The following is an article I wrote that appeared in the mighty AdExchanger on July 19, 2022.
Tuesday, July 19th, 2022 – 6:15 am
Martin KihnAdExchanger Contributor
This article is based on interviews with participants. It was inspired by Microsoft’s supposedly surprising selection as Netflix’s ad tech partner. But driven by the acquisition of AT&T’s Xandr, that’s just the latest chapter in a breathtaking adventure of pivots, write-downs, partnerships and potential.
In the beginning were these words …
Bill Gates:
The future of advertising is the internet.
The occasion was the IAB Engage conference in London in 2005. At the time, Microsoft had MSN, an ad network and content deals with Fox, NBC and others. But it was focused on one particular upstart in Mountain View. Having lost a bid to acquire Overture, Microsoft launched its own search engine, originally code-named Project Moonshot.
Jed Nahum (director, product management, Microsoft adCenter): Google made about two times what we made on each keyword. We had this functionality which enabled you to bid for age and gender on top of keywords for search. It was our differentiator – but it wasn’t enough.
Eric Picard (director, ad tech strategy, Microsoft): Microsoft was focused on search, but Bill Gates recognized it was bigger – that ads could be another MS Office or Windows-sized business. We looked at investments in Xbox and PC gaming, video ads on Microsoft TV and Media Player and MSN Video. We looked at ads in Office. Around this time, Brian Burdick wrote a paper … that basically invented RTB.
Brian Burdick (principal group program manager, adCenter): In 2005, a couple people on my team and I wrote a proposal for an Online Listings Exchange. … We were piloting a contextual ad program that competed with [Google’s] AdSense. Microsoft had deals for content controlled by a premium display system. I realized on a drive home from work one day that if the revenue per impression between the contextual and premium systems was materialized in real time, any external third party could also participate.
Nahum: The insight of Brian’s paper was basically that what ad networks need is the User ID – like a cookie, IP header info, and a URL that corresponds to the context and location of the ad. If we could pass those three things to ad networks, they could evaluate on an impression-by-impression basis.
Burdick: Gates was super-bullish in the meeting. He had a bunch of comments. He said, “This is bold and ambitious and something we should do.” … Eventually, a lot of other teams wanted to piggyback on the idea, and our ask was for hundreds of engineers. It didn’t get approved.
Microsoft also took a look at Right Media, a pioneering exchange that allowed ad networks to bid on one another’s inventory. That meeting didn’t go so well.
Brian O’Kelley (CTO, Right Media): We went in to Microsoft to talk with a Technical Fellow. He put us through the wringer. I remember he asked us, “How many man-years did it take you to build the platform?” I said, “You’re missing the point. It’s liquidity you’re buying as much as technology.” Back then, Microsoft had swagger. I came away from Redmond feeling they were arrogant.
Right Media was later acquired by Yahoo, and Microsoft set its sights on another target, then owned by private equity firm Hellman & Friedman.
Nahum: Hellman & Friedman pitched DoubleClick to us. On my team, we were f*ing terrified. We understood the value of DoubleClick and what it would mean if it went to Google. After a low bid from Microsoft, Google and DoubleClick went into a quiet period. … We were very depressed. … Steve [Ballmer] quietly bid $3 billion, but Google threw in another $100 million to shut down the dalliance. We were left feeling burned. We were in a situation where we had to get a competitor to DoubleClick.
Picard: We left that meeting where we lost DoubleClick, and a week later Steve [Ballmer] had me and a few others in the room. He says, “This is like that scene in Animal House where Belushi rallies the troops.” And he says, “Okay, we lost DoubleClick – what else we got?”
Microsoft ended up buying aQuantive – including the agency Razorfish, the DrivePM ad network and the Atlas ad server – for $6.3 billion. On the same day, it acquired the AdECN exchange for, reportedly, somewhere between $50 million and $75 million. Bill Urschel and a rising star named Jeff Green ran AdECN.
Bill Urschel (co-founder, AdECN): They bought us and it happened pretty quickly. It was at an Ad:Tech [event] … Eric Picard and Jed Nahum came by our booth and asked all kinds of interesting questions.
Picard: We walked up and started chatting. We talked about what they’d built – it was interesting. Jed, [Microsoft GM] Joe Doran, Bill, Jeff and I had a fancy dinner and got along well. We were kindred spirits.
Jeff Green (COO, AdECN): Everyone wanted to see Microsoft do well. The AdECN strategy was to get Yahoo and AOL to join up and create a pool of liquidity that rivaled Google. But aQuantive was saying, you know, our ad server [Atlas] is better. Let’s combine it with Microsoft tech and build the world’s biggest ad network.
Burdick: DrivePM was the internal ad network aQuantive ran for Microsoft, and it had more than 40% margin. [They] put the head of strategy of aQuantive in charge of strategy for Microsoft. … They eventually came around to the exchange model, but not in the beginning. There was resistance to the exchange, putting margins at risk.
Boris Mouzykantskii (founder, IPONWEB): I think AdECN had a chance to test real-time bidding in the market. It never happened. It’s possible, if they’d done it, Microsoft would be AdX.
Urschel: After the acquisition, on the Microsoft side there were some brilliant people who saw a vision of a bigger exchange, but they were essentially drowned out. The cash at the time was flowing from the aQuantive business, so I don’t think the exchange business ever got a serious look and didn’t get the resources.
