Microsoft has sometimes been described as more of a legacy player than an active tech giant – there’s no ‘M’ in ‘GAFA’ after all. But in recent months, the company has taken centre stage in the tech world through a number of notable acquisitions.
The buyout of Activision Blizzard in January for $68.7 billion made headlines in the mainstream press. Activision Blizzard is the games manufacturer behind titles like Call of Duty, World of Warcraft, and Overwatch.
But for those in the advertising industry, the acquisition of Xandr at the very end of last year was perhaps even more interesting. Microsoft acquired the end-to-end ad tech outfit from AT&T for an undisclosed fee in December 2021.
Microsoft already had a very sizable ad business without Xandr. In its latest earnings call, the company reported advertising revenues of $10 billion for Q4 2021, including LinkedIn.
Some Microsoft products like Bing, Edge and MSN may seem somewhat passé, but the tech giant still reaches a huge audience, which also spans Xbox, LinkedIn, and Outlook. The company reported search ad revenue of $8.53 million for the year ended 30 June 2021.
All the ingredients
Despite the size of its ad business, Microsoft has not really been seen as a true rival for Google and Facebook in the advertising sphere. But John Cosley, senior director of advertising at Microsoft, says there are bigger things in store for the company’s ad offering.
“Our Microsoft Advertising team has been working hard to create the most value for our clients and partners to pursue our bold ambitions, including the upcoming potential with Xandr, continued momentum with our PromoteIQ offering and Microsoft Audience Network solution, and ongoing innovations and market expansion for our advertisers across search and our audience network,” he said.
While Microsoft is already generating a lot of ad revenue, there’s plenty of room to exploit untapped potential says Shiv Gupta, founder of U of Digital, a company that offers education for the advertising world.
“Microsoft has previously been very focused on a couple things. One was native formats, across their own and operated inventory. They’ve also been very focused on their data and their ID solution. And that was it,” said Gupta, “They weren’t really using that tech to tap into external exchanges and apply their data elsewhere.”
Now with the acquisition of Xandr , Microsoft is not only strengthening its reputation as a company with a stake in the ad tech world, but also gaining capabilities on the demand-side and supply-side.
“Xandr helps them on both sides of the equation. On the supply-side it helps them monetise their ID and data better, because in the past they weren’t selling that outside their own properties, and now they can bring that outside through Xandr. And then on the demand side, it helps them access more budget,” said Gupta.
Microsoft has history with Xandr, having been an early investor in, and flagship client of, AppNexus. AppNexus was acquired by AT&T in 2018 and placed under the Xandr banner.
While the companies have been working together for a number of years, Shiv Gupta believes the recent acquisition will form a crucial ingredient in waking the sleeping ad giant.
“I’m a big believer in the advertising flywheel. Microsoft has content, they have data, and now they have tech, which they didn’t really have before. That’s something that all the walled gardens have and which is really powerful,” he said.
Microsoft have built their content offering further through the acquisition of Activision Blizzard. It also builds out their audience, something which Cosley identifies as a key area for Microsoft’s ad business.
“In the year ahead, you can expect to see us sharpen our focus in a couple of key areas – especially around data, audiences and international expansion,” he said.
Alongside gamers, Microsoft says it offers advertisers access to a fairly unique audience through properties such as LinkedIn and Outlook.
“We have an audience of more than a billion people who sit at the intersection of work and life – we call it the “workday consumer”,” said Cosley, “These audiences have higher purchasing power, are more likely to make a purchase online, and are more likely to engage with advertising to discover new products.”
A changed game
Microsoft does not have the strongest history in ad tech. In 2007, the company acquired advertising company aQuantive for $6.3 billion – then the biggest acquisition Microsoft had ever made. In the years following, Microsoft’s ad business proved largely unprofitable. In 2012, the company announced that it would take a $6.2 billion writedown, largely due to the aQuantive acquisition five years earlier.
Microsoft and Xandr will be hoping that history doesn’t repeat itself. Shiv Gupta says that things have changed at the company since then, starting with a change of CEO.
“Satya Nadella has been a really good CEO. He has not screwed up acquisitions, he’s been really strategic and thoughtful about the moves he makes,” Gupta said, “And he’s accelerated their market cap to become the second most valuable company in the world.”
In the ten years that have passed since that 2012 markdown, the ad tech industry has seen dramatic changes. The market has matured, and with that has come new challenges, particularly around privacy.
Microsoft’s John Cosley says the company is on a mission to build “a trusted, free and open web where everyone can thrive – customers, advertisers, publishers and platforms alike”.
“A critical part of this is data. With the impending deprecation of third-party cookies, strong, permissioned first-party data will be more important than ever,” Cosley said.
Shiv Gupta says that Microsoft is primed to take advantage of the post-cookie era.
“Data privacy makes walled gardens more powerful. And Microsoft should theoretically be one of the most powerful walled gardens, but they haven’t had ad tech to really tap into that,” he said, “Now that they do, data privacy moves should actually empower them, just like it’s empowering Google and some of the other walled gardens.”
And Microsoft, somewhat counterintuitively, could potentially benefit from the current regulatory landscape. Once upon a time Microsoft was the biggest game in antitrust regulators’ sights. Nowadays however the FTC and Justice Department are more focussed on Google, Facebook, and Apple (despite the fact that Microsoft has a higher market cap than two of those three companies).
Microsoft won’t be banking on help from antitrust regulators. Given its size, Microsoft could just as easily see its own plans hampered by antitrust investigations – and indeed still needs regulatory clearance for its acquisition of Activision Blizzard. But the current scrutiny of Facebook and Google could help it play catch up.
“In the US, the government is obviously looking at Google for having a monopolistic control over the ads business,” said Gupta, “In the wake of that we’ve seen companies like Amazon blow up, and others like TikTok grow really fast. Microsoft has all the same kind of assets, so why not them too?”
