Quick thoughts: Microsoft’s ad business

Given today’s news about Microsoft selling its display ad business to AOL and in turn replacing Google as the search advertising provider for AOL, I thought I’d quickly revisit some of my earlier analysis on Microsoft’s ad business.

By way of background, Microsoft has never directly reported the financials for its advertising business, but it has provided enough detail in its past financial reporting that I’ve been able to build a pretty good picture of this business over time. This past quarter, perhaps as a precursor to today’s announcement, Microsoft stopped providing any sort of information about its display ad business, but here’s a quick view of my estimates of Microsoft’s two major ad revenue streams over the past couple of years:

Screenshot 2015-06-29 16.02.44As you can see, Search advertising has been growing very well indeed, almost reaching the $1 billion per quarter mark last quarter, and likely to hit it very shortly, especially with the help of the AOL deal. By contrast, though, Display advertising has been heading south for some time now, and was under a quarter of a billion in revenue for each of the last two quarters of 2014. The split between the two, then, is roughly as shown in the chart below:Screenshot 2015-06-29 16.04.58In other words, search advertising was not only vastly outperforming display advertising in growth terms, but as a percentage of Microsoft’s overall online advertising business. As such, it’s made sense for some time for Microsoft to jettison this part of the business in favor of focusing on the part that’s working: search advertising. Part of the reason for the disparity between the two is general industry dynamics – display has been struggling for other companies too, while search continues to be one of the most effective forms of advertising and to command commensurate rates.  Microsoft’s display ad business, though, was also sub-scale, and hadn’t made the transition to mobile devices and native advertising effectively. Search, meanwhile, has benefited both from positive industry trends and the growth of Bing and Yahoo’s growth in search market share in the last couple of years.

The impact on Google

AOL’s decision to switch from Google to Microsoft is not enormously impactful on Google by itself, but in the context of Firefox’s earlier switch to Yahoo as its default search engine in the US, and the potential for a much more significant switch away from Google by Apple sometime this year, it’s part of a drumbeat of bad news for Google. One of Google’s challenges at this point is that it’s come to compete with many of its erstwhile partners, with Apple as perhaps the most striking example, and it’s arguably starting to pay the price for that strategy.