Mr. Softy Goes to Madison Avenue

It's finally happened. Just days after announcing a reorganization that had every appearance of making the company more competitive with Google (Nasdaq: GOOG  ) , Microsoft (Nasdaq: MSFT  ) this morning said it will begin offering its own search-based advertising network. The service kicks off in France and Singapore and will expand globally.

Clearly, the move is aimed at both Google and Yahoo! (Nasdaq: YHOO  ) , but it's the latter that should take a more immediate hit. Yahoo! has long delivered ads through MSN. Now that relationship will end by as early as next spring, according to The New York Times. In the long term, though, Google is the obvious target.

My guess is that many will find it tempting to write off Microsoft's entry into the white-hot search advertising market as a high-profile but largely meaningless competitive threat. After all, Google was still the heavy in the space as of August, when it claimed 37.3% of domestic Web searches, up nearly a point from the previous month. All of the other notables declined in their share over the same period, including Yahoo!, Time Warner's AOL, and InterActiveCorp's (Nasdaq: IACI  ) AskJeeves unit. All, that is, except for MSN. Like Google, it increased its share from July.

That increase marks one reason why Microsoft could gain traction in the search advertising war. The other has to do with technology: Mr. Softy's new service, dubbed adCenter, proposes a different way to advertise in that it will mix search algorithms with demographic data made available through its various Web properties, including Hotmail and MSN Messenger. That, in turn, should make for more relevant results, which could lead to more click-throughs. MSN also plans to extend ads to third parties in the way that Google does with its immensely popular AdSense program.

Scariest of all, however, is history. Search has been a very fickle business, dominated at every turn by the best technology. For now, the dominator is Google. But trying to get everything you need from a Google search isn't that easy. You can't just ask Google a question and get an exact answer, unless you want to pay a human to do research for you, which is hardly convenient. That's the reason I treasure alternatives such as Wikipedia. For me, Wikipedia, not Google, is the best source for facts on record.

Right now, Google's moat -- the way it protects profits -- stems from its highly regarded brand. But that's only a function of the speed and thoroughness of its search engine. That loyalty will dissipate if someone else figures out how to make search results more relevant, and therefore ads more meaningful. My guess is that Mr. Softy is about to spend a few billion to do just that.

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Fool contributor Tim Beyers has looked up all kinds of cool stuff at Wikipedia. He suggests you try it sometime. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.


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