Update: Microsoft chases search ad revenue

Microsoft launched on Thursday its online advertising sales platform for search engine advertising in the U.S. at an event in Seattle, the company said. The move opens the way for Microsoft to challenge Google's business model for search advertising revenue.

AdCenter will now be the sole platform serving up advertisements on MSN, Windows Live, and other Microsoft Web sites, Microsoft said. Microsoft has previously relied on partners like Yahoo to sell advertising on its behalf, said Nate Elliott, an analyst with Jupiter Research.

The launch of adCenter in the U.S. is an important milestone for Microsoft, which says it is shifting from being a software company into a provider of online media through sites like MSN and Windows Live.

AdCenter works in a similar way to Google AdWords and Yahoo's advertising platform, where advertisers set the amount they want to pay each time someone clicks on their ad. Pledging a higher fee than other advertisers delivers a higher placement of the ad on the page. The ads are displayed on pages where users search for certain words that are chosen by the advertiser.

AdCenter uses a slightly more intelligent targeting system than the others, targeting ads based on user demographics in addition to the words they type into the search field, Elliott said. If it works better, advertisers will be drawn to it, he said.

Initially at least, adCenter is likely to be very attractive to advertisers, Elliott said. Because at first there will be a smaller number of advertisers using the platform and bidding against each other, the prices will be low, he said. "In the early days, there will be some bargains," he said.

However, Microsoft will have to improve the volume of users on its sites if it is to grow adCenter into a major revenue earner, he said. Microsoft "is not representing nearly as many searches as Google and Yahoo and that's their biggest problem," he said.

Microsoft said it will continue to evolve adCenter to become a one-stop shop for advertisers to buy search, contextual or display ads across Microsoft's online sites including Windows Live Mail, Windows Live Spaces, Windows Live Safety Center, Windows Live for Mobile, Office Live, Office Online, and the Xbox Web site. The service will also let advertisers track their ad campaign performance.

In fiscal year 2007, which begins on July 1, Microsoft plans to spend about $1.1 billion on research and development in its MSN Internet unit, which includes adCenter, said Steve Ballmer, Microsoft's chief executive officer, at the MSN Strategic Account Summit on Thursday. That is up from $500 million in fiscal year 2005, he said.

"This is really a platform play. We need an ecosystem, as we call it, around our Live platform, just as we needed an ecosystem around Windows," Ballmer said at the event, which was made available in a replay on Microsoft's Web site.

As part of the adCenter launch, Microsoft also announced that it bought DeepMatrix Corp., a provider of Web analytics for online marketers and publishers for an undisclosed sum. Microsoft plans to use DeepMatrix's products to offer Web analytics applications as part of adCenter in the future.

Microsoft also announced the acquisition of Massive, which specializes on placing advertising in video games. Among other things, Massive allows developers to place items bearing brands, such as soda cans and billboards, at natural places within game environments, according to Microsoft. The company plans to use the Massive technology to deliver in-game ads for Xbox Live, MSN Games and MSN Messenger. It is exploring ways to integrate the technology with Windows Live and adCenter.

Microsoft first launched adCenter in France and Singapore in 2005 after announcing the development of the platform earlier last year. Some advertisers in the U.K. will be able to test the service starting in June, Microsoft said.

(Juan Carlos Perez in Miami contributed to this story.)