Microsoft Ad Business Strong, But Display Ads Threatened

Among Microsoft’s diverse revenue streams, its display ad business is the most vulnerable to economic conditions. That’s according to CFO Chris Liddell, who yesterday told investors the company still has great expectations for its online services business, which includes its search and ad platforms.

According to Microsoft’s earnings report yesterday, online services revenue grew an impressive 15 percent to $770 million for the quarter just ended. It experienced an overall loss of $267 million, but that’s not surprising in light of Microsoft’s heavy R&D investment in search.

The picture’s far from rosy however. Microsoft said it expects less aggressive growth of between 6 and 10 percent for the current quarter, and between 10 and 13 percent growth for the entire fiscal year (July 2008 to June 2009). Liddell said online ad revenue by itself will grow a slightly more robust 15 percent for the year, a rate he called “still healthy in a more difficult advertising spending environment.”

In other words, Microsoft anticipates single-digit growth for the first six months of next year. Web advertising performance beyond that is anyone’s guess.

As Liddell put it, “Our display advertising business is probably the most economically sensitive of our revenue streams and therefore has the highest potential to either under or outperform depending on the state of the economy.”