DoubleClick Acquisition: Google Heads Microsoft Off At the Pass

When I wrote that Microsoft (MSFT) won’t buy DoubleClick (DCLK), I was right. But I was wrong when I thought that Google (GOOG) wouldn’t, because that would cause a publisher flight.

An ongoing theme pertaining to Google has been its desperate desire to diversify revenue streams. We recently talked about how Google is not looking for traffic, but rather, ways to monetize its traffic. And since the next wave of growth is display/banners at the expense of video (and the one after that being video), Google did not apparently blink today, spending twice what it spent on YouTube to keep DCLK out of the hands of MSFT.

“Keeping Microsoft away from DoubleClick is worth billions to Google,” an analyst with RBC Capital Markets, Jordan Rohan, said. Indeed, MySpace got $900M in an ad deal, and this $3.1B deal is the price to pay to maintain Google’s lead online, I presume.

As Om Malik states: “the amount Google spent is shade under Google’s revenues in the fourth quarter of 2006 ($3.21 billion) and what the company earned in entire 2006. At the end of 2006, Google had $11.2 billion in cash.”

While many folks will rush out and say this is a brilliant deal (and frankly, from a defensive, Monopoly-money using perspective, sure it is), I personally do not see this being a wise, long term investment… the publisher risk is enormous, in my humble opinion. But then again, as the line between search and display advertisers gets blurry, offering a one-stop solution is in theory a good one:

Or better yet, this graph I found on Business Week via B2.0 when asked “Which medium will represent the largest percentage increase in spending this year for your brand (or your top client)?”:

That says it all.

Of course, when most banks merged to offer that to clients, we learned, it was not sound. Furthermore, many media firms that did just that also learned the hard way that this does not always work in practice.

But when you have over $10B in cash and securities and a market cap of $145B - much of which is hinged on growth, then cost is secondary.

GigaOm looked at the year-by-year appreciation of Google’s stock price:

2004: Up 126.8%, from the offering price of $85 to $192.79.

2005: Up 115.2% to $414.86.

2006: Up 11.0% to $460.48.

2007: Up 1.5%, as of April 12.

Google, which joined the S&P 500 a little more than a year ago, has since failed to outperform that index: The S&P 500 returned 16.5% in 2006 and is up 2.1% this year.

But do ask yourself this: YouTube got $1.65B in stock, DCLK got $3.1-3.3B in cash. Of course, private equity financiers prefer cash… and DCLK could parlay MSFT against GOOG to get cash, but what does that say about the likelihood of this deal really being accretive for Google? I don’t think it will, no matter how large display/banner ads are.

In fact, just earlier this week, Eric Schmidt said that if given the choice, Google would prefer building solutions in-house than buy them… yet they pull this deal?

Is Google desperate, or is DCLK such a great deal? One thing is for sure, the blogosphere will be talking about this for a while, and great arguments will be made on what this means for Google, MSFT, Yahoo! and the industry in general.

It’s also breathtaking how much things have changed, between 1994-2000: DoubleClick was synonymous with online advertising, then it got out of the advertising network business for technology. Today, Google is synonymous with online ads… even though, as Business 2.0 reminds us:

Here’s the grand irony, though, that the Times missed.

Google is spending a mere 2 percent of its $145 billion market cap on DoubleClick. But at one point, Google was counting on the much-mightier DoubleClick for its survival. When Google launched AdWords, even its founders had doubts that the newfangled advertising system would work. Sergey Brin once told Business 2.0 columnist John Battelle that if AdWords failed, he and cofounder Larry Page figured they could swim to DoubleClick as a “life preserver.”

A more global theme I’ve covered here is how large new and old media, as well as technology companies essentially keep prices of startups and valuations of these high by bidding for assets to keep them away from one another.In other words, Google recognizes that it’s a vicious cycle, they need growth to maintain their stock price, and so long as the multiples on their earnings and growth are healthy, they can afford to pay anything to keep MSFT (and Yahoo! (YHOO) ) at arms’ length.

DCLK generated about $300 million in revenue last year, mostly from providings ads on Web sites, so it got 10 times revenues which is very healthy, especially when you consider that after being bought for $1.1 billion by private equity firms, it sold off a couple of assets to net these $535M. In other words, Google needs to ask itself what it paid $3.1B for?

Don’t get me wrong, Google is laden with smart people, but after acknowledging that billion dollar acquisitions for dMarc and YouTube are not as synergistic as they would have hoped, I am, frankly, shocked by this news!

Naturally, Yahoo! did not need to partake in this deal, since they have a more healthy display/banner business… but MSFT - that has been trying to get into this game - now feels like a distant competitor in the online advertising war.

Here’s how Google - whose stock is down less than 1% after announcing the deal - is spinning this, according to Google’s own press release, and paraphrased by PaidContent.org:

– “For users, the combined company will deliver an improved experience on the web, by increasing the relevancy and the quality of the ads they see.
– For online publishers, the combination provides access to new advertisers, which creates a powerful opportunity to monetize their inventory more efficiently.
– For agencies and advertisers, Google and DoubleClick will provide an easy and efficient way to manage both search and display ads in one place. They will be able to optimize their ad spending across different online media using a common set of metrics.”

All to say, it’s a great time to be in new media, I’ll tell you that.

Comments

[ben allen:]

Ashkan, greatly enjoyed reading your thoughts on this and earlier related articles. I believe most of your points are right on, but now with the benefit of 20/20 hindsight let me give my two cents on what I think Google sees as the opportunity here.

