Is Microsoft's Great Ad Experiment Over?

msadvertisingNearly two years ago, Microsoft CEO Steve Ballmer told a group of European advertising executives that he saw online ads generating one-quarter of Microsoft’s revenue within a few years. Yet in the quarter ended June 30, Microsoft’s Online Services Business turned in sales of just $731 million, some 5 percent of its $13.1 billion total. It was also the company’s worst-performing division, with an operating loss of $732 million. In other words, Microsoft spent $2 for every $1 it made online. So with the recent Yahoo search deal and today’s sale of its Razorfish digital ad shop, is Microsoft trying to get out of the ad business?

Microsoft picked up digital marketing shop Razorfish when it bought aQuantive for $6 billion in 2007 (four months before Ballmer made his one-quarter-of-revenue remark). Today, after months of rumors, Microsoft is selling Razorfish to the Publicis Group for $530 million in cash and stock plus a 5-year strategic alliance between the two companies. And with the search deal it inked with Yahoo last month, Microsoft gets to jettison its advertising responsibilities to Yahoo while it focuses on the technology — its search engine, Bing, and sales platform, AdCenter — side of things.

Microsoft has spent billions of dollars trying to create an online advertising business with no meaningful revenue or any profits to show for it. Steve Ballmer was even prepared to take Microsoft into debt for the first time in company history to buy Yahoo. Taken together, the Yahoo deal and the Razorfish sale beg the question: Has Microsoft made a strategic decision to move away from online advertising and back to software, which is the company’s bread and butter? But, then, if not advertising, what is Microsoft’s next big thing?

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