AdExchanger: How Microsoft Almost Won Digital Advertising

Today’s column is written by Eric Picard, vice president of strategic partnerships at MediaMath.

The announcement last week that Microsoft is effectively selling off its display advertising business to AOL made me a bit nostalgic. I was recruited by Microsoft as it geared up for a major foray into the advertising space.

Although I only worked there from 2004 to 2010, I think my perspective on the company’s evolution and decision to leave the display advertising business holds some value.

When I joined Microsoft, there were 20 people on the product planning team responsible for advertising technology products. The engineering team for ads was about 400. By the time I left in late 2010, the business team had grown to more than 300, and the engineering team had more than 1,500 heads. And that doesn’t include the sales and marketing organizations.

While I was at the company, we acquired seven ad tech companies, reviewed hundreds and engaged on about a dozen. We invented whole swaths of technology that the market, in general, isn’t aware of. We drove massive innovation and investment in the space. We could have won it all.

Moving To Microsoft

I had started one of the early ad tech companies – Bluestreak – in 1997. We had raised a large war chest of venture funding – and acquired several companies after the dot-com bubble burst in 2001. In late 2004 I was recruited to Microsoft by Mike Hurt and Joe Doran.

During my interview, Joe disclosed that Microsoft had come to the realization that digital advertising was critical to its future. He showed me printed slides showcasing Google’s revenue growth, funded completely by ads. Google would soon make more money than Microsoft from each copy of Windows.

In no small part, this revelation drove the decision to fund Microsoft’s search product, especially the advertising engine behind it, referred to as Project Moonshot at the time, later to be called adCenter. AdCenter was about a year from launch, the center of innovation and scale for the company. Microsoft’s broad analysis showed that digital advertising was critical to the ongoing funding of software, which was increasingly being bonded to the Internet. Joe needed someone who understood the ecosystem and could help drive the future strategy of the company. He laid out an enticing opportunity: I could help drive the investments that Microsoft would make across the ad technology landscape.

Joe described a scenario where digital advertising was potentially a core monetization mechanism for Microsoft software products that would either serve as their primary revenue source, enhance revenue, or offset lost revenue from piracy.

Over the course of the next few years I met an extremely impressive cast of characters.* They ranged from the core business team under Joe to some of the most brilliant engineers I’ve met and executives from whom I learned an immense amount about business and technology.

Microsoft’s Not-So-Secret Weapon: Engineers

When I talk to people about the value of world-class engineers, they often fundamentally misunderstand what I’m talking about – because they’ve never worked with world-class engineers.

There’s a whole set of assumptions that are wrong, such as the belief that engineers build what business people ask them to build. Or that engineers are socially goofy and can’t understand business issues. That engineers would never get anywhere without business people who translate the market to them.

The engineers who I worked with at Microsoft – especially at senior levels – were in many cases geniuses. While there was the occasional social stumble, this was less common than you’d expect. And any of the senior engineering leaders could easily transition to CEO or non-engineering leadership roles at most companies – and many have.

In the first few weeks at Microsoft, I met a handful of engineers with whom I’d form long and fruitful relationships. Tarek Najm was the engineering leader who started the adCenter team. He’s one of the most brilliant people I’ve met – extremely inventive, high-energy and curious. Tarek took the lead in trying to catch Google’s AdWords product. With a relatively small team, he built a superior monetization engine from scratch.

One of Tarek’s lieutenants on adCenter was a program manager named Brian Burdick, who became one of the great unsung heroes of the advertising technology space. Brian is the one who ultimately invented RTB.

Tarek’s lead engineer for display advertising was a wiry man named Phani Vaddadi – who brought with him his two lieutenants, Alam Ali and Brian Tschumper. These three guys formed a back-room brainstorming group with me. Among other things, the four of us came up with some ideas around ad-funded software that we incubated and brought to market, which ultimately became the mechanism by which ads were delivered into Xbox.

There were also numerous trials in a variety of devices and applications, from the ill-fated Zune to trials of ad-funded Office and Windows in various markets across the world where piracy was an epidemic.

