Microsoft (NASDAQ:MSFT) has stumbled in its ad business, but HoloLens -- which the company says "allows you to pin holograms in your physical environment and provides a new way to see your world" -- might help to turn that around.
That's good news for AOL, which is now a unit of Verizon, since the company has reached a deal with Microsoft to take over its display ad sales, according to Reuters. That agreement includes selling the ads on Bing, MSN, Skype, Outlook, some of its apps, and presumably HoloLens. The entire Microsoft ad team will be offered positions by AOL, according to Reuters, so it's essentially the same people selling the space.
Microsoft has long sold advertising on MSN.com and Bing, as well as on its news, finance, and sports apps, but those divisions -- which are no longer broken out in Microsoft's financials -- have been money losers. The deal with AOL, coupled with the launch of an exciting new platform in HoloLens gives the company a chance to turn that around and equal the success of ad leaders Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB).
Why has Microsoft suffered?
Both of its key rivals have figured out how to not only sell ads to the top-tier brands, but they have also been able to shake the nickels and dimes out of the pockets of smaller players down to individuals. Microsoft has not been as successful doing that and in some ways, the various Microsoft products have suffered from being me-too offerings.
Bing is a Google knockoff, MSN.com is an answer to all the portal pages that came before it, and the apps -- once called the Windows 8 apps, but now available on Apple (NASDAQ:AAPL) iOS and Android -- are also somewhat late to the party.
That makes selling these offerings to ad buyers a challenge. Google and Facebook are the innovators, while Microsoft has followed. Now, however, the company has a way to change that. It has been showing off its HoloLens immersive virtual reality headset to advertisers. The device, which is not yet available for sale, offers a whole new world for advertisers, and that could be a game changer.
What is Microsoft doing?
The company booked a number of private demos of its new technology for leading advertisers at the Cannes advertising festival in mid-June. In addition, CEO Satya Nadella has been involved in the ad sales process, meeting with top agency personnel and listening to their feedback, The Wall Street Journal reported. That's something his predecessor, Steve Ballmer, did not do, according to the newspaper, and it's likely to pay off even with AOL in the mix.
HoloLens gives the company an opportunity to offer advertisers a whole new way to reach people.
"If they pull it off [and turn it into a hit], it could be really powerful," Adam Shlachter, chief investment officer at DigitasLBi, told the Journal. "But when you have no idea about things like distribution, volume, cost of reaching people, it gives you pause. There is a risk with these new platforms."
Along with those risks, Microsoft is also in a race to market, as Facebook, Sony (NYSE:SNE), and potentially others are looking get into the virtual reality game where's it's already an uphill game as advertisers aren't sure how to use the new technology.
What's at stake for Microsoft?
Microsoft has fallen well behind its chief rivals in the digital advertising space. The company commands a 5% U.S. market share in 2015, down from 5.7% in 2014, according to Statista. That's still an impressive number, but Google has a commanding lead with 42.3% of the market and Facebook has grown to a 9% share.
That leaves a lot of room to grow for Microsoft, and HoloLens could be a way to capture an increasing share of the $149.2 billion Statista forecast will be spent this year globally and the $194.5 billion the statistics site predicts the market will reach by 2018.
Will it work?
Advertising has been evolving. Simple commercials and banner ads are giving way to more immersive and, in some cases, natural ads. HoloLens offers the opportunity for advertising to be an experience. The VR tech also makes it possible to integrate ads in an organic way that does not take people out of the experience in the virtual world.
Imagine a character in a first-person shooter in which the ads are simply part of the scenery that fits logically into gameplay. That has already happened in 2D games such as Grand Theft Auto, but in a virtual world the possibilities for natural engagement increase dramatically.
Microsoft, and its partner AOL, have an opportunity to become the first company to create a new experience for advertisers. To do that, however, Microsoft must put HoloLens in millions of homes, and that could be its greatest challenge. The ads might be an easy pitch because they will likely be very effective as long as there is an audience watching.
Daniel Kline owns shares of Apple, Facebook, and Microsoft. He has enough trouble navigating regular reality. The Motley Fool recommends Apple, Facebook, Google (A shares), Google (C shares), and Verizon Communications. The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.