Microsoft’s struggles to make a successful business out of advertising led to the company posting its first-ever quarterly loss. The main culprit was a $6.2 billion write-down of the goodwill associated the 2007 acquisition of aQuantive – a company that combined advertising technologies, networks and an agency business. But Microsoft’s continuing losses in its search and ad-driven Online Business division didn’t help. Some have been saying for years Microsoft should never have gotten into media. Is it about to get out?

Microsoft is sending signals that it might be about to dramatically restructure its ad-based businesses:

• The write-down. Microsoft’s purchase of aQuantive was an over-reaction to acquisitions the same year by Google (DoubleClick), Yahoo (Right Media) and WPP (24/7 Real Media). Two years later, Microsoft sold off the agency business of aQuantive, but it hasn’t made the technology and ad network pieces pay off. It’s been losing money on MSN and search forever.
• MSNBC. Microsoft and NBC Universal finally cut their MSNBC ties. NBC bought out Microsoft’s share of the joint venture so it could better align its online and traditional media brands and sell cross-media ad campaigns all by itself. Microsoft says it will still use MSNBC content on its MSN portal, but that it can open up to other potential news partners.
• Ad staff layoffs. Microsoft isn’t saying how many, but last week it may have laid off a significant portion of its online advertising sales force, including a key public face.
• Do Not Track. Microsoft angered the online advertising community with its unilateral intention to implement Do Not Track as the default option in its next browser release. Microsoft wants to appear to be taking the privacy high ground, potentially putting ad targeting techniques at risk. But Do Not Track won’t work without support from sites and publishers, and even the FTC was miffed.

Why media?

In the past, I’ve tried to make the case for why Microsoft needs to have an advertising and search business. But I’m beginning to have my doubts, and my argument was always stronger for search. Search is technology- and scale-driven, is a core navigation/UI mechanism that threatens Microsoft’s Windows and browser franchises and is the unchallenged cash cow that powers Microsoft’s chief technology platform rival, Google.

A competitive search offering could fuel a display advertising business with user intention data valuable for re-targeting and advertising attribution analysis, two key factors in raising display ad CPMs. Years ago, Microsoft was an early leader in advertising yield management (acquiring Rapt Inc. in 2008) and attribution analysis. Advertising complements Microsoft’s digital living room and mobile efforts. And many consumer app and cloud businesses are paid for via a combination of advertising and fees, even if the idea of B2B marketplaces with advertising as one of the exchange currencies never caught on.

But Microsoft’s recent big acquisitions – Skype and Yammer – may employ freemium business models, but they don’t depend on advertising. They’re far closer to traditional Microsoft strengths in unified communications and enterprise software. Other social media acquisitions by enterprise software firms, like Salseforce.com and Oracle, display much more of a marketing focus than Microsoft’s.

Here are potential scenarios for Microsoft’s advertising and media business:

• Stay the current course. Keep investing in MSN and Bing, build out ad networks and exchanges with other portal partners like Yahoo and AOL. Jump hard on local and mobile and buy a Yellow Pages company if that’s what it takes. Odds: 3:1.
• Pick a spot.  Focus on one or two core advertising businesses, but de-emphasize the others and stop hoping for synergies. Pick only 2 of the following: Bing, MSN, targeting/hosting technology, ad neworks/exchanges, MSN, local/mobile. Odds 5:2.
• Unload the media business. At the risk of being the boy who cried wolf, I could see Microsoft keeping search technology, but spinning off MSN and Bing to a joint venture with Yahoo, perhaps with AOL in the mix. Odds 2:1.

Some hybrid of the second and third scenarios is looking increasingly likely.

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