During my first year, we launched new brands, including Windows Live – if you can remember that one – and innovated on advertising formats. I crafted a set of principles regarding when and what kind of advertising was appropriate for which content experiences. It was based on the idea that modality of the user experience should drive whether we showed ads at all, such as when a Hotmail user is composing an email, or whether the ad could be disruptive, such as covering the page where a user is reading an email.

2005-2006: The Plan And Beginnings Of Execution

In addition to being responsible for overall ad technology strategy, I led a group focused on “emerging media.” This included mobile, OTT and addressable TV, video game advertising, device-based advertising, ad-funded software and a category known as “other.” Working with Joe, his direct reports and some of their direct reports, we crafted a comprehensive vision and plan for winning the ad technology space.

The strategy that evolved was pretty comprehensive and clear: build, buy or partner analysis on all opportunities in the space. Where we had existing investment in heads and technology, we’d increase our investment in alignment to revenue opportunity. We would acquire other companies in the space that owned strategically valuable components and held significant market share. We’d partner when there were assets that were not strategically important to own – but were needed for our customers or to operate our business.

The overarching vision was to be the platform of record for buyers and sellers, and use the scale of our technology investments to drive prices down while claiming a small percentage of all transactions. Our vision was that we’d automate buying and selling, and build direct connections between buyers and inventory owners wherever possible.

In 2005, Joe asked me to pick up all the M&A coordination work. Over the next few years, we reviewed hundreds of deals and pursued about a dozen.

Video

I engaged on a massive video and television advertising project that went through various iterations for nearly three years. Steve Ballmer had asked Joe to rationalize all the video advertising projects across the company and ensure that we had one cohesive strategy. Within three weeks I found six major initiatives across three divisions of the company that all were trying to build a comprehensive video or television advertising product suite as a standalone. It took several quarters, but eventually we rationalized all these projects and packaged them up.

I suggested that we should either partner or create a joint venture with broadcasters, networks and studios to offer a digital version of their content over the web. It would be integrated into all of Microsoft’s consumer-facing video consumption assets, including Xbox, Windows MediaCenter, Microsoft TV, Windows MediaCenter and MSN Video. This was before YouTube, while Netflix was still mailing DVDs. Our various business discussions with broadcasters may well have been the kernel of the idea for Hulu.

We had significant investment across numerous divisions and technologies – and we supported video advertising for one of the largest digital video providers, MSN Video. We invested in software to run video ads in any Microsoft product or device.

In-Game

On the video game front, Kevin Browne reached out to us while investigating the emerging area of “in-game” advertising. He said that some new companies were driving significant revenue to game studios by dynamically inserting ads into the video game, usually in a billboard-like model.

He suggested that the Xbox division wanted the capability to support in-game advertising but it wanted the overall monetization and advertising sales to be centralized outside of its team. Joe and I had agreed upon a strategic framework for technology investment such that if any player in an emerging market had gained significant market share that seemed sustainable, we should consider them for acquisition.

Massive fit that bill exactly: It had about 80% market share and was growing. While there were other companies in the space, Massive was the standout – nearly defining the category. It became the first of several acquisitions I was involved with for the company. It also taught me for the first time exactly how hard it was to get acquisitions at Microsoft to work post acquisition.

Mobile

Microsoft has obviously lost many opportunities in mobile, not least of which is in mobile advertising. But in the days before the iPhone, when the smartphone market was made up of Blackberry, Microsoft and “other,” Windows Mobile had a chance to be big.

And we saw mobile as a big part of our strategic footprint. We invested in core assets in the mobile space. To bolster our European footprint, we acquired ScreenTonic in France.

Nobody imagined Facebook back then. Nobody imagined that Apple would build a smartphone. And Google was a threat we all feared. In 2005, Google acquired Android – but nobody got it.

