Microsoft (NASDAQ:MSFT) announced that it has entered a partnership with Yahoo (NASDAQ:YHOO) and AOL (NYSE:AOL) for display ads. ^[1] The partnership will help Microsoft, Yahoo and AOL sell their remnant “Class 2″ display ad inventory on each others’ networks.^[2] The lower priced, secondary ad slots are generally handed over to third-party ad networks. Entering a deal to sell the remaining display ad inventory on each others’ sites would help these three media giants to gain more control over their inventory as well as additional revenue. Microsoft, AOL and Yahoo have traditionally been the biggest players in the display ad market. However, Google (NASDAQ:GOOG) and Facebook have been increasing their share of the display ad market since 2009, at the expense of Microsoft, AOL and mostly, Yahoo.

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 Fighting to Stay Relevant in Display Ads

Microsoft acquired aQuantive in 2007, which now powers its display ad network. It has been trying to improve its display ads offerings with new tools and partnerships (see Trefis article: Microsoft Upgrades Display Ad Technology to Counter Facebook & Google), but Google and Facebook continue to grow their market share in the display ad space, which is expected to be worth $15 billion by 2012.

While even a significant gain in display ad revenues will hardly affect Microsoft’s stock price, they could at least push the online division, which has been bleeding cash, to profitability.

This new partnership will be beneficial to all three parties – Microsoft, Yahoo and AOL, which should get some more time to think up a new strategy to compete with Google and Facebook, which will soon dominate the market by a significant margin.

Check out our complete analysis for Microsoft

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