Welcome to the world of Microsoft APS

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APS-bead So, last Monday was a big day for me, and for a few thousand of my colleagues at Microsoft and aQuantive – we closed the aQuantive acquisition that we originally announced in May. Those of you who like to track every iteration of Microsoft’s ever-changing organizational structure may already have read that we’ve created a new organization within the “Platform and Services Division” that is headed by Kevin Johnson, called the “Advertiser and Publisher Solutions Group” (or APS, as we acronym-heads are already calling it). APS will be headed by Brian McAndrews, former CEO of aQuantive and will provide ad buying and selling solutions for advertisers and publishers (hence the imaginative name).

So far, so “so what?” But actually the creation of APS is highly significant for Microsoft’s online business – I’d go as far as to say it’s the most significant development since the creation of MSN back in 1995 (or perhaps more accurately the creation of MSN.com in 1999, which heralded the start of Microsoft’s foray into selling online advertising).

Why? Because up until now Microsoft’s online business model has been as a “first-party” seller of ads.

Publish and be damned

MSN and Live.com are essentially just big publisher sites (or media networks, to use the fancy term), and the day-to-day business of making money from them has been a case of creating advertising opportunities (everything from banners on the MSN.com home page to ad spots within the MSN Messenger window) and selling this ad space to advertisers, either directly or through agencies or networks.

Sure, Microsoft is one of the most sophisticated media networks out there, with a full-fledged search engine and a whole suite of tools to sell, buy and place ads on our network, but we’ve always been limited (with some minor exceptions) to selling inventory from our own network. And how do you grow a first-party ad business? Well, you have to grow your audience, or you have to grow the amount they use your stuff (since the more often they come back to your site, the more times you can show them ads). We’ve been doing pretty well in both these areas, but big online portals are one of the more mature areas of the Internet, and the other guys have been providing some fairly robust competition in the area of search.

From first-party to third-party

So over the past year or so, we’ve been embarking on a different strategy; or, at least, a complementary one. We’ve been cutting deals with Facebook and Digg to serve ads onto their pages; we’ve been working on a contextual ad platform that will allow third-party publishers to monetize their content, and we’ve been acquiring companies like Massive (which sells ads inside video games) and adECN (an online ad exchange).

What all of these have in common is that they help us to sell ads on third-party sites, not just on our own sites. The aQuantive acquisition fits right into this strategy.

aQuantive’s business is all third-party – they help advertisers to buy advertising, and they help publishers to sell ad space. The money’s made in fees for providing those services. So they really understand this business, especially the third-party publisher part, where we have less experience.

Brian, meet Steve; Steve, Brian.

So the way to think about APS is as a third-party ad business within Microsoft. We already have a long list of advertiser clients, and a long list of publishers and ad networks (define), of whom one (albeit a really, really big one) is Steve Berkowitz’s Online Services Business – that is, MSN and Live.com. With the creation of APS, Steve’s charter just got simpler: his job is to generate the maximum revenue he can from the MSN and Live properties. He’s running a media business.

Brian’s job, on the other hand, is to buy and sell the most ads he can for the best price he can, by connecting various buyers and sellers of these ads. And to do this, he needs a great suite of products to help advertisers compose and upload ads, find the best places online to show those ads, decide on what price to pay, and understand how those ads are performing; whilst for publishers, we need products to help them make their ad inventory available to buy, decide on what price to charge, structure their inventory so they sell the most of it they can, and understand how their inventory is performing (i.e. how many ad clicks they’re getting).

Plenty of technology, in other words, for a died-in-the-wool geek like me to sink his teeth into. And did you notice how measurement is present on both sides of the equation? Measurement (and its glamorous younger sister, optimization) is the bread and butter of the online ad business. So the next couple of years should be fun…