Google obviously needs to continue to grow at a tremendous clip hitting quarterly milestones for wall street. And if you look at how online ad revenue is expected to be spent in the forseeable future we find the biggest chunk in search followed by display and classifieds… and there is only so much more Google can do to affect the tug a war match underway for that big chunk of pie ear-marked for search spending. So the next logical place to look is the next biggest piece of the pie… ie display ad spend. If you drill down into that display ad spending you’ll find enormous chunks that are spent via buys on one of a handful of ad networks like advertising.com, valueclick, burst, real media, in addition to the big media content creators sites. So if you’re Google wanting to play in that display space very quickly and in a big way the fastest way is to buy an existing ad network. Traditional network like advertising.com, tribal, valueclick are all big, but arguably have lower quality inventory provided from a mix of thousands of very small mom and pop sites plus the sub-prime inventory from the larger publishers (stuff those publishers can’t sell using their in house sales force). Doubleclick, on the other hand is not a true ad network per se, it’s a technology solution/tool that they sell as a service to advertisers and publishers to help make running their ad business easier/more streamlined… the same way a company buys Microsoft office or SAP to run their business. They’re not currently active in the market trying to get advertisers to spend on the ‘network’ any more than Microsoft is trying to dream up math problems that can be solved by excel.

What I can see Google doing is going to Doubleclicks premium Fortune 500 clientele and saying this. “Listen I know that you only sell 50% of your banner and video inventory, join our partner program and let us have a look at your incoming ad calls and if doubleclick has a low value or no value match against it based on what you’ve already sold, let us see if we can find a higher valued match with a search query the user may have performed on Google recently… if we can, we can get $x for it and we will share x with you.” The value proposition to the advertiser is the same high relevance that they enjoy from the search query matches tied together with the premium content quality of the doubleclick customer base.

This is already sort of what folks like Tacoda and Revenue Science are doing, although they obviously don’t have the Google search behemoth to tie to.

Voila the next thing you know you have a massive ad network of quality content sites that you’re skimming sales revenue from.

About the publisher flight risks… yeah some may get spooked about giving more money to Google, but remember a few points… First many of these publishers happily contribute significantly to the Google or Yahoo coffers already through participation in adsense or overture programs as a part of their internal inventory yield management initiatives. These services ultimately help the publisher make more money everyday and offers something they can’t do themselves, so publishers have shown that they’ll happily let Google get paid as long as it helps them get paid too. Also, Doubleclick has been in the business quite a while and is one of the most respected and established vendors in the market, with the most publisher customers, with unsurpassed up time (reliability) and a large talent pool of operations folks well versed in running their system, etc. This along with the fact that Doubleclick recently bought out one of their key smaller and more nimble competitors (FALK) means that if you’re in the market for ad serving solutions, there aren’t that many other strong competitors in market to offer an end to end solution for publishers, so just saying no thanks to Doubleclick and hopping to another solution is no light or easy decision.

Looks like Google really wants to be in the display ad network business and this is the biggest and quickest bang they could make and got some cdn and data center assets to boot.

2007 Apr 17 06:32 PM

[Ashkan Karb...:]

Ben, thanks for the kind words. Really enjoyed your post. But in the end, you hit it on the head of the nail here:

"Doubleclick, on the other hand is not a true ad network per se, it’s a technology solution/tool that they sell as a service to advertisers and publishers to help make running their ad business easier/more streamlined… the same way a company buys Microsoft office or SAP to run their business. They’re not currently active in the market trying to get advertisers to spend on the ‘network’ any more than Microsoft is trying to dream up math problems that can be solved by excel. "

Saying that GOOG bought DCLK to get into the display/banner biz is aking to saying that MSFT is in real tight with ad agencies because they use Powerpoint for client pitches. DCLK is a software company and ad serving is a commodity, which combined with the publisher and advertiser flight risks, AND the high price, makes me scratch my head.

But, in the end, Google used cash to prop up growth, position for display/banner ads and win back Wall Street's affection and imagination.

2007 Apr 18 12:43 PM

[ben allen:]

The alternative is to think that Google overpaid for something (in cash no less) that they knew was an old school, low barrier to entry, commodity business that ran the risk of losing customers en mass becuase of their new ownership. From what little I know of Google I somehow doubt just having it run as it was is the long term plan.

What you essentially have in Doubleclick now is already a very large ad network, although no buyer can currently buy the Doublelick ad network directly, its a bunch of big web sites all opertaing separately and independently but on a common back end platform... Doubleclick's DFP clients certainly don't consider themsleves a part of any Doubleclck network. But that's certainly not to say that they wouldn't consider it if it helped them bring in more money. I don't think its too much of a stretch to see doublclick go back into the ad network type business, thats how they started afterall... and they'd already made a step in that general direction by starting their ad marketplace, knowing that, like you said, ad serving is a commodity business, they wanted to find a way to get a small slice of the media money that was exchanging hands right in front of their faces every day... motif and klipmart were similar endeavors.

bottom line is that 1. there is potential value to be created for both parties by bringing together Google search query data to display ad calls from DFPs exiting client base, and 2. trying to get in on a piece of the media spend has been the holy grail of all of these 3rd party software solution providers since their inception, this is not a new concept. Go talk to PointRoll, eyeblaster et al... it aint much fun to sit back and take in tiny software licensing fees as you watch the businesses that you help run make that much and more in a single ad buy.

2007 Apr 18 02:24 PM