Microsoft admits it is lagging in fight for online advertising market share

The head of Microsoft's internet business has admitted that the company is "not where we want to be" in its battle to win market share in online advertising.

An internal memo from Kevin Johnson to Microsoft staff surfaced yesterday, after the company revived its pursuit of a deal with rival Yahoo and before an important gathering of its advertising clients, designed to showcase the progress of its internet business.

The two-day event, advance08, starts today and features speakers including the film director James Cameron and Viacom's chief executive, Philippe Dauman, discussing the advertising industry. Bill Gates, Micro-soft founder, will be among the company executives trying to illustrate how Micro-soft can offer advertisers co-ordinated access to internet search users, visitors to its MSN websites and users of its Xbox games console and other products.

But analysts said they expected Microsoft to add little to its offering at the event, which will be overshadowed by the off-and-on talks with Yahoo and by the perception that Microsoft has fallen far behind rival Google in capturing a share of the fast-growing online advertising market. Google has almost 60 per cent of the search-based advertising market, and Microsoft has less than 10 per cent, according to comScore data.

Mr Johnson wrote: "Regardless of the outcome of any new discussions [with Yahoo], it is important we continue to move forward to strengthen our online services business. The fact is that we are not where we want to be in this business yet and we've been in this position longer than we'd all like."

Steve Ballmer, Microsoft's chief executive, had hoped to combine MSN and Yahoo to improve the cost-effectiveness of its search-based advertising business, but Yahoo rejected a $46bn takeover offer. On Sunday, Microsoft proposed an alternative business alliance, understood to involve buying Yahoo's search ad business and taking a stake in the remainder of the company. Microsoft said it may reconsider a full bid in due course. Dissident Yahoo shareholders, led by Carl Icahn, are trying to force out the Yahoo board and replace it with directors more willing to talk to Microsoft.

Sarah Friar, analyst at Goldman Sachs, told clients that Microsoft still needs Yahoo to "kick-start" its online business.