Five in Five

Introduction:
It began with a bang and finished with a boom. Five weeks, five companies, and more than $10 billion spent in the largest wave of consolidation in recent history, if not ever, in the Internet advertising space. And, for better or worse, it might not be over yet. In this week’s Trends Report, we look at what these deals suggest, picking apart the best of what has already been written all while trying not to say B-U-B-B-L-E.

Timeline:
April 13th – Google Announces Acquisition of DoubleClick for $3.1 billion
April 30th – Yahoo Announces Acquisition of outstanding shares of Right Media for $680 million
May 16th – AOL Announces Acquisition of Adtech AG for an undisclosed sum
May 17th – WPP Group Announces Acquisition of 24/7 Real Media (TFSM) for $649 million
May 18th – Microsoft Announces Acquisition of aQuantive (AQNT) for $6 million

What We’ve Learned:

• Microsoft Has Cash and Has Just Begun – When DoubleClick was sold, the assumption was that Microsoft was somehow not serious and/or didn’t want to spend that much money. With aQuantive, they proved both, paying almost twice what Google paid for DoubleClick and an astounding 85% premium on top of the then current stock price. Even if, out of desperation, Microsoft picked up 2600 people spread across two technology driven units – Atlas ad serving and Drive PM ad network along with the well-regarded service based online agency Avenue A / Razorfish. Leave it to Redmond though to send mixed signals about its future plans. Despite this mega-acquisition, the company still lacks the advertising base necessary to compete with Google in search along with the query volume. Picking up Yahoo, still makes sense to many analysts, as it "plugs a strategic hole," but as senior vice president and chief advertising strategist, Yusuf Mehdi, said "We feel quite good that we have all of the pieces we need," in an article appropriately titled, "Yahoo deal not needed, Microsoft exec suggests." That said, Microsoft no doubt felt some pressure to their software business from the continuing trend towards free, ad supported software; this move helps them hedge even though any real pressure to their core business will not come for several years.
• Nature of Inventory is Changing – In past articles, we wrote how the nature of communication has changed online, that sites like MySpace represented the next evolution of how people interact. MySpace’s growth didn’t necessarily have to come at the expense of other sites, but it only makes sense that it would at some degree, and the numbers support this. We didn’t, however, take our observations about the growth in MySpace and others to the next level, which RBC Capital Markets analyst Jordan Rohan (whom we and almost every publication has referenced recently) did, when he mentioned in a recent conference call that portals have lost a little of their relevancy. User behavior has shifted, and over time (years not months), when the MySpace audience matures, they stand to lose even more. As Jordan says, they have become more narrow. No longer do they represent where people go to find information, to communicate, and/or begin the web exploration. This doesn’t mean Yahoo should worry, only that it makes sense they have invested heavily in properties outside their core web business and technology that allows them to leverage their ad sales outside of their portal pages.
• These Are Strategic Acquisitions – While some of the prices might represent a tad more exuberance than I would like, the buyers aren’t doing so just to do so. WPP’s acquisition illustrates this point well. WPP and other large ad holding companies, as the Wall Street Journal summarizes,make most of their money by creating ads and planning where they should appear. They don’t make money from the actual display of ads or facilitating the display. As big brand advertisers continue to shift their budgets away from traditional media, WPP Group and other traditional advertising companies are at risk. WPP doesn’t really care about 24/7’s ad network, but for 1/10 the price of aQuantive, they picked up an ad serving solution (for publishers only now) that they can use as the basis for a broader play. All of the acquisitions above, including yesterday’s $100 million purchase of Feedburner by Google, have done so as part of a long term vision and commitment to Internet advertising. This brings us to our next point.
• Advertising is about (a) Technology (Platform) – It might seem like a dash to grab whoever, or to have a solution ready in case advertisers and publishers want to jump ship from DoubleClick now that Google owns them, but as we see from above, this isn’t the case. Those would be nice side benefits, but the bigger vision is more cohesive. Companies have judged that the market is right and the technologies ready that they must become platforms. The various channels of online each require so much specialization and have grown so fragmented that the major stakeholders in online advertising needed to bring them closer. In a theme that echoes the strategic acquisition point above, these purchases have less to do with $30+ billion in interactive advertising marketers will spend this year and almost everything to do with the future of the $600 billion advertising market that continues to shift online. Success online, especially for companies that look to achieve and have achieved any real scale means technology. It means not just having eyeballs or advertisers but becoming an integral piece in how they connect.

Who is Next?
We have heard that IACI and Experian Interactive have expressed an interest in Valueclick, but those covering the stock see such an event on hold until the FTC issue clears, as that could impact the value by upwards of a billion dollars if not more. Additionally, while it might be tempting to grab Valueclick, the last of those with any scale in display and some underlying technology, they do not have the same depth of advertiser relationships that aQuantive and 24/7 have, nor do they have any exchange technology like Right Media or Doubleclick that would help a company with good relationships but too much extra inventory. Other companies certainly fared well by the speculations, including the unprofitable Answers.com and money loser Aptimus. They are available but not strategic. As we are seeing with Feedburner, AOL’s acquisition of Third Screen, and Yahoo’s potential $1 billion purchase of social networking site Bebo, the most likely to go next either have an audience that stems the bleeding, offer technology to reach a new channel of users, or targeting to better leverage in-house assets. At some point, it’s not unlikely to think that Revenue Science or Tacoda won’t get taken (when they can prove to add more value and have a greater network) or my personal favorite Facebook. When Yahoo offered more than $1 billion, I, like many, felt they should have taken it, that no such offer would come again. Good for them though, as we fully expect Facebook to become a Craigslist 2.0, meaning that if it doesn’t rush, it could not only do better than one billion; it could challenge Yahoo. Microsoft, get them now before they do what Google did and grow beyond their once potential suitor Yahoo.