Gates makes case for Microsoft's ad business

SEATTLE--While Microsoft may face some challenges taking advantage of the shift to Internet advertising, it's in good company.

Television, newspapers and all forms of publishing are being fundamentally changed by a shift to digital media, Bill Gates said Tuesday as Microsoft kicked off a conference for large online advertisers.

"Yellow Page(s) usage among people below 50 will drop to near zero in the next five years," Gates told a crowd of more than 1,000 people from the advertising, publishing and tech industries at the company's Strategic Account Summit.

TV is similarly being overhauled, as broadcast media suddenly have to compete with videos of high school games and short clips posted to YouTube. Newspapers are moving to digital forums but finding plenty of competition for things like the job classifieds that were once their exclusive domain.

Gates said he has a lot of friends in the newspaper business, but added there is also an "inexorable decline" in the use of newspapers to get news, even local news. "This is a tough, wrenching change for them," Gates said.

Microsoft, too, has found plenty of competition. But Gates and other Microsoft executives are trying to make the case that they are still in the game, despite missing out on recent, key deals and struggling to make a dent in the search market.

Kevin Johnson, head of Microsoft's Windows and advertising businesses, sent an e-mail to conference attendees on Monday reassuring them that the software giant is in the ad game for the long haul.

"Some of you have asked if we remain as committed following the announcement of Google's proposed acquisition of DoubleClick," Johnson wrote. "Many of you have also expressed your concerns about the impact that such an acquisition will have on the online advertising landscape. While we share your concerns, we maintain our sharp focus on this industry, and we will continue to invest heavily in innovation and partnerships in this area."

While Microsoft is working to catch up to Google in areas such as search, it is also looking to technology to provide new types of Internet content and advertising that it hopes will change the rules of the game.

"To think about this as the endgame is quite silly," said Gary Flake, the former Yahoo executive who heads up Microsoft's Live Labs, which tests out new ideas in Internet content and advertising.

Microsoft showed how its Seadragon technology for scrolling large images could pave the way for a new type of advertising in which a small ad could actually contain an entire brochure or product catalog. While the average browser would see just the small ad, an interested potential buyer could zoom in for more detailed photos and even detailed product specifications. Internally, Microsoft is calling that an "infinite zoom ad", Flake said.

"It's pretty mind-boggling," Flake said in an interview. "The idea that you can have a finite piece of real estate, a fixed area that can be explored and expanded...now what is an advertisement can actually have as much information as a product catalog."

Such ads could also be less obtrusive. "It can be surfaced in a way that doesn't bother the user," Flake said. "It's actually great for the user because they only see it if they choose to dive into it."

That said, the ad business would have to shift some to adapt to a different kind of ad. "The click doesn't happen. There is no cost per click. We need something different...pay per zoom or pay per attention," he said.

In a talk later Tuesday, Flake also plans to show a potential ad use for another Microsoft photo technology, PhotoSynth, which creates 3D images out of collections of digital photos of the same space. In the past, Microsoft has demoed the software to allow people to move around tourist spots and landmarks. But, Flake said, the technology could also be used to replicate storefronts.

"We kind of jokingly call it 'One and a Half Life'," Flake said, a reference to an experience in between today's Web and the Second Life virtual world.

Flake said he has talked to a lot of partners who want something more immersive than current e-commerce options, but aren't sure Second Life is really a viable e-commerce option. "A lot of them have such conflicted emotions about building a Second Life storefront," Flake said. "They kind of want to do it because it's maybe a cool thing to do. They have no expectations or aspirations that it will make any money."