Programmatic

In 2005, I first heard about a paper written by Brian Burdick, with help from others on the adCenter team. He proposed something called an Open Listings Exchange (OLX) to mirror the financial markets when ad exchanges went digital. His paper was a revelation. I believe it was the first time anyone proposed the concepts we now know of as real-time bidding (RTB) to the market.

In my purview of emerging media was that category called “other.” It was in this “other” category where the OLX lived. Today, we call it “programmatic.”

The adCenter team proposed building a broad overarching platform that was open and available for all parties in the space to develop against and plug supply and demand into. When we pitched this to Bill Gates and asked for 1,000 engineers to run after this opportunity, he balked.

This led ultimately to our acquisition of AdECN, which had an early ad exchange that didn’t quite meet the technical need we envisioned for OLX. But that wasn’t until 2007.

Search

Also in 2005, Microsoft brought in David Jakubowski to build a new product marketing team for adCenter to effectively bring adCenter and paid search ads for our search engine to market. David hired a stellar team of leaders that included Brian Boland, James Colborn, Jennifer Kattula and many others. With great product managers like Jed Nahum, Erynn Petersen and Saleel Sathe on Joe Doran’s team, along with others working with David’s team, adCenter and related products and technologies went live.

What Went Wrong

Over the next few years, we significantly grew our investment in advertising technology, with much of the investment going toward our defined build, buy or partner strategy. We acquired DeepMetrix as a web analytics provider, Massive for in-game advertising, Screen Tonic for mobile advertising and AdECN as an advertising exchange.

All of these acquisitions were done with the expectation that we would bite off a big chunk of a market and grow – but as I learned, Microsoft had a hard time ingesting acquisitions at the time. There are many reasons why. Suffice it to say that DeepMetrix, ScreenTonic and Massive didn’t provide the catalysts we’d hoped for to jumpstart these marketplaces. Of all of them, only the AdECN acquisition seemed to have real promise because Brian Burdick took over engineering as CTO and ran after RTB.

2007: aQuantive

Numerous times in our strategic analysis of the space, our team recommended running after DoubleClick. Ultimately, our executive chain was unwilling to consider such a large acquisition in the 2005-2006 timeframe, so we went after other opportunities.

By late 2006, we had been pushing our vision externally to target opportunities with video and even OLX. We’d met with every large media company and every large company in the TV and video content space. Mostly these strategic discussions were driven by Yusuf Mehdi, Joe Doran, me, folks in the corporate strategy group and Tarek Najm.

In 2007 Yusuf, who had been the CVP who managed search, MSN and advertising, was promoted to the title of SVP and chief advertising strategist. This signaled internally and externally that Microsoft was very serious about investing in digital advertising. Since my team owned ad tech strategy, I was asked to dotted-line report to Yusuf as we started considering big strategic opportunities.

By 2007, with Yusuf’s promotion, we started reviewing much larger and more strategic deals and investments. We recirculated across the video content space and held numerous meetings about our OLX vision and the desire to invest in an alternative to Google, which resonated with strategic partners. Executives from agency holding companies and media companies frequently expressed extreme interest in Microsoft developing as the alternative to Google in paid search and across all digital media.

We began to get very serious about a few big acquisitions that we’d developed an appetite for. One was DoubleClick – the other was Donovan Data Systems.

DoubleClick was the only company that met our strategic framework on the ad platform side. It had a huge position – approximately 65% on publishers and about 45% on agency desktops with DoubleClick for Publishers (DFP) and DoubleClick for Advertisers (DFA). Importantly, we started hearing about a new large project internally called the DoubleClick Exchange.

We investigated and ultimately passed on acquiring Right Media at the end of 2006. We were now fervent in our belief in the OLX vision, which had matured over two years. OLX could be catalyzed by combining the supply from DFP with the demand from DFA, with Microsoft inventory as an anchor tenant. We’d have the opportunity to really take off.

We saw Donovan Data Systems as a perfect fit in our strategy. It had a huge percentage of agency media buyers using its systems, and was a big Microsoft customer.

