MSN does not penalize for adsense adds and never will. That would be a lawsuit for the ages if they did! The reason that you show up and he doesn't is because of anchor text and on page factors like title tag and keyword saturation. If you look at the anchor text of the backlinks that your competitor has, you will probably not find that many of the keyword that he doesn't show up for.
If you want to show up more for that keyword that he has you beat on, simply make sure it is in an H1 title, at least 1% of the time on your page, and in the anchor text of a lot of your incoming links.
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