Microsoft thinks the advertising business model for traditional media...hose venues where advertisers still channel most of their...

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Microsoft thinks the advertising business model for traditional media — those venues where advertisers still channel most of their spending — will fall apart faster in the coming five years as the kind of interactive, targeted advertising that is defining the Web comes to the fore.

Chairman Bill Gates, speaking to an audience of Microsoft’s top advertising customers in Seattle this morning, expounded on this theme. It’s something that he’s talked about before, but today he described the decline in more certain, and biting, terms.

“We’re saying newspapers will go online, and there will be massive innovation that comes out of that. We’re saying that TV, the biggest ad market in the world, will completely go online and have the kind of targeting interaction that you only get out on the Web today,” he said. “As dramatic as things happening on the Web are, that’s actually what all advertising … will be in the future.”

Gates painted a grim picture of the transition.

“I have a lot of friends in the newspaper industry and, of course, this is a tough, wrenching change for them because the number of people who actually buy, subscribe to the newspaper and read it has started an inexorable decline,” he said.

With that decline, Gates said, advertisers are shifting their budgets to new areas.

Advertisers will spend about $445.5 billion globally in 2007, according to ZenithOptimedia’s most recent quarterly forecast. Of that, online is expected to get 7 percent of the pie compared with newspapers’ 28.3 percent. By 2009, online is forecast to grow to 8.7 percent, while newspapers’ share dips to 27 percent.

Newspapers aren’t the only media that will suffer from this transition, Gates said.

The traditional Yellow Pages are doomed as voice-activated Internet searches combined with on-screen interfaces on smart mobile devices get better and proliferate, Gates said. The company’s recent acquisition of voice-technology provider TellMe is accelerating the trend.

“When you say something like ‘plumber’ the presentation you get will be far better than what you get in the Yellow Pages,” Gates said. “After all, we know your location and so we can cluster [results] around that. … Yellow Page usage amongst people in their, say below 50, will drop to near zero over the next five years.”

Microsoft showed off IPTV, its underlying software technology for television delivered over the Internet. Gates said it makes traditional broadcasting obsolete, supplanting the model in which one show is delivered to many viewers who may or may not be interested in it.

“The end-user experience and the creativity and the new content that will emerge using the capabilities of this environment will be so much dramatically better that broadcast TV will not be competitive,” he said.

The IPTV model presents opportunities for advertisers to present viewers with messages specifically tailored to them.

“In this environment, the ads will be targeted, not just targeted to the neighborhood level … but we’ll actually know who the viewers of that show are,” Gates said.

Microsoft’s platform for delivering this kind of targeted advertising across the spread of its Web properties, and now these advancing competitors to traditional media, is called adCenter. Competitors Google and Yahoo! have similar platforms.

Gates said Microsoft is committed to making its platform the best, or one of the best, for selling and buying advertising inventory that targets specific audiences.

Microsoft, which still views itself as primarily a software company, is building tools to make and display the new kinds of interactive advertising that will define this new world. The company’s Silverlight online video technology, released in a test version last week, is one such example.

Gates said he will focus on online services, search and advertising in his last 15 months of full-time work at Microsoft before moving next summer to full-time work at his charitable foundation.

Benjamin J. Romano: