By Sunshine K. Mugrabi

Sunshine K. Mugrabi

Microsoft, the software behemoth and online services convert, is getting religion online—again.

This time the software maker plans to shift the bulk of its advertising budget to digital media.

That detail emerged when the computer software company’s vice president of marketing told a group of advertising industry professionals at a recent conference that the move will take place over the next three years.

But one industry analyst cautioned that such a massive shift in Microsoft’s ad spending could send shock waves not only through traditional media outlets, but also among existing advertisers that currently bid for online ad placements.

“There is probably not enough advertising inventory [online] to accommodate all that spending,” said Greg Sterling, analyst at Sterling Market Intelligence.

The software giant’s readiness to spend its marketing muscle in the digital domain underscores the company’s commitment to the Internet. Microsoft currently spends about $1 billion a year on advertising in the U.S. alone, with more than three quarters of that amount earmarked for television, newspaper, radio, and other non-digital advertising outlets. The software company’s overall advertising budget was equivalent to about 6 percent of all U.S. online ad spending in 2006.

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“Based on what we’ve learned so far from our investments and experiments, we’re confident that by 2010, the majority of our media mix will shift to digital,” said Microsoft VP Mich Matthews, speaking at the recent American Association of Advertising Agencies conference in Las Vegas.

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Microsoft’s spending on digital marketing made up 22 percent of the company’s overall marketing budget last year. It will rise to 28 percent in 2007, according to a Microsoft spokesperson.

A move toward digital advertising is inevitable, as information and entertainment is consumed online at higher rates, said Mr. Sterling. The Interactive Advertising Bureau this week said U.S. online advertising surged 34 percent to reach $16.8 billion in 2006, although research group eMarketer has projected that online advertising growth will slow to 19 percent in 2007.

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Nonetheless, as a technology company, Microsoft must stay ahead of the curve on this trend in order to meet its customer base, said Mr. Sterling.

Microsoft said it will work to integrate its marketing offerings so they include both traditional and digital media. “There are times, places, and audiences where a TV spot [or] a print ad … is the best choice … Live sports on television, a fresh episode of ‘24,’ the Wall Street Journal, and the airport terminal will continue to be great ways to reach them,” the Microsoft spokesperson said.