The tech giant sees advertising as a key focus, but can it match the revenue generated by licensing, Maisie McCabe asks.
Microsoft is trying to reinvent itself. It has diversified in many ways over the past ten years, not least with the purchase of Nokia’s handset business, which finalised in April. Now, the company’s new chief executive, Satya Nadella, a 22-year Microsoft veteran, suggests advertising is going to feature heavily in its reformed business model.
Frank Holland, the corporate vice-president at Microsoft Advertising, which is responsible for the company’s ad business, sees this change as a real opportunity both for his team and for brands. After three decades of making a lot of money from selling licences of its Windows operating systems to electronic manufacturers, Microsoft has started to give it away for free for screens less than ten inches.
Google has demonstrated that you can amass a considerable fortune by giving things away for "free". Microsoft is not the first to try to emulate this (see Facebook, Twitter et al) – even if it already has a clear (though stagnating) paid-for revenue stream.
Microsoft made more than $14 billion (£8.2 billion) from licensing in the first quarter of this year alone. Yet, according to Holland, Nadella believes things have changed, "market share is all-important" and ads can be "an alternative way of making money".
In Cannes, Microsoft loudly demonstrated its increased commitment to advertising. Although the company has been attending for 14 years, it signed up to be the festival’s technology innovation partner this year. Microsoft Advertising UK, now run by Owen Sagness, its general manager, uses Cannes as an opportunity to build relationships with media agencies.
Even by Cannes standards, Microsoft’s budget was big. Its party – featuring the DJ Calvin Harris – was one of the week’s hottest tickets. Sagness notes that, in addition to showcasing products, Microsoft uses the event to "strengthen" its networks.
Amid the relationship-building, Microsoft is trying to show it can reach people at the "moments that matter" through products such as Outlook.com, Windows 8, Skype and Xbox. "The way I try to think about it," Holland explains, "it is a case of where people spend their time: be it at work, at play and every moment in-between. Because, if you look at our competitors, what they offer is a pretty monolithic way of delivering a consumer to a brand."
Holland says Microsoft can offer a "very complete 24/7 way of delivering a consumer to a brand". He cites a US Lexus campaign that is shown in episodes to logged-in users as they travelled through its products. It featured "wingsuit artists" as they jumped out of planes, glided through the air and landed.
"Consumers got to the point where they were eagerly awaiting the next instalment of the series," Holland says proudly.
It is clear that advertising has become more important to Microsoft. In the first three months of 2014, the company posted a 16 per cent (or $144 million) increase in online ad revenue, driven by search – putting the total figure for the quarter at $900 million. Display ad revenue actually declined by 24 per cent during the same period.
It will take a lot of Lexus-style innovative campaigns to bring in the $56 billion-plus a year generated by licensing, but Microsoft’s new direction seems to be set.
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