Unfortunately as we neared a swing at DoubleClick, which would have been the centerpiece of our strategy, it ran a quick process and stepped into exclusivity with Google. We tried unsuccessfully to break them out of that exclusivity and were prepared to throw a ton of money at it – but Google prevailed.

The alternative approach that Yusuf, corporate strategy, Joe and I came up with was less than optimal. We’d basically acquire and roll up several major assets. We bought AdECN to create a center of gravity around our OLX vision. We continued discussions with Donovan Data Systems and got very close to a deal.

And we began conversations with aQuantive.

Since aQuantive was based in Seattle, it was easy for our executive team, who hadn’t been deeply ingrained in the strategic view so far, to step in and participate directly in conversations. And things accelerated quickly – so fast that negotiations moved beyond the pale of expectations – with the valuation of aQuantive eclipsing the next most expensive acquisition at Microsoft by a wide margin.

Ultimately, Microsoft decided that aQuantive was the big bet we would make in the space. The strategy was to leverage the buy-side footprint of Atlas, which was similar to DoubleClick’s 45% market share, and attach it to the AdECN exchange to form the basis of OLX. While I continued to push hard for Donovan Data Systems to augment that Atlas footprint, the decision was made to focus on aQuantive and build out an automated optimization engine that would connect Atlas with AdECN, providing automated bidding capabilities. Microsoft’s ad network inventory would anchor the exchange, including owned and operated remnant inventory with a small amount of premium inventory. And we would create synergy with our existing adCenter customers.

Things didn’t proceed as planned. It took a long time to get the new aQuantive team up to speed on our OLX vision, and they were skeptical. The aQuantive leadership team became the business leadership team of the new advertising organization that swelled to 1,500 engineers and 300 business people The aQuantive executive team never embraced our OLX-enabled advertising platform business strategy – they felt that the astronomical price we paid for the company validated their previous strategic direction. They felt strongly that we needed to incrementally grow revenue from our base, which is how they’d grown their company. What they missed was that their existing revenue had very little impact on the strategic imperatives that Microsoft cared about. We needed to move the needle by billions of dollars, not millions.

The plan had been for Yusuf to lead the new division, with his core leadership team making up the leadership ranks. During the final stages of the aQuantive negotiations, a new path was forged with Brian McAndrews and his team stepping into the lead. I really liked those guys – and had been friends with many of them for years ahead of the acquisition. But ingesting and digesting that acquisition was really hard for both companies. And adECN died on the vine of that ingestion. We weren’t allowed to start testing live inventory through the exchange because an executive wouldn’t sign off on the revenue risk.

Ultimately we lost our opportunity. Prior to that acquisition, we refuted the idea that Microsoft couldn’t be agile and responsive to the market. After the acquisition, we crawled into our cave to digest a big meal – like a dragon. By the time we emerged from our cave, the world had evolved past us.

We ran instead after a giant partnership with Yahoo on search. We reduced our investment in display and other forms of advertising. That defocus culminated finally in the exit we saw last week from everything but search and paid search.

But there was a time when Microsoft almost won. We were duking it out with Google and focused on a major win, not just participating. We led the market. Many of those in this story went on to huge careers in advertising – with several now at Facebook.

We almost had it.

* While posting a comprehensive list of people on Joe’s team back then would be nigh impossible, there are some key players that should be mentioned. Those included Alexandra Tibbets, Jed Nahum, Michael Dwan Matt Carr and Mike Hurt and Some real powerhouses that worked under them, giving the bench on this team extraordinary quality and depth, including Ryan Mackle, John Genna, Meera Bhatia, Sloan Ginn, Aaron Sandorffy, Michael Weaver, Dean Carignan, Gabriel Nanda, Gabe Bevilacqua, Mark Jacobson, Gary Hebert, Jilani Zeribi, Khan Smith, Erynn Petersen, Saleel Sathe, Maziar Sattari, Jenn Dorre, Bart Barden and Matt Romney, as well as many others I’m sure that I’m forgetting, with apologies.

Follow Eric Picard (@ericpicard) and AdExchanger (@adexchanger) on Twitter.