• by Brian McAndrews , February 1, 2008

On the eve of today's offer to acquire Yahoo, Brian McAndrews, head of Microsoft's Advertiser and Publisher Solutions Group, and former CEO of its aQuantive division, circulated the following "state of Microsoft's advertising union" to key stakeholders, including Online Media Daily. In light of today's offer, we are publishing it unedited. .

I think it is safe to say that 2007 was a historic year for aQuantive, as we became the largest acquisition in the history of Microsoft. As a result, we enter 2008 as a combined entity, excited to take on the challenges and opportunities of the digital advertising world as the Microsoft Advertiser & Publisher Solutions (APS) group.

Of course, several key milestones happened in addition to the Microsoft acquisition, so I thought it might be helpful to start by sharing a brief recap of what we were up to before the acquisition closed and highlight the momentum we continue to generate as the APS group within Microsoft. A lot of work has gone into shaping this new organization and our integration efforts are paying off.

Looking back

In what would be aQuantive's final earnings announcement on May 8, we enjoyed record growth for aQuantive and its three business units: Atlas, Avenue A | Razorfish and DRIVEpm. Each performed extremely well, with 42% organic growth and revenues of $142.6 million, an increase of 55 percent over the first quarter of 2006. Some of the top news highlights from our teams included:

• Abroad, Avenue A | Razorfish made an investment and formed a business alliance with Dentsu's digital subsidiary Digital Palette in Japan, and acquired Duke in France.
• We introduced Atlas AdManager Version 10 to help digital publishers increase revenue from under-utilized impressions. This was our first innovation resulting from our Accipiter acquisition in December 2006.
• Atlas signed a global partnership deal with Media Contacts, the interactive arm of Havas, to support its global network, comprised of 30 cities in 23 countries.
• aQuantive was named #9 in Advertising Age's list of the World's Top 25 Marketing Organizations - the first interactive operating company to crack the top 10.
• Avenue A | Razorfish was the No. 1 interactive agency in Advertising Age's list of top interactive agencies.

The day Microsoft closed the acquisition of aQuantive on Aug. 10 was a pivotal moment not only for us but for the industry. Our new business group is now responsible for growing Microsoft's ad platform to better serve the advertiser and publisher community. Under my leadership, the APS team helps build and market all components of our ad platform, including Atlas, DRIVEpm, MSNDR and Microsoft adCenter, along with emerging media types such as in-game (Massive) and mobile ads (Screentonic). It also includes Avenue A | Razorfish, one of the largest global interactive firms, led by CEO Clark Kokich.

Our vision is to make buying and selling media simpler, smarter and more cost-effective across media and devices in the Microsoft network of properties and beyond.

I am proud of the fact that we were able to secure some quick, yet significant wins following the deal close. We believe these wins communicate to the market that we are gathering momentum even as we continue to develop our roadmap for the year ahead. Here are a few:

• Atlas secured nearly 60 publisher wins in the second half of 2007, including significant deals with IAC, The Associated Press and Viacom.
• DRIVEpm opened offices in Australia, Germany, France and Italy last year. Combined with Microsoft's owned and operated inventory and the recent syndication deals we recently made, we are firmly within the top five networks worldwide when evaluated on reach and available impressions.
• Microsoft's investment in Facebook in November continues to position us as a strong and viable contender in the global digital advertising market.
• Microsoft adCenter launched its contextual advertising offering, ContentAds, as well as a beta of Project Gatineau, its new web analytics offering.
• Avenue A| Razorfish won 11 W3 awards, which recognize the power of web creativity, Amnesia, our Australian agency, won interactive agency of the year, and Forrester Research cited the AA|RF as an interactive marketing leader among only six other agencies.
• To finish off 2007, we signed a multi-year deal with Viacom (alluded to above) to be their ad syndication, discretionary inventory and content distribution partner.

Looking ahead

While search has been the main driver of the blistering growth of online advertising in the past, at least partially because of the "last ad clicked" performance measurement standard (pioneered by Atlas in the late 90s), we do not believe this will necessarily be the case in the coming years.

The current system for tracking ad conversions , while the best available for years, is not optimal because it gives all credit to that last ad seen or clicked - often a search engine - and not any credit to other ad units the consumer may have seen prior that helped influence the user to seek more information about the advertiser. Thus, Search has gotten more than its share of the credit, but that's starting to change. We'll be making significant inroads here in 2008 through our continuing ground-breaking work in the area of "conversion attribution," a new Atlas technology offering that will do a better job of "giving credit where credit is due."

That said, we're not discounting the importance of Search as it continues to drive a lion's share of digital advertising budgets. Our goal is to help advertisers and agencies make their Search campaigns as relevant, targeted and highly converting as possible. We've made great strides toward this end, and will continue to make deep investments in both our Live Search engine and Microsoft adCenter to improve the value of our Search offerings for customers.

We're also excited by the opportunities we'll see in emerging media formats this year.

Online video advertising will experience significant growth. In fact, video is expected to be the fastest growing ad category on the web for the foreseeable future. The alignment of factors including broadband penetration, the ubiquity of connected devices, audience shifts and video ad-serving advances mean online video is growing in popularity with both consumers and advertisers. Atlas was the first technology to integrate in-stream video into its product; we expect to continue to lead the way in this area.

In-game advertising will also begin to make meaningful inroads. With seven-figure deals and the metrics to make them pay, dynamic in-game advertising is growing up as a medium for branding and selling. With its unique insights into this non-interruptive, entertainment-oriented, highly interactive and user-directed environment, our subsidiary Massive is leading the way for marketers of every size and sector to incorporate games into multi-channel campaigns.

Mobile advertising is still a nascent market, but one with huge potential. Here you'll see us invest in our Atlas toolset, working very closely with our subsidiary ScreenTonic and our colleagues in Windows Mobile, to make significant progress with new mobile advertiser and publisher tools, mobile syndication, and new advertising clients.

For advertisers specifically, the future of digital advertising is not about creating a video ad out of a recycled TV spot or designing a gimmicky web site camouflaged as a social media experience. Avenue A | Razorfish's goal is to help advertisers get their brands into more conversations so they can empower consumers to share brand experiences with each other. Looking ahead, Avenue A | Razorfish will continue to help advertisers build relationships with their consumers through the power of social media. And be sure to look out for the agency's 5th annual Digital Outlook Report at the end of February, which outlines media spending for the previous year and provides expectations and trends for 2008.

Through our combined resources, technical expertise and marketing experience, APS will deliver in 2008 on its unique offering for advertisers and publishers. It will no doubt be another incredible year and a fast ride.

McAndrews is SVP Microsoft Advertiser & Publisher Solutions.