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This Much-Improved Microsoft Service Should Have Google Worried

By James Brumley - Jul 23, 2020 at 7:26AM

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The software powerhouse is starting to take advertising much more seriously and has more of the right tools for the job.

Google is the undisputed king of the internet. Alphabet's (GOOGL -1.86%) (GOOG -1.75%) breadwinner not only fields 90% of the world's web searches, according to GlobalStats statcounter, its Android operating system powers about three-fourths of the world's smartphones. Android can be monetized in multiple ways, but first and foremost it generates search-driven ad revenue.

Alphabet's dominance of the web-advertising market isn't going unchecked though. While no other search engine even comes close to Google's reach, Microsoft (MSFT -1.06%) is making surprising inroads that will chip away at Google's commanding lead. Just within the past month, the software giant seriously stepped up its game.

Worried man sitting, looking at a computer screen.

Image source: Getty Images.

Advertising services starting to gel

You read that right. Microsoft is becoming a much bigger player in the search and advertising arena. It may never catch up with its enormous rival, but it could certainly stymie Google with its effort.

Many investors don't realize that aside from software, game consoles, and cloud computing, Microsoft already owns a piece of the internet search market. It's a small piece to be sure. Its Bing search engine only fields about 3% of the world's search queries. Even in the U.S. where it's a better-known brand, Bing still only accounts for about 7% of searches. That's why Google has been the go-to choice for organizations looking to promote their brands online.

After several years of planning, though, Microsoft is making a major move.

For instance, late last month the company unveiled what it simply calls its Digital Marketing Center. It's aimed at small businesses that are thinking big, offering clients a way of managing social media presences as well as ad campaigns. More specifically, the Digital Marketing Center allows its users to manage ads on platforms ranging from Google to Facebook to Instagram. LinkedIn is reportedly due to be added to the mix.

The service is free for now and seems to be in a beta stage. Regardless, it's a departure for Microsoft in that it takes advertisers outside of Microsoft's ad network even if doing so means the company misses out on ad revenue.

That said, Microsoft is still beefing up the potential of its homegrown ad network too. This week, the company revealed users of its Microsoft Audience Ads will now enjoy free access to the 300 million+ digital images in Shutterstock's portfolio. The imagery will grant users a cost-effective way to make ads of their own design a bit more powerful with the ideal photo or graphic.

This move may not seem as hard-hitting as the Digital Marketing Center, as access to Shutterstock's imagery is only available for ads displayed within the company's network of partner sites, and Bing. Many of these sites are major destinations, however, like Reuters, CBS Sports, Fox Business, and MSN. And as for Bing, it may only enjoy a tiny portion of the world's search market share, but it commands more than 6% of North America's search traffic and 7% of the United States' searches.

That's still not a lot, but what Microsoft's advertising platform lacks in size it makes up for in other ways. As an example, Invoca's Owen Ray noted late last year that while Bing may be much smaller, the typical Bing user is considerably more affluent than the average Google user. They're also generally older, which may partly explain their outsized affluence.

Moreover, while Google still handles the majority of web searches performed on a desktop or laptop, Bing is the preferred portal for nearly 37% of desktop users in the U.S. Sometimes consumers' discretionary dollars are easier to extract using a bigger screen. The key is finding the right way to connect. Microsoft's more detailed consumer profiles are also said to allow better targeted ads. Both arguments are supported by Wordstream's estimation that the click-through rate for Microsoft ads is about 50% better than Google's click-through rate.

Put it on your radar

Is Google's dominance of the $220 billion internet advertising market in imminent jeopardy? No. Bing is still playing second fiddle to Google in several ways. Even though Bing is gaining market share, it remains miles behind Alphabet's flagship Google ... a word that's powerfully a proper noun and a verb.

Microsoft is executing a growth plan that's smart though, taking small steps into areas where it knows it can do well and not taking indiscriminate aim in a way that would achieve little traction. Integrating all of its productivity and advertising tools to offer users a custom-built, one-stop-shop makes the company's products, if nothing else, easy for clients to plug into.

With the beta launch of Digital Marketing Center that lets people manage ad campaigns beyond the company's ad network, followed just a few days later by the rollout of free digital imagery for another subset of its advertising customers, Microsoft is turning up the heat.

These products are good. Alphabet's market leadership isn't threatened, but its market share now is.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. James Brumley owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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