Microsoft buys into banner adverts

Microsoft followed the lead of Excite and Yahoo when this week it announced the purchase of its own online advertising network for a reported $250 million.

On the face of it, Microsoft now controls one of the most popular banner-exchange companies. LinkExchange's best-known service is Banner Network, which lets small businesses barter for advertising on the service's more than 400,000 member sites. Mr Easy Plumbing, for example, could display an advert from Mr Garden Furniture, who would return the favour.

But industry experts said what Microsoft is getting has little to do with advertising -- instead, it is a move to reach out to the small businesses that typify LinkExchange's customer base.

"Companies have been reaching out more and more to the small-merchant market, that's the strongest trend out there right now," said Melissa Bane, industry analyst for Yankee Group.

LinkExchange is adamant that it will not alter its business practices after the deal. "We plan to continue offering our free products like the Banner Network, and are currently working to link all our products so it'll be easier to use them together," the company said in a statement.

LinkExchange also sells low-cost advertising blocks on big sites such as Yahoo, and services such as automatic e-mail mailing lists targeted at small businesses. The low-cost services have attracted 800,000 members to LinkExchange, most of them falling into the small-business category.

Microsoft sees small businesses as a big, untapped market, one that could purchase everything from advertising to back-end e-commerce software.

"The primary advantage for [The Microsoft Network] is the ability to expand our offerings for small business," said Marty Taucher, director of network communications for MSN. "Overnight, we become an almost full-service company for businesses looking to get on the Web and get things done. It fills a critical hole in our network."

LinkExchange's current features have already been integrated into Microsoft's MSN Web service, which competes with Yahoo, Excite, Lycos, Infoseek, Netscape Communications's Netcenter and others.

Microsoft's entry also means LinkExchange users can get their ads shown across MSN sites such as Sidewalk and Expedia, said Deborah Whitman, LinkExchange's marketing VP. "Now our 400,000 Banner Network members can have their ads appear across the Microsoft Network," she said. "For our customers, it means the ability to reach a new set of consumers."

Analysts reckon LinkExchange's free services will be a valuable hook to get businesses using Microsoft Web products. Microsoft can then sell them progressively more powerful -- and more expensive -- ways of running and marketing their sites, all the way up to back-end software and Web hosting.

"Microsoft is getting access to what they purport to be 800,000 mom-and-pop shops, and that's a great future channel to move any of its authoring products," said analyst Julia Pickar with Zona Research. "It's not easy to obtain that type of demographically correct audience."

The ability to exclusively offer LinkExchange's one-of-a-kind, popular commerce tools could also be a boost for the MSN Internet hub, which faces the challenge of distinguishing itself from the competition.

"Microsoft realises it needs to hit the ground running [with MSN]," said Jupiter Communications analyst Evan Neufeld. "It's behind the ball a little bit, and it's spending money to play catch-up. The advantage of LinkExchange is, it's unique. It's not like a free e-mail company, of which there are five."

That might help to explain why Microsoft spent $250 million in stock, according to industry gossip, to buy the company. It works out at a little over $300 per LinkExchange user. The price might be a little steep, observers say. But on the other hand, Microsoft isn't about to let a one-chance deal slip away.

"It's kind of surprising, but on the other hand, think of the customers that were using services by Junglee before they were bought by Amazon.com," said analyst Bane. "If you see a strategic advantage, you'd better buy the company now, before someone else does."