Ads in Microsoft Apps: Dawn of an Era?

Microsoft has seen the future and it is ad-supported.

The rallying cry of the digital downloader, “Content wants to be free,” now applies to software as well, as a growing number of businesses and consumers say no to paying for applications they can get free online. That’s thanks to Google, to Yahoo, to smaller players like Weatherbug and yes, to Microsoft as well.

While Microsoft has everything to lose by turning its old licensing model on its head and putting its fate in the hands of media buyers, the company appears ready to do just that. How this trend will play out is far from settled. Nobody, not even Microsoft, knows the extent to which advertising will permeate popular applications.

The strategy is also rife with uncertainties from the advertiser’s point of view. What’s the value of an ad in a spreadsheet? How will it be targeted? Will the consumer even see it? These questions will ultimately be answered through development, testing and analysis, but marketers have at least some experiences they can apply.

After all, advertisers have already embraced some ad-supported software. But the most popular of these have largely have been messaging-related applications like Microsoft’s own Hotmail, America Online’s AIM instant messenger and Google’s Gmail.

But what about applications like Excel, Word and PowerPoint? Can these perform as ad vehicles?

JupiterResearch analyst Gary Stein sees in the model an inherent contradiction between the requisite intrusiveness of advertising on the one hand and the user experience on the other.

“You’re in a different mode when you’re consuming different kinds of media,” he said. “You have an expectation of ad-level, and ultimately that’s your acceptance of it. So if all of a sudden you’re using Word and a big pop-up appears, you’re going to be offended and turn it off.”

On the flipside, Stein said, “If it’s in an innocuous place, I’m wondering if the modality will even allow it. Are you going to see the ads? Are you going to be accepting of them? It’s obviously unexplored territory.”

Others agree Microsoft has a lot of careful testing to do around the user experience.

“You have to have something very special and defensible,” said Eric Valk Peterson, Agency.com’s VP of media services. “Otherwise people just move to the next thing, either because of too much advertising or [worry about data].”

“I don’t know if someone’s going to want a blinking ad in the upper corner of their spreadsheet, or want to watch a :30 before opening their PowerPoint presentation. I do think there are opportunities. It depends very much on what the software is,” he said.

Jeff Lanctot, VP of Media for Avenue A / Razorfish, sees the opportunity, as well, and seems to think Redmond can pull it off.

“MSN and Microsoft, from what I’ve heard from them, are keenly aware of the importance of user experience, that gives me hope that the advertising will achieve the correct balance,” he said. “If there is an appropriate way to serve ads beyond the Web page, they’re the ones to do it. They’re trying to reinvent what people think of when they think of advertising on the PC.”

Another important issue that Microsoft has yet to address directly is that of targeting. Common sense suggests an ad in a business document can’t reliably indicate consumer interest like a travel-themed article can.

That’s where the ads-in-software concept could dovetail with Microsoft’s unabashed pursuit of behavioral and demographic targeting.

“I think it could present some new targeting options,” said Agency.com’s Valk Peterson. “With the increase in software and digital touch points that folks like Google and Yahoo are getting into now — the desktop, mail, IM — they’re essentially expanding their suite and providing a set of compelling tools that are free and sync up together. It increases the number of touch points they have… and feeds into a repository of data.”

Microsoft is doing the same. You use this software for free, will be the message to users, and in exchange we’ll deliver ads based on your behavior elsewhere on our network. Hmm. Sound familiar? It’s the adware value proposition, originally brought to you by Claria, WhenU and 180Solutions.

“It’s similar to the adware model,” said Lanctot. “In theory, the controls and distribution around it would be different and better when Microsoft is running the program. Microsoft would probably cringe to hear me make the comparison, but the reality of the model is that you’re shown advertising in exchange for free software and services.”

As Microsoft CTO Ray Ozzie hinted in an October memo leaked to the press, there’s naturally a limit to the kinds of software that can be supported with ads. JupiterResearch’s Stein put it this way:

“You get to this point where the desire of consumers to pay for things goes beneath advertisers’ desire to pay to reach those people,” he said. “E-mail is the first to go. So imagine the spectrum, with email at one end and a high-end drafting application at the other end. Where is that needle moving to?”

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