20:08 PM

News Analysis: Savvy MSFT Ad Deals as GOOG Momentum Slows

Microsoft's acquisition late last week of the AdECN advertising exchange is a smart move. I interviewed Bill Urschel, the founder of AdECN earlier this year.

It is a company that has quietly managed to establish itself as a major real-time exchange for trading online advertising. It is a market that is very difficult to break into once first mover advantage is established because scale and liquidity are the most important attributes for the success of any exchange.

Mr Urschell said that there is probably only room for about three ad exchanges.

A neutral MSFT

An important aspect of AdECN is that it is neutral, it is not competing with advertising networks for ads, it trades the ads themselves, linking buyers and sellers, along with demographic, regional, and time-based delivery of advertising.

This neutral model could be a feather in MSFT's cap because Google is competing with its own publisher network. Advertising on Google's own sites has climbed to 64 percent of total revenues when it used to be evenly split with third-party publishers.

MSFT's AdECN exchange combined with its ad server technology could position MSFT as a preffered advertising partner for some publishers because it is not a direct competitor.

- MSFT recently won a major client, Digg, the community powered news aggregator.

- MSFT recently won EA, the world's largest gaming software company, to serve ads in online games.

MSFT is less of a competitor

- MSFT's own sites aren't doing that well, so it could claim that its own sites aren't competing against its publishing partners.

- In contrast: GOOG's own web sites grew 9 per cent in revenues in the most recent three months compared with no growth over the same period for its partner sites - GOOG 2Q 2007.

- Microsoft could sweeten deals with aggressive revenue sharing offers. It could potentially pay out more than 100 per cent of advertising revenues to publishers.

Google and Yahoo have tied up some of the largest online publishers into multi-year deals, however, most of the publishers in their ad networks can leave at anytime. Billions of dollars in online advertising revenues could switch to MSFT in an instant from GOOG and YHOO. It is a huge vulnerability for those companies.

A bonanza for publishers?

A battle for online publishers among GOOG, YHOO and MSFT could result in a bonanza for content producers. The revenue sharing agreements would favor the publishers and it could help some struggling newspapers and magazines.