Microsoft gets personal with online ads

"To us, it is clear that Microsoft understands the need for software as a service using AdCenter for monetisation. But how quickly the company can respond is unclear and how far it is prepared to drive this approach is also unclear," Goldman Sachs analyst Rick Sherlund said in a report earlier this week.

On the marketing front, Bradford says the next step is making the ads more palatable to the consumers that are viewing them. All of this ad-supported stuff won't work if people feel overwhelmed.

"We don't want people to 'put up' with the ads," Bradford said. Instead, the goal is that the ads are so targeted that people see the ads as a relevant part of what they are doing. "We don't want anybody to feel bad about the ads they are getting. Today sometimes you do," she said.

Today's search ads make no distinction of who is doing the searching. "Right now, we're just fire-hosing everybody," Bradford said. She pointed to how much more useful it might be for a mobile phone carrier, say, to know who is searching for "mobile phone". If the person is in their 20s, a ringtone ad might be a good idea, while for a 40-year-old, a pitch for a new rate plan might be a better bet.

Winfield said that Microsoft's demographic abilities are far from perfect, but says even information that is 25 percent accurate is useful.

"I'd still rather that, than the zero percent Google is giving," he said.

The added feature would not be enough for Whitfield to switch all his marketing funds away, however. "That doesn't mean I am going to stop advertising on Google or Yahoo. They have the ad reach," he said.

Personalisation or privacy invasion?
Yahoo, for its part, has some targeted options when it comes to display and banner advertising, but a representative said the company is still weighing the privacy concerns of offering something similar to what Microsoft is doing.

"Audience intelligence may be something that's of value to our advertisers and we're testing a number of ways to look into that," the Yahoo representative said.

Google said it is sticking with its approach of targeting its ads based on the context of the search query, rather than using demographic information of the person doing the searching.

"We believe the targeting capabilities we offer today provide advertisers with the greatest return and result in the highest quality user experience," Google spokesman Michael Mayzel said.

Although rivalry with Google is often cited as the main impetus behind Microsoft's ad push, Yahoo is the most likely to feel the first impact from Microsoft's AdCenter. Yahoo currently supplies most of the keyword-related search ads to Microsoft's MSN Web portal under a deal that runs until next June.

Microsoft has said its goal with the current trial of AdCenter is to generate up to a quarter of those MSN results using its own tool and it expects to reach that capacity soon, Bradford said. "We have a long line of people that want to get in the pilot," Bradford said.

Yahoo, for its part, has seen the writing on the wall. The company is looking to areas outside its MSN relationship, such as an expansion of its Yahoo Publisher Network program, in which it delivers self-serve ads to small- and mid-sized publishers. That program, a rival to Google's AdSense, has been in limited beta testing since August.

"We see significant growth opportunities next year regardless of any particular relationships," the Yahoo representative said.

Bradford, meanwhile, is looking beyond search. The next goal for AdCenter will be to serve up display ads for Windows Live and Office Live. From there, Microsoft has its eyes set on sending ads to mobile devices and Xboxes.

"It's not just about in your PC with your browser open," Bradford said.