If you’ve ever wondered whatever possessed you to shell out hard-earned cash for that huge machine that purportedly vibrates your abs into a six pack, you’ve got an idea of what the folks at Microsoft have been going through as they took a discerning look at the online display advertising business that was supposed to put them in fighting trim against Google. It essentially declared yesterday that its $6.3 billion acquisition of aQuantive is worthless by announcing a $6.2 billion “goodwill impairment” write-down that it says is "substantially the result" of buying the firm in 2007.
Here’s how the company actually puts it: "While the aQuantive acquisition continues to provide tools for Microsoft's online advertising efforts, the acquisition did not accelerate growth to the degree anticipated, contributing to the write down."
“The charge underscores the difficulty Microsoft has had branching out into other markets,” writes Andrea Chang in the Los Angeles Times, “as well as the challenge many big tech firms face as they try to find viable ways to drum up online advertising dollars.” The charge is expected to wipe out any profit when Microsoft’s results for the fourth quarter are announced on July 19.
This doesn’t necessarily mean that Microsoft's online business, which is centered on the Bing search engine, is unsuccessful, Crowell, Weedon & Co analyst James Ragan says, “but I think it's fair to say that aQuantive did not deliver, did not contribute to that business like they were hoping."
Microsoft made the acquisition “when technology and traditional advertising firms were desperately seeking footholds in the world of Internet display advertising,” write Quentin Hardy and Michael de la Merced in the New York Times. “At the time, aQuantive was the biggest company Microsoft had bought in its history.”
But Internet strategy moves at warp speed, of course.
“In a sign of how little display now means to Microsoft, the Windows unit is planning to roll out the next version of Internet Explorer with Do Not Track automatically turned on, a setting that disables many of the ad capabilities that the team at the former aQuantive worked so hard to build,” writesAd Age’s Michael Learmonth.
Although the Online Services Division business has been improving, Microsoft says “its expectations for future growth and profitability are lower than previous estimates,” although it has positive news about Bing.
“Bing search share in the U.S. has been increasing, revenue per search (RPS) has been growing, MSN is the No. 1 portal in 29 markets worldwide and the company’s partnership with Yahoo! has continued to expand geographically,” the statement reads.
The write-down says“that Microsoft still is not really able to effectively challenge the big kahuna of Internet advertising, Google,” Therese Poletti writes in a MarketWatch commentary. “It may also raise additional questions about the value of online ads in general.”
“Microsoft executives have said they are working to close a gap in the amount of money the company makes from each search on Bing, compared with the revenue Google makes from each search,” writes the Wall Street Journal’s Shira Ovide.
Google’s share of U.S. Web-search ad revenue is expected to grow from 74% in 2011 to 77.9% in 2012, according to eMarketer estimates cited by Ovide. Microsoft’s share, including searches it performs for Yahoo, is expected to drop to 11.5% from 13.7% in 2011.
Meanwhile, Microsoft separately announced a price designed to encourage one and all to upgrade to Windows 8 when it rolls out later this year, although some see the move as more aggressive than others do.
“Microsoft has apparently grown some serious stones,” David Gewirtz observes on ZDNet. “First, the company gave OEMs something to hold meetings about when the Surface twins were announced. Now Microsoft is upping the ante by driving a great big stake into the heart of Windows XP, Vista and Windows 7 hangers-on by offering a $39.95 upgrade from pretty much anything to Windows 8 Pro.” Gewirtz concludes: “Ballsy move, Ballmer.”
On the other hand, “I would call this a fair price, but aggressive? No, given what other operating system upgrades cost,” NPD Group analyst Stephen Baker tellsComputerworld’s Gregg Keizer. “Many are free or cheaper than that.”
As far as the online advertising business goes, “AQuantive didn't work out, but everyone already pretty much knew that," BGP Financial Partners analyst Colin Gillis tells the AP’s Michael Liedtke on SFGate.com. “None of this means Microsoft is backing away from online advertising -- mainly because it can’t,” as Robert Hof writes on Forbes.
Put another way, now that they’ve seen the light and shed the weight, it’s time for Microsoft to get working with some serious abdominal holds, crunches and planks.