Burdick: I went down to be CTO of AdECN. … We built the first real-time bid exchange. But between the aQuantive people and our VP, they would not let us go outside [Microsoft] for inventory. The reasons are murky to me. They just didn’t greenlight it.
Meanwhile, Brian O’Kelley had started AppNexus, originally a cloud hosting platform that became an SSP and exchange.
Brian O’Kelley (co-founder, AppNexus): My pitch to Microsoft was that they can’t fight Google in search and display. Let us be the market maker, make us the dominant exchange platform. But that would only work if you put the whole heft of Microsoft behind it – all MSN inventory – [and] make everyone buy through us. I spent a lot of time in Bellevue and got a mind meld [for] how we could beat Google. It was an incredibly strategic conversation about the future of the internet, not just about product.
Picard: I introduced Brian to [Microsoft Ads exec] Rik van der Kooi. I said, “If we’re not going to be allowed to build this internally, it’s not a bad thing to invest in another company that’s a credible competitor to Google’s ad exchange.”
O’Kelley: We made a deal where [Microsoft] gave us inventory and they got one-third of the company. … Exclusive inventory from one of the top five publishers. Over time, we delivered. Some things were not successful, like a Windows Phone integration, but Microsoft was the first fully programmatic major seller.
Nahum: After the AppNexus deal was done, we branded our instance of [as] MAX, [the Microsoft Advertising Exchange]. We couldn’t get the aQuantive guys to put inventory in AdECN, but we were able to put it into the waterfall after direct sales for AppNexus. Immediately it started making money. My team launched 35 markets internationally. We sold to aggregators of demand, to DSPs, agencies and trading desks.
Picard: It was really bittersweet. The day I decided to leave, I was in a meeting with Ballmer. He said, “I want us to shut MSN down, divest all the non-search ad business [and] the exchange and double down on paid search.” Ultimately, the team convinced him MSN was too critical – but the strategy shifted from editorial to being a portal with content from other publishers. It took about six years to fully divest the display business, until 2015.
Microsoft Press Release, July 2012: While the aQuantive acquisition continues to provide tools for Microsoft’s online advertising efforts, the acquisition did not accelerate growth to the degree anticipated, contributing to the write-down [of $6.2 billion].
AdExchanger, June 29, 2015: AOL to Absorb Microsoft’s Display Ad Business Along with 1,200 Employees, Bing to Power all AOL Search
O’Kelley: AOL’s pitch to Microsoft was [to] let us rep everything. There was tension there. [AOL CEO] Tim Armstrong and I would see each other on the street corner “growling.” Microsoft wanted AOL to choose Bing as its search engine. That was a $1 billion deal. We couldn’t beat that. How could we possibly win? We had to massively overdeliver.
David Jacobs (SVP, sales & monetization partnerships, AOL): I’d give credit to Tim Armstrong, who really leaned in, and Bob Lord who pushed the deal through. It seemed like a good thing. … It was almost like a scale play. AOL and Huffington Post were relevant properties that had legs, but this created an opportunity to take brand sales to another level. Header bidding was not mature yet.
O’Kelley: I convinced Microsoft to give AOL [some] major markets, including Japan, the US and UK, and [to] give us the rest. The deal was good for everyone. We made Microsoft hundreds of millions. That was a $30 million revenue account for us. We ran with 17 [or] 18 “demand evangelists” providing a lightweight sales model. My nightmare was AOL would drive us out of the deal.
Jacobs: It happened at a time with a lot of moving parts. AOL acquired Millennial Media around then. I was in Dulles with some Microsoft people when the deal was about to be signed – and that same day the Verizon acquisition [of AOL] was announced. … There was a lot of change management happening. It allowed Microsoft to not have to support a display ad sales team.
O’Kelley: There were so many of those moments. That was constant. Google was selling against us. AOL was selling against us. I used every bit of leverage to keep from losing our biggest client.
Jacobs: While not core to the deal, we would have liked to get Microsoft inventory into our SSP [from AppNexus]. Eventually, we migrated the Microsoft display inventory over to AOL’s ad server.
AppNexus was acquired by AT&T in 2018 and became the foundation for Xandr – which, in a twist of programmatic irony, was acquired by Microsoft this summer.
Brian Lesser (CEO, Xandr): Clearly there was some value there that we created, because Microsoft could have bought a lot of things, and they bought Xandr. … I think Xandr is going to be great with Microsoft.
John Cosley (senior director, brand marketing, Microsoft Advertising): We have bold ambitions, including the innovations we’ll drive with Xandr now that the deal closed – [also] continued momentum with our PromoteIQ offering, Microsoft Audience Network solution, our new measurement partnership with Roku – and ongoing innovations and market expansion for our advertisers across our search and audience network.
O’Kelley: I have mixed feelings because I wanted Microsoft to be the buyer the first time around. It felt like the right home for the company.
So, it’s a little bittersweet that they end up there now. I would have wanted to work at Microsoft. … LinkedIn is a huge asset. Activision is big. Windows is free now. There’s search, gaming – amazing ad assets. It doesn’t seem crazy that they could be successful in the ad tech business.
To be continued …