May 11, 2011 6:40 pm

Skype users expect more ads under Microsoft

Users of Skype are bracing themselves for more advertising alongside their chats with friends and family, after ad agencies endorsed Microsoft’s plans to increase the amount of marketing on the online telephone service.

The negotiations between the two technology companies that led to the US group’s $8.5bn acquisition of Skype began as a discussion about an advertising partnership, after the telephone service introduced ads to its communications application this year.

Tony Bates, chief executive of Skype, and Steve Ballmer, Microsoft’s chief, told reporters on Tuesday that video advertising would be one of their biggest opportunities to generate greater revenues.

“We think advertising is a very powerful monetisation stream for us, if you think about the size of our userbase,” says Mr Bates, referring to Skype’s 170m active monthly users.

Advertising agencies contacted by the FT welcomed the opportunity to access Skype’s large and international customer network. Video is among the fastest growing forms of online marketing but good-quality video-advertising units are in short supply.

ZenithOptimedia, a media agency, expects the US online video market to grow by more than 20 per cent a year in the coming years, with spending likely to rise from $2.7bn last year to $5.1bn by 2013.

Curt Hecht, chief executive of Vivaki Nerve Centre, part of Publicis Groupe, said that Skype could help Microsoft to fend off growing competition from AOL and Google’s YouTube in video ads: “I think the opportunity for them in terms of reach and scale and a global platform for advertising sounds good.”

That could include brand advertising – the most lucrative kind – as well as targeted direct-response marketing, whereby interested consumers could call to buy a product or place an order through Skype.

Agencies also suggested Skype could provide a new distribution channel for Bing, Microsoft’s search engine which is making slow inroads into Google’s dominance of search.

“Microsoft have a very strong global sales force in place who are very good at selling inventory and opportunities across a portfolio of devices and destinations,” said Norm Johnston, global digital leader at Mindshare Worldwide. “The challenge will be to identify new opportunities for online video advertising that doesn’t interfere with the user experience.”

Several Skype users told the FT they would rather pay than see ads on the service, with others particularly opposed to the idea of running short “pre-roll” ads – the most common online video format – before connecting a call.

“I struggle to see how they will get to $8bn of online advertising,” said one senior agency executive. “Janus [Friis] and Niklas [Zennström, Skype’s co-founders] were allergic to putting advertising on it.”

Phil Hall, head of broadcast investment at Media- Com, said Skype should be “very careful” as it added more advertising when people are accustomed to using it without the “intrusion” of ads.

Volkswagen, a MediaCom client and early Skype advertiser in Germany, found that consumers were unlikely to click on its Beetle video ad, which played during calls, but they did watch the content in the background.

“The tricky bit is how you incorporate advertising into one-to-one communications,” said Suranga Chandratillake, chief executive of Blinkx, an online video service. “There have been a few attempts before to have ad-supported mobile phones and in general they haven’t taken off. But that’s not to say that it can’t be done.”

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