Seeking To Banish “Distraction” Microsoft Replaces Hotmail Display Ads With Deals

Microsoft is trying to make ads in Hotmail better. The company is replacing conventional display ads in its webmail service with deal ads that it believes will be more relevant and interesting to users.

Not all Hotmail users will see the new ads immediately. Microsoft is doing a pilot in which it’s testing consumer response to deals ads vs. traditional email display ads in selected cities. However, Dharmesh Mehta, Director for the Windows and Windows Live Business Group, believes users will prefer the new ads to the old.

He’s interested in delivering a “less distracting ad” to users. He acknowledged that Microsoft, Yahoo and Google are making something on the order of a $1 billion or more annually from ads in email. He also pointed out that many of the ads seen by consumers in their webmail accounts are of low quality, inappropriate or “creepy” in some cases.

The following are examples of the questionable or low-quality ads many people have seen in web-based email (in this case Yahoo):

Below are images of an actual display unit in Hotmail (left) vs. a screen capture of the new deals unit (right):

Microsoft’s Mehta told me that, based on “early qualitative feedback” Microsoft has received, he is confident people will prefer the new deal ads. He added that there would likely be “a lot of refinement” as the new units roll out.

According to October, 2011 data from comScore Hotmail is the world’s largest web-based email provider with roughly 350 million users on a global basis. Yahoo is second with 310 million and Gmail is third, with 260 million. However, on its most recent earnings call Google said that Gmail had “350 million active users.”

In the US Yahoo is generally regarded as the largest webmail provider. According to comScore (10/11) the US email user numbers look like this:

• Yahoo: 96.6 million
• Gmail: 62.7 million
• Hotmail: 45.5 million

In the US market then Hotmail is the underdog. However, Mehta told me, “We have tons of people signing up for new accounts.” He points out that Hotmail can be used as a single in-box for “any email address you want, including Gmail and Yahoo.”

The new deals ads will be initially targeted by country, language, age and gender. However Microsoft might allow users to select categories of interest later on.

I asked Mehta about the deal sources Microsoft is using. He said that some were sourced by Microsoft directly and some are aggregated from partners. The business models and the way Microsoft gets paid also probably vary accordingly. The company said it will be testing out different models and approaches.

Microsoft now has several distribution points for deals, including Bing Deals and MSN Offers in addition to the new email deals ads.

Microsoft will probably see a decline in email-generated ad revenue initially by switching to deals. Mehta isn’t concerned. He wants the user experience to improve and says that Microsoft can afford not to maximize ad revenue in email. “We’re focused on making a great product,” he told me.

Hotmail is a also gateway to other products for Microsoft, such as Office Web Apps. Mehta added that that Hotmail is a “great experience” on Windows Phones. “We have lots of opportunity to cross-sell people on our product story,” he explained.

It thus appears there’s new or a renewed strategic interest in email, especially as the company steps up promotion of Windows Phones in the US and simultaneously tries to push back against the rise of Google Docs/Apps.

Mehta repeatedly conveyed during our call that Microsoft wants to create the best webmail experience possible. “We’re willing to do what it takes,” he emphasized.