has had with online display ads business. We believe that Microsoft is systematically dis-investing from non-core and unprofitable business areas to focus on its cloud and hardware products. It stands to benefit from this deal as it can now plough back more resources into its growing search engine Bing. Furthermore, it can leverage AOL’s ecosystem (ads stack and platform) to sell its display ads. In this note, we explore the reason behind the exit and how Microsoft plans to supplement its search ads business to take on Google (NASDAQ:GOOG).

See our complete analysis of Microsoft here

Microsoft’s Display Ads Vertical Was Struggling

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Over the past few years, Microsoft’s share of the $89 billion global display advertising market — including online video, banner ads, rich media and sponsorships — has been eroding. [2] [3] Considering the 22.4% growth in global display ads last year, Microsoft’s decline in display ads was considerably steep. eMarketer projected that Microsoft’s share would have declined further had the company not exited the display ads business. eMarketer predicted that Microsoft’s share in the U.S. would have declined to 1.7% this year, down from a 2.2% share in 2014 and a 3.9% share in 2013. [4]

Considering that most of the digital display ads budgets were increasingly ear marked toward the leading social network, it made sense for Microsoft to offload its display ads division to AOL, which has emerged as one of the leaders in the display ads industry. Under the terms of the agreement, 1200 employees working in display ads unit will be moving from Microsoft to AOL. Specifics are undisclosed, though Microsoft’s Bing will replace Google Search across AOL’s sites.

Investing In Bing’s Search for Success

On the other side of the online ad spectrum is Microsoft’s Bing search engine, which has done fairly well over the past few years. Bing’s market share in the U.S. has improved from 15% in January 2014 to over 20.3% in May this year. [5] Microsoft has also been able to make a dent to Google’s dominance by inking deal with Yahoo, which also is the default search engine for Mozilla Firefox. According to eMarketer, Microsoft’s revenue share in the search ads industry is projected to improve from $2.91 billion in 2014 to $3.45 billion in 2015. [6] Microsoft is committed to its search ads business and has signed an exclusive 10-year deal with AOL that will see Microsoft’s Bing replace Google as the search engine providing 100% of the organic search results and search ads when people search on AOL’s sites. The deal would come into effect from Jan. 1, 2016. and target Google’s search dominance. Currently, we project Bing’s market share to increase to 4.2% by 2021. However, as Microsoft is proactively engaging content sites to enlist its Bing search engine as the default service, this share can be significantly higher and search ad revenue for Microsoft can increase. If its share were to increase to 5% by 2019, then it would boost Microsoft’s search ads topline to $6.5 billion.

We currently have a $44.46 price estimate for Microsoft, which is in-line with the current market price.

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Notes:
  1. Microsoft expands partnerships with AOL and AppNexus, Bing to power search for AOL properties, 29th June 2015 [↩]
  2. Advertisers Will Spend Nearly $600 Billion Worldwide in 2015, www.eMarketer.com, December 10 2014 [↩]
  3. Google Will Take 55% of Search Ad Dollars Globally in 2015, March 31 2015, www.eMarketer.com [↩]
  4. Facebook and Twitter Will Take 33% Share of US Digital Display Market by 2017, March 26 2015, www.eMarketer.com [↩]
  5. comScore Releases May 2015 U.S. Desktop Search Engine Rankings, June 16 2015, wwww.comscore.com [↩]
  6. Google Will Take 55% of Search Ad Dollars Globally in 2015, March 31 2015, www.emarketer.com [↩]