Microsoft Ad Business In Doubt After $6.2 Billion Write-Off

With its $6.3 billion purchase of aQuantive in 2007, Microsoft sought to become an instant player in the lucrative business of serving up display ads for literally millions of websites. A half-decade later, those hopes are in tatters, as the company on Monday said it will write off almost the full cost of the digital ad unit.

Microsoft's $6.2 billion write-down of aQuantive's goodwill--the value of the business beyond its tangible assets--by roughly the same amount it paid for the company is an admission that its plan to become a major distributor of Web advertising has failed. The charge is expected to wipe out most of Microsoft's profits for its fiscal fourth quarter, ended June 30. Results will be announced July 19.

"While the online services division business has been improving, the company's expectations for future growth and profitability are lower than previous estimates," Microsoft said in what might be called an understatement, released after the close of trading Monday.

The admission is in stark contrast to heady pronouncements from Microsoft executives at the time of the aQuantive deal.

"The advertising industry is evolving and growing at an incredible pace, moving increasingly toward online and IP-served platforms, which dramatically increases the importance of software for this industry," Microsoft CEO Steve Ballmer said in 2007. "Microsoft is intensively committed to creating a thriving advertising business and to partnering closely with all key constituents in this industry to help maximize the digital advertising opportunity for all," Ballmer said.

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But by many accounts, Microsoft didn't know much about the ad business, and aQuantive's ad-serving technology never quite meshed with Redmond's existing platforms. To boot, Google had already launched its assault on Internet advertising with its $3.1 billion acquisition of DoubleClick, a deal that preceded Microsoft's buyout of aQuantive.

As a result, Microsoft was never able to build much momentum as a digital ad broker. Its online services unit posted a loss of $1.45 billion over the past nine months, on revenue of just $2.1 billion.

The $6.2 billion charge may be enough to have Microsoft seriously thinking about exiting the online advertising business, according to at least one analyst. "We sense a tidal shift away from the online business in favor of reducing losses and shifting investments to more strategic areas," said Nomura analyst Rick Sherlund.

In addition to display ad weakness, Sherlund noted that Microsoft has not been able to generate search-based ad revenue as well as Google. "The ability to drive higher revenue per search monetization has proven more challenging over the past two years than was expected," the analyst said. Microsoft in 2009 formed a search alliance with Yahoo to boost its performance in the ad space, but the deal has not yielded significant gains for either company.

Investors shrugged off news about the charge, viewing advertising as non-core to the software maker, which still sits on $59.5 billion in cash and equivalents and hopes to shake up the tablet market with the Windows 8 launch later this year. Microsoft shares were off just 0.33%, to $30.46, in pre-Fourth of July trading Tuesday.