March 16, 2005
SEATTLE - Following the lead of Google Inc. and other online competitors, Microsoft Corp. plans to start selling sponsored links on its search Web pages.
Microsoft's move into this potentially lucrative area capitalizes on detailed demographic information the software company has gathered over the years, raising privacy concerns for some.
It also comes as Microsoft continues its aggressive effort to catch up in online search with market leaders Google and Yahoo Inc.
Google, the search leader, is thriving in large part because advertisers are willing to pay more to have their Web site links displayed prominently alongside Google's regular search results.
Microsoft also displays such sponsored links next to its regular results, which are based on a formula that ranks Web pages according to such factors as relevance, but has until now outsourced the bulk of the job of selling sponsored links to Yahoo.
Microsoft's paid search platform will provide detailed - but not personally identifiable - information, such as gender, age and location, for many people who use its search engine, allowing advertisers to target their ads to a specific audience.
Yusuf Mehdi, a corporate vice president with the MSN unit, said Microsoft has gathered this personal information by tracking users who have logged into its Hotmail e-mail program or other Microsoft Web sites, and then matching the data they provided with publicly known demographics, such as average income for a particular ZIP code.
The company uses computer addresses to track who's who, but Mehdi said it will not release names or other personally identifiable information.
For example, a car company could choose to have Microsoft display its sports car link when a man types in certain keywords, and a link to an SUV model when a woman uses the search criteria.
Microsoft would then provide the company with detailed information about the demographics of the people who clicked on its ads.
Analyst Niki Scevak with Jupiter Research said Microsoft's detailed profiles, combined with plans to eventually also sell regular ads on other MSN Web sites through the same system, could give the company a significant edge over its rivals in the long-term.
But although the personal information is anonymous, analyst David Garrity with Caris & Co. said the detailed profiles could dissuade some consumers from using the search engine.
"This all very much smacks of Big Brother," Garrity said.
Chris Hoofnagle of the Electronic Privacy Information Center said Microsoft's efforts are part of an industrywide trend of using personal information to garner advertising dollars.
Google scans content to plant relevant ads for its free e-mail service. Yahoo uses some personal information gathered from its customers to target advertising on the Yahoo network, but it does not provide that service for outside clients like MSN.
"Steadily, the Internet is becoming more invasive," Hoofnagle said.
Microsoft said it will test the paid search product in Singapore and France over the next six months, with plans to eventually expand into other markets.
In the France trial, Mehdi said Microsoft's paid search technology will complement Yahoo's on MSN sites. But Mehdi said it was too early to say what might happen after Microsoft's current contract with Yahoo runs out in June 2006.
Garrity said Microsoft also has other hurdles before it can catch up with Google and Yahoo.
Microsoft has made its name selling software, he said, and the new model of giving a product away and making money from advertising requires a steep learning curve.
Microsoft also has not yet done a good enough job of showing consumers why its MSN search engine is different enough from Google's and Yahoo's to warrant switching loyalties, he said.
"Microsoft is going to have to differentiate msn.com or MSN Search as a destination for consumers to come to," Garrity said.
Microsoft's paid search effort will be unveiled Wednesday at the company's annual MSN Strategic Account Summit, geared toward the online advertising industry.
At the same event last year, Microsoft Chief Executive Steve Ballmer conceded that one of Microsoft's biggest missteps was not to use its in-house research and development staff to create a proprietary search engine earlier.
"That's probably the thing I feel worst about over the last few years - not making our own R&D investment," Ballmer said then.
The company has since worked hard to play catch-up, including formally launching its own Internet search engine a couple of months ago.
At this year's event on Microsoft's Redmond campus, speakers include Google CEO Eric Schmidt and Barry Diller, CEO of IAC/InterActiveCorp. But in a switch from previous years, Microsoft is not allowing journalists to attend the meeting.