Microsoft, still bulking up to pry more of the online advertising market from Google, has acquired a Web site called Jellyfish.com that has struck unconventional ad deals with big retailers such as Target and Best Buy.
Using Jellyfish, consumers can compare prices of products culled from a number of online stores. Retailers pay Jellyfish fees to promote their products, and Jellyfish refunds part of that revenue to consumers who buy through its site. The site also hosts an unusual form of auctions in which the prices of products get progressively lower until the supply runs out. No purchase price was disclosed for the deal, which closed Sep. 27 but wasn't announced until Oct. 2.
The acquisition comes just after Microsoft launched a new version of its Internet search engine that is designed to boost traffic—and ad sales—by offering to help users simplify online shopping and Web searches. Microsoft, though still dominant in the market for computer operating systems and business software, has been struggling to extend that success to Web search and advertising.
Underscoring the significance of that push at an Oct. 2 event in Paris, Microsoft Chief Executive Officer Steve Ballmer estimated that as much as 25 percent of the company's revenue could come from advertising in the next four to 10 years.
Massive Competition
That's a tall order—and not merely because Microsoft's total online revenue, which encompasses more than just ads, accounted for less than 5 percent of the company's US$51.1 billion revenue total in the fiscal year that ended in June. At present, Google accounts for more than half of all Internet searches and more than a quarter of U.S. Internet ad spending, making it the go-to company for distributing online ads.
And with all that revenue coming in, Google has thrown tremendous resources into developing and pushing Web-based software that competes with Microsoft's desktop applications. The most notable move in Microsoft's counteroffensive has been the acquisition of the online advertising company aQuantive, a US$6 billion deal announced in May. With its completion in August, Microsoft has given broader powers to aQuantive's former CEO, Brian McAndrews.
Microsoft may incorporate Jellyfish's rebates and auctions for consumer electronics and other products into its MSN online properties, Jellyfish founder Brian Wiegand says. "They are investing heavily in shopping and e-commerce," says Wiegand, who will become a group manager at Microsoft. Wiegand says Jellyfish, based in Madison, Wis., raised US$6.2 million in early-stage capital from investors including Kegonsa Capital Partners of Wisconsin.
Jellyfish is Wiegand's third startup. In March, he says, he sold NameProtect, which combed the Web for trademark abuses on behalf of clients including Microsoft and Procter & Gamble, for more than US$20 million to Corporation Service. Wiegand also sold BizFilings, which helped startups incorporate, to Wolters Kluwer, a Dutch publisher of professional databases, for US$14 million in 2002. This time he plans to stay on with his acquirer. "I'm going to give being an entrepreneur within a big company a shot. Microsoft is trying to become more entrepreneurial," he says.
How It Works
Jellyfish's main service lets consumers browse through products, then lists the merchants that sell them. Retailers, including Target, Best Buy, and Home Depot agree to pay Jellyfish a commission for selling a certain number of products. Jellyfish then refunds some of that money to consumers, effectively lowering a product's price, according to Wiegand. Jellyfish also hosts daily Smack Shopping auctions—a smack is a group of jellyfish—in which the price of a product gets progressively lower, and consumers vie to buy items before the stock runs out. Jellyfish sells about US$5 million a year in merchandise through auctions, Wiegand says. He declined to quantify sales of products through the comparison-shopping service or Jellyfish's revenue from either operation.
By snaring Jellyfish, Microsoft could "chip a little niche" from Google's dominant share of Internet ad spending, says David Hallerman, a senior analyst at researcher eMarketer. "But it's not a game changer," he says. eMarketer predicts Google will account for 27.4 percent of the US$21.7 billion that U.S. advertisers will spend on the Web in 2007. Yahoo's estimated share of the market is 16.3 percent, and Microsoft is expected to bring in 6.1 percent—-even less than Time Warner's AOL.
Google is also tops in fielding search requests for Web users, handling 56.5 percent of U.S. Web searches in August, vs. 23.3 percent for Yahoo and 11.3 percent for Microsoft, according to market researcher ComScore.
To close the gap, Microsoft is trying to differentiate its search engine by spotlighting results that pertain to shopping, health, and entertainment. The company's Live Search technology, launched on Sep. 26, sifts through an expanded index of Web sites in a bid to respond to queries with more relevant results. For example, searches for products will yield results that include reviews, prices, and photos of products, as well as links to retailers.
In a blog post announcing the deal, Microsoft said Jellyfish's comparison-shopping technology "has some interesting potential applications as we continue to invest heavily in shopping and commerce as a key component of Live Search." But with Yahoo and even Google also deploying enhanced search capabilities to return more useful snippets of information, Microsoft remains a long way from finding a more relevant role in the online ad market.
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