Microsoft's new ad model aims to break Google's grip

After years of watching Google run away with Internet search and make billions from the related advertising, Microsoft is trying to tweak the fundamental business model of the industry in its favor.

While the Redmond company is still trying to catch Google — and second-place Yahoo — by adding features and improving the relevancy of its Live Search service, this week it detailed two initiatives meant to change how search advertising is bought and valued.

On Wednesday, Microsoft announced Live Search Cashback, a program that gives consumers some of the revenue Microsoft takes in when they buy products from companies that advertise on the search engine.

Another program, "engagement mapping," seeks to give credit to all the digital advertising that influences a consumer's online purchases, rather than just the "last ad clicked" — often a search ad on Google.

Some analysts quickly derided the cash-back program as a desperation move, but Microsoft sees it as a game-changer.

"I think years from now, you may look back and say, 'Wow, search started to get a fair bit more competitive and we can look back to [this] announcement,' " Chairman Bill Gates told executives at advance08, the company's conference for advertisers.

Commerce searches — mainly researching and shopping for products — represent one of the most lucrative parts of the online world.

This category makes up about a third of all searches but generates a "dominant share of the revenue," Gates said.

Microsoft's cash-back program sells this commerce-search audience to advertisers on a cost-per-action basis, in which the advertiser pays only when someone buys something.

"That really eliminates risk for advertisers," said Matt Rosoff, an analyst with Directions on Microsoft.

The current standard, which has made Google rich, is cost per click. In that model, advertisers pay when someone clicks on their ad.

The model was a step forward from online advertising sold on a cost-per-impression basis, in which advertisers pay for the number of people who view their ads.

Search providers act as the middleman between advertisers and consumers.

With its cash-back program, Microsoft is passing some of what it makes from advertisers on to consumers to drive sales and traffic to Live Search.

"It's not just the search engine capturing the value of your time, it's the consumer and advertiser getting more of that economic value," Gates said.

At the same time, it is undercutting Google.

"That absolutely changes the economics of search, not to Google's benefit," Rosoff said.

Microsoft has signed up 700 retailers, including The Home Depot, Spiegel, Crutchfield and Foot Locker.

Consumers searching for a specific product will see comparisons and a bottom-line price they'll pay at each retailer, after the rebate, which the retailer sets.

"[The retailers] are essentially deciding what percentage of each sale they're willing to cut off as marketing costs," Rosoff said.

Consumers make the purchase through the retailer's site, then follow a multistep process, including setting up a Windows Live account, to claim their rebate through eBay's PayPal unit.

Some industry watchers think average users will struggle.

"It still remains to be seen whether it's worth doing to begin with," said Kip Kniskern, contributor to LiveSide.net, which tracks Microsoft's online efforts. "Microsoft doesn't have much to lose."

The company's search efforts still suffer from small and shrinking market share, and scale is critical in the online world.

That's part of the reason Microsoft tried to buy Yahoo and is reportedly pursuing an alternative transaction to buy only Yahoo's search business.

"I don't know if [the cash-back program] is going to change the whole game unless they do other things to build traffic," Rosoff said.

With the tech world's attention turned toward the new pay-for-search program, Gates reviewed several existing features of Live Search that Microsoft has added in the last year.

He said the company is continuing its work to improve relevancy and the way the search engine recognizes what a user is looking for based on the context of recent searches and other activities. That will carry over to more targeted advertising, as well.

Gates said he can't recall a project in Microsoft's history to which the company has devoted more talent.

Google, meanwhile, is not sitting on its hands.

The company showed off its latest search innovations Monday, including face recognition in advanced searches, and plans to sell advertising related to image search.

Google's stock slid 4.9 percent Wednesday to close at $549.99.

Microsoft shares closed at $28.25, a drop of about 1.8 percent that was in line with the broader markets.

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com