Microsoft is testing a new pilot program that will let third party publishers add Microsoft’s contextual ads next to their content in a self-serve format. From what we can tell from the email below, it will be very similar to Google’ Adsense and Yahoo’s Publisher Network.

Google dominates this space (and all other contextual advertising) because it offers publishers far higher fees for ads. Yahoo and Microsoft have made up for that shortfall by offering guarantees in the past. Or in the case of Yahoo, by offering more flexible products like allowing their ads to be shown next to third party search results.

The new program will begin on July 21. No word on how Microsoft will get more money to these sites than what is offered by Google today but they are not requiring exclusivity: “You may also use Microsoft ads on the same sites and pages as Google ads as long as you do not have a specific exclusivity agreement with them.”

Putting ads on third parties is a controversial product, since advertisers expect the kinds of click throughs and conversions that they get from search. Earlier this week Google was sued for fraud because ads placed on parked pages weren’t producing results.

Still, if Microsoft is willing to take a bath and pay publishers more than Google does, they can get a lot of page views quickly and build up inventory.

Full email is below. I’ve contacted Microsoft for a comment. From what we can determine this is the first time Microsoft has experimented with a self-serve product. Until now, you had to enter into a partnership agreement with them and they only targeted very high traffic sites.

Update: A Microsoft spokesperson says this trial has actually been underway since earlier this year with a small group of publishers, but won’t say when or if this will officially roll out publicly.

Update 2: Microsoft has sent us the following statement:

Microsoft’s self-serve advertising offering for publishers is still under development and is currently in a private pilot phase, being tested by select publishers who met the participation requirements. The private pilot phase began earlier this year. A private, phased approach allows us to learn more about customer interest in content advertising and provide guidance as to how we can improve the product and deliver the right features required to meet publisher and advertiser needs. It’s our intention to continue to expand our high quality network and relevant audience gradually and intelligently over time for our advertisers. We will evaluate customer interest and product performance as we move through the private pilot, but we have no specific launch plans to announce at this time.

We encourage publishers who are interested in joining the pilot to fill out an interest form here: http://advertising.microsoft.com/publisher

Dear xxxxxx:

Thank you for your recent completion of the self-submission form on the Microsoft adCenter site for this program. Below is more information for you about the pilot. I can answer general questions you may have about participation. Please let me know if you would like to proceed and I can invite you formally on Monday July 21st to begin.

The pilot is small and not public, and participants will be asked to agree to a Confidentiality Statement before taking part – this means that you will not be able to blog about the program or discuss it outside of your company.. We would be seeking feedback and suggestions from you about the service, its interface, and its effectiveness in generating revenue for your site. There is no exclusivity requirement and no minimum requirement for the number of ad units you may implement. You may use other contextual ads on the same pages as Microsoft ads during the pilot or implement only on the most relevant pages on your site.

You may also use Microsoft ads on the same sites and pages as Google ads as long as you do not have a specific exclusivity agreement with them.

“Competitive Ads and Services: In order to prevent user confusion, we do not permit Google ads or search boxes to be published on websites that also contain other ads or services formatted to use the same layout and colors as the Google ads or search boxes on that site. Although you may sell ads directly on your site, it is your responsibility to ensure these ads cannot be confused with Google ads.”

In addition, please take note of the following:

•We would request that you agree to take part in the pilot for at least two months or two full payment cycles.

•Only publishers who are U.S. based may take part; completing a W9 form is necessary to receive payment.

•Click rates will be closely monitored during the pilot and publishers whose click rates give cause for concern or are anomalous will be removed from the program and will not be paid for clicks on their ads.

•Microsoft can make no guarantee regarding the amount of any payments you may receive for the ads shown on your website during this test although the purpose of the program is to monetize your site with contextual advertising.

•We would ask that you not use a third party provider to serve Microsoft ads during this test program. If this is an impossible obstacle for you, please contact me about it.

•For the purposes of the pilot, you will be limited to a single account but you may implement ads on up to ten approved web properties that comply with the Microsoft adCenter editorial guidelines.

Best regards,

XXXXXXXX (for Aditi) at Microsoft