Microsoft Preparing Challenge to Google and Yahoo for Ads

By John Markoff

March 16, 2005

Microsoft is expected to offer a first look today at some features of a new advertising system
on the MSN search engine, part of the company's effort to match the success of Google in
the paid Internet search business.

The service, called MSN adCenter, is yet to be tested, but executives say it could allow
Microsoft to catch up to the top two Web search engines, Google and Yahoo, in search-based
advertising by creating a system with broader scope.

The executives said the MSN adCenter software would appeal to advertisers by giving them
the ability to fine-tune their purchases based on audience demographics. For example, on a
search results page, men might be shown ads different from those shown to women.

Microsoft now relies on the Overture service owned by Yahoo to place text advertisements
on the results pages of the MSN search service.

The company says it generates about $1.5 billion annually from Internet advertising, though
it does not publicly disclose how much of that revenue comes from paid searches on MSN.

In a telephone interview on Monday, the chief executive, Steven A. Ballmer, said the new
advertising system could successfully compete with Google and Yahoo and having an
independent advertising system was strategically vital.

"Advertising is going to be a very important long-term source of revenue to Microsoft," Mr.

Ballmer said. He added that the company was developing the system not just for its Web
search engine, but also for inserting text and display advertisements in other systems, like
its digital television service, known as IPTV.

Mr. Ballmer also said he thought Microsoft could avoid potential privacy problems by using
aggregated data of Web search users rather than individual data.

The company plans to begin limited tests of the adCenter system in France and Singapore in
the next six months. But Mr. Ballmer said he did not expect to end the alliance with
Overture, with which Microsoft now shares ad revenue.
He said that he had spoken to Yahoo's chief executive, Terry S. Semel, and that he thought
their companies could find ways to cooperate even after Microsoft rolled out the rival search
advertising system.

Industry analysts, though, said that Mr. Ballmer was probably trying to soften the blow.

"Both parties knew this was going to happen," said Danny Sullivan, editor of
SearchEngineWatch.com, an online newsletter. "Ultimately, you don't partner significantly
with your competitors on the Web."