The Internet Services Disruption

According to a recent press release and a couple of leaked memos from Bill Gates and Microsoft CTO Ray Ozzie, it appears the folks in Redmond are gearing up to take on Google for a major share of the online ad market.

Dubbing the new wave of Web-delivered applications “The Internet Services Disruption,” Ozzie and Gates have announced Microsoft is changing course to address a world where consumers are used to getting software for free (or at least have a chance to try it for free). The company’s turning to advertising as a major revenue source. In fact, advertising as a revenue source is Ozzie’s first of “three key tenets that are driving fundamental shifts in the landscape.” He points out when it comes to software, “it may be possible for one to obtain more revenue through the advertising model than through a traditional licensing model.”

Microsoft’s begun by taking some tentative steps into the world of ad-supported Web services. Microsoft Live recently launched in beta, and Office Live will be launched as an invitation-only beta in early 2006. Microsoft Live delivers email, messaging, virus removal, and universal Favorites (bookmarks) access via the Web. Office Live will allow integration with existing office products as well as provide “a new set of Internet-based services for growing and managing a business online,” according to the press release.

Clearly, Microsoft is responding to fears that competitors such as Google, Flickr, Skype, Blogger, Firefox, and Sun’s OpenOffice.org are making inroads with ad-supported and Web-delivered models. It’s also finally recognizing the Web’s power isn’t just delivering software but also linking people together and providing access to information no matter where people are. It’s seeing what most of us in the biz have seen for years: ad-supported models work. And it’s reorganizing its business to meet the changes wrought by the Web, open source, social networking, freeware, and “try before you buy” models.

So what does this mean for us in the ad business? Clearly, Microsoft is the technology world’s 800-pound gorilla. It’s got a track record selling advertising into its various MSN properties, so the infrastructure for selling ads is already in place. It’s got the cash to promote the new services, a built-in user Office and Windows customer base, and an enormous, well-established community of developers who will welcome the new Internet services APIs (define) with open arms.

But will consumers welcome the new Web-based software as warmly? Although ad-supported software has a long history, much of it is sullied by association with spyware and other malware. Privacy will be a big concern for users, many of whom may wonder what Microsoft will do with the information it gathers from them if they use all these services. Advertisers will probably revel in the ability to deliver ads to users glued to Microsoft’s applications for hours at a time. But there’s not a lot of evidence about how effective such exposure will be.

It’s obvious from Microsoft’s information we’re about to enter into a new world when it comes to how consumers use the Web and how we can advertise to them. In some respects, application software’s ubiquity and utility make it a perfect vehicle for reaching hard-to-reach consumers. Yet many lessons we’ve learned about putting advertising into content may not apply when advertising is integrated into applications. Will consumers balk at context-sensitive ads that appear based on the kind of document they’re writing? What about creative? What level of color, animation, or even sound will be appropriate? How will we integrate software into our media mix? What are the best economic models?

All these questions remain to be answered. It’s probably foolish to think everything we’ve learned about how consumers react to advertising on the Web will apply to software. There’s been ad-supported software for a while now, but with Microsoft stepping into the fray, it’s a whole new (and disruptive) ballgame.

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