Until this major partnership, OpenX was a relatively small Pasadena, CA-based web startup that operated one of the country’s largest independent online advertising networks by developing software that enabled users (most likely marketers) to post ads on websites that would likely be visited by the type of buyers they were most interested in — or rather, their target audience.
A majority of the software offered by OpenX, which had only been around for three years at the time of the deal, is centered on open source technology. This type of technology is characterized by the fact that it’s created and built by online communities of experts who are volunteering their services for free. In turn, the resulting technology and/or software is also offered for free. This is exactly why the company, though relatively small, has so many clients that are of interest to Microsoft: it has succeeded in attracting smaller companies who don’t have a lot of money to spend, but are looking to make money on their websites by selling ads.
It should be pointed out that before striking a deal with Microsoft, OpenX was by no means hurting for business or doing poorly financially, as illustrated by the number of websites they service. Last year this open-sourced ad server made a smart decision by rebranding their name and image; the company was formerly known as OpenAds.
Aside from this rebranding, OpenX made a lot of changes since raking in $15.5 million in December of 2007. In April 2008, OpenX chose Yahoo’s former global ad marketplaces SVP Tim Cadogan as their new CEO and moved their offices from London (where the company was founded) to their new home base in California. Even more recently, the startup launched what it refers to as its “OpenX Market.” According to Cadogan, this market is essentially “an exchange for all classes of buyers and sellers.” OpenX claims that since October of 2009, their marketplace has “experienced a monthly run rate of more than two billion impressions.”
There’s no telling if the plants have changed, but before the deal with Microsoft Cadogan revealed that the company intended to use the proceeds to invest in engineers and sales personnel. “No one has built an exchange market for mid-size businesses,” Cadogan said. “It’s a under-served part of the display business and there is a general under-appreciation of display right now. But most marketing areas need the brand building that display offers, not search. I think companies are slowly starting to come around to that realization.” Apparently, so to is Microsoft.
Both companies should transition into a working relationship together fairly easily, seeing as how Microsoft basically provides a similar service. Sure, the company is most known for their Office software suite and Windows, but it also enables advertisers to both create and distribute ads for small companies such as flower shops or much larger accounts, such as the one Microsoft has with Maserati.
To many, it will surely look like OpenX got the better end of this deal. After all, they were rather small and have now been placed in the limelight to play with the big boys, but the relationship will actually be mutually beneficial. This deal will enable both companies to drastically expand their business and online ad revenue, but how?
Essentially, the two companies have brokered a deal that will allow them to mutually promote their ad-selling technologies, while also sharing customers. Microsoft has some pretty stiff competition from the likes of Google and Yahoo in the ever-growing online ad market, and anything the company can do to get ahead could make all the difference. It’s safe to say that OpenX’s ability to potentially increase Microsoft’s ad viewership to 150,000 more websites, which in turn display 300 billion ads every month, will help put them over the top.
Strangely enough, Microsoft was a former competitor of OpenX. During OpenX’s first couple of years, they competed heavily with a division of Microsoft’s advertising department that, at the time, was called aQuantive, but is now simply called Microsoft Advertising. Chances are the new partnership between the two companies will also give OpenX the upper hand against some of their longtime rivals, such as Google’s DoubleClick.
So, what does OpenX get out of all of this? Some would argue that being in business with Microsoft is enough, but in return Microsoft has promised to use its name and credibility to refer large companies to OpenX.
Though none of the financial terms of the transaction were disclosed by OpenX’s Cadogan, he was more than willing to talk about the future of the two companies. According to Cadogan, this is “just the beginning of a partnership” and being attached to Microsoft “adds credibility” to what OpenX is doing and hopefully kicks the company up “to another level in terms of industry awareness."
Microsoft, as usually, isn’t talking too extensively about the deal. The company did reveal, however, that no revenue would be shared between the two companies and that the newly formed alliance is “an early step toward an ‘open ecosystem’ in which site owners and marketers have a variety of choices for how and where to their place advertisements.”
Microsoft has become as successful as it has for a reason; the company thinks ahead and makes decisions not simply based on the here and now. This new business referral agreement Microsoft has made with OpenX will bring a huge amount of inventory to Microsoft’s Content Ads contextual ad network for years to come.
Many early critics, however, believe this new deal illustrates Microsoft’s lack of commitment to its own line of ad management products. For example, the company’s Atlas Publisher Solutions (APS) includes a few advanced product offerings, such as AdManager, which has long been the company’s flagship ad management platform. Other Microsoft offerings include DealManager, which is a capability media sellers can utilize, and Inventory Manager, which is an inventory forecasting tool.
It’s become very apparent over the last couple of weeks that Microsoft isn’t likely to abandon its APS products, but the company does seem more than willing to put them on the back burner if it means they can get a hold of more ad inventory through other means.
Microsoft’s Corporate VP of Advertiser and Publisher Solutions, Scott Howe, recently revealed that a majority of the referrals Microsoft intends to share with OpenX will be “mid- and long-tail publishers and the referral pact won’t be limited to small publishers.”
Chances are the partnership with OpenX was very strategic, and the line of thinking went something like this: OpenX has 150,000 websites that it services in the United States, most of which are small, which means the company has a ton of small niche content publishers that Microsoft most likely would have never reached with their more advanced product offerings.
"We’ve always looked at the tools of business as a means to an end," Howe said. "It’s a good set of offerings for publishers, but it also allows those publishers to be more acquainted with the broader technology stack." In other words, OpenX offered some decent software, but Microsoft has more to offer in terms of technology.
Currently, Microsoft has more customers dependent on aspects of their Content Ads contextual network than it does on their publishing tools, and according to some, this imbalance of the company’s priorities will eventually affect their long-term investments.
"We need to be good at a lot of things to deliver this holy grail of advertising," said Howe. "Yet we need to temper that with the realization that if you try to do everything, generally you do everything poorly."
It could be said that Microsoft is playing dirty using a spoiler tactic, though it’s nothing that hasn’t been done before. Essentially, this is the way a spoiler tactic works: one company takes their competitor’s biggest cash cow by offering a free alternative.
Just about every major company has used this tactic against Microsoft, including Linux and Google. So, technically, who could really blame Microsoft for teaming up with OpenX and basically taking Google’s advertising cash cow?
Ad-serving, which Google has really excelled at in recent years, isn’t really a cash cow in and of itself, but there’s no denying that it’s definitely a major part of it. This is perhaps why Microsoft’s partnership with OpenX was so smart: it provides legitimate and major competition to Google’s ever-popular AdSense.
Despite the fact that Google’s AdSense program has many weaknesses, it’s still the most lucrative aspect of the company. It seems as if things are moving toward the idea of publishers selling more directly, which means Google better find themselves a company similar to OpenX if they want to stay relevant and rich.
That being said, Microsoft won’t be successful in their new endeavor if their ads with OpenX aren’t relevant. If it appears as if Microsoft’s ads are relevant and featured on the appropriate sites, Internet users will be grateful, which in turn will result in a better return on invested capital for the advertisers. Let’s hope Microsoft keeps it relevant.