How to lose $6.2 billion: Microsoft shows the way

Microsoft’s biggest push into digital advertising has failed, with the company announcing a $US6.2 billion non-cash write-down in its online services division.

“While the Online Services Division business has been improving, the company’s expectations for future growth and profitability are lower than previous estimates,” Microsoft said in a statement.

The announcement  came as a result of Microsoft’s annual assessment of goodwill – the value of the company above its net assets. By downgrading the goodwill in its online services division, Microsoft indicated its aQuantive acquisition was now worthless. aQuantive provides an inventory of paid web ads which are delivered to external third-party websites. It takes a cut of the click-through revenue generated.

Analysts had predicted $5.3 billion in profit for Microsoft this quarter to June 30, but the stray $6.2 billion is expected to wipe out all gains for the quarter.

Still, Microsoft’s shares fell only 0.43% after the announcement, likely reflecting the fact that the write-down wasn’t lost cash – just book value.

It’s a long way from the hopeful days of 2007, when a Microsoft executive described the deal as “more of a merger than an acquisition” suggesting that it saw the company’s value on a par with its own.

What went so terribly wrong?

The consensus view is that Microsoft failed to improve aQuantive’s service offering as ad-placement technology improved. While aQuantive was one of several well-regarded, leading companies in that area at the time of acquisition, Microsoft allowed it to drift behind rivals. This is despite Microsoft spending heavily its Bing web search service, which requires online advertising to be monetised.

Microsoft bought aQuantive to help it compete with Google and other rising computer companies by giving it exposure to search-based advertising.

Google bought another market leader, DoubleClick, for half the price Microsoft paid, and proceeded to radically improve its offering. It used DoubleClick’s inventory of web ads inside AdSense, Google’s ad placement program that takes a cut of the tailored advertising it provides on external websites. This gave Google an edge over Microsoft because the ads were tailored to the online audience.

Microsoft didn’t update the way it used aQuantive’s ad inventory. Though aQuantive had similar ad placement technology to DoubleClick when both were bought up, aQuantive’s has barely changed since 2007. Its top executives left the ad company soon after Microsoft took control.

These factors meant that while Google’s acquisition made it a fortune, Microsoft’s ended up being a wasted asset.

At the time, aQuantive was the biggest acquisition Microsoft had ever made. However, it was eclipsed in May 2011 by the $US8.1 billion it paid to buy online communications company Skype. Insiders say that purchase is tracking better for the company, but really, it is too early to judge if the acquisition will follow aQuantive into a black hole.