TechCrunch’s Erick Schonfeld reports on Microsoft’s dismal quarterly earnings report, with its Online Services division (including advertising) almost doubling its quarterly loss over Q4 2007 to $471 million. Microsoft says that advertising revenue grew at an anemic 7%, with search advertising higher, but these modest increases were not enough to offset ballooning expenses.

So where were there expenses? The development and early marketing of PubCenter, Microsoft’s answer to AdSense, has probably been running up red ink, but that’s to be expected. I’m thinking more about Microsoft’s bets on advertising on social networks. It inked a 3-year deal with Digg in July 2007, but the bigger bet was its advertising agreement (via a substantial investment) with Facebook. Facebook relies on MSFT as its exclusive advertising partner worldwide through 2011.

So why the loss? It’s possible, if not probable, that the deal guarantees Facebook revenue, and Microsoft is eating the loss. After all, Facebook is a social network, and social network users are unresponsive to online ads. Its own advertising platform turns out poor results; it’s not difficult to imagine that ads served by Microsoft wouldn’t perform any better.

This entry was posted on Thursday, January 22nd, 2009 at 4:40 pm and is filed under Online Advertising. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.