Microsoft Upgrades Display Ad Technology to Counter Facebook & Google

Microsoft (NASDAQ:MSFT) announced that it will be adding new features to its Internet display advertising products to stop customers from defecting to Google‘s (NASDAQ:GOOG) or Facebook‘s competing products. ^[1] Display advertising could grow to around $12.3 billion in the U.S. according to Bloomberg. While Google leads the search advertising market, Facebook is the clear leader when it comes to display ads with a 17.7% share. Yahoo (NASDAQ:YHOO) and Google come in next with 13.1% and 9.3% of the market followed by Microsoft with 4.9%. ^[2] Facebook and Google have been expanding their market share rapidly in the last couple of years at the expense of Yahoo and Microsoft.

We estimate that Microsoft’s online division contributes just under 5% of our $28 Trefis price estimate for Microsoft. Our price estimate implies 10% upside to the current market price.

Microsoft to Make a Push in the Display Ad Market with New Tools

Microsoft acquired aQuantive for $6 billion in 2007, which now powers Microsoft’s advertiser and publisher network. The company also announced that it will unveil some new tools and partnerships with companies like AppNexus and MediaMath that will help customers tailor and measure the impact of ads.

After some complaints from customers, Microsoft reassured users that it is investing in its display ads solution and improving the customer targeting technology available to advertisers as well as making the overall design easier to use. Display ad spending in the U.S. is expected to reach $15 billion by 2012 and Microsoft is looking to capture a larger share of this growing market going forward.

Microsoft had revenues of $2.52 billion from the online services division in FY11, but it’s still bleeding as it had an operating loss of $2.55 billion in the same year.

Bing’s global search market share is quite low at around 4.2% but its U.S search market share is up at 14.4% with Google’s U.S. share at 65.5%. By upgrading its display ads offering, Microsoft may be able to increase not only the revenue per page view but also the total number of page views through which it serves display ads.

It is unlikely to impact Microsoft’s earnings significantly as it will still be a drop in the bucket compared to Microsoft’s main money makers – Office, Windows etc., but it will at least will push the Online Services division towards profitability and remain competitive against Facebook and Google.

Check out our complete analysis for Microsoft

1. Microsoft Ramps Up Google Challenge in $12 Billion Display-Ad Market, Bloomberg, September 6, 2011 [↩]
2. Facebook Passes Yahoo! in Display Advertising, eMarketer, June 20, 2011 [↩]