Tuesday, October 30, 2012

How Windows 8 Could Save Microsoft’s Online Advertising Business

The press has called the launch of Windows 8 a “defining moment” for Microsoft as it struggles to transition to the new generation of mobile computing. The media, as well as Microsoft shareholders, are closely watching the launch and rightly so. The Windows Division is a cornerstone of Microsoft’s business model, responsible for 31% of the company’s profit in the third quarter. It’s assumed that Microsoft must protect the Windows business if it’s to survive.

The success of Windows 8 would not only defend the lucrative Windows Division, it could rescue another hugely important division of Microsoft business: online advertising. That business, known as the Online Services Division (OSD) comprised of Bing, MSN network, Atlas and Hotmail, has been a disaster. The division is most notorious for the ill-advised purchase of aQuantive advertising firm, a $6.2 billion blunder Microsoft wrote off this year. That aside, OSD continuously weighs down Microsoft. In the third quarter it operated at a loss of $364 million compared to the Windows Division profit of $1.6 billion. OSD was the only Microsoft division to operate at a loss in the third quarter.

Microsoft’s opportunity to turnaround its struggling advertising business lies within the new Windows 8 interface, known as Metro. The Metro interface does away with the old-school Windows icons and replaces them with web-connected “tiles” that dynamically pull in updates for things like weather, news, social and email. These tiles amount to desktop apps that, just like mobile apps, can be ad supported. Google, Netflix and The New York Times are among nine thousand companies that have already built desktop web apps for Windows 8. As the owner of the app store (called Microsoft Windows Store), Microsoft, like Apple, has implemented a 70:30 revenue share with developers. Microsoft hopes it can parlay Windows 8 penetration of the PC market into a position of strength in the online ad market.

For that strategy to pay off, Windows 8 must replace web browsing with dedicated apps. That’s exactly what happened in mobile computing and Apple turned that into a healthy business - reportedly paying out $2.5 billion to developers in 2011. The good news for Microsoft is that the PC app market may turn out to be a bigger business. Time spent with PC accounts for 26% of a consumer’s time compared to10% for mobile, creating a bigger inventory set.  

The app-based interface of Windows 8 is also a key component of Microsoft’s strategy to combat Apple and Google in the mobile and tablet market. If consumers download desktop apps for their Windows 8 PCs, they may want them available on other devices, boosting the appeal of Windows 8 phones and tablets. If Windows 8 is a success, Microsoft advertising business could become the company’s newest bright spot, instead of its perennial black eye.