The Right (Media) Stuff
In October of last year, Yahoo took many in the ad space by surprise announcing a strategic investment in ad network and exchange Right Media, as it led a $45 million Series B round of financing. While not an obvious investment it made sense, given the large role display advertising plays in Yahoo’s business. If anything, only the timing of the investment didn’t make sense given the scrutiny placed on the number one portal as it either lost out or chose not to fully commit on several high profile deals, including YouTube, Facebook, and most recently Doubleclick. Yahoo, though, started to make up for their gun-shy behavior as they decided they liked what they saw in Right Media, and decided earlier this week, a scant seven months after the initial invesment, to pick up the remaining 80% of Right Media.
Yahoo paid $680 million in cash and stock for its unowned piece. That puts the total valuation of the company at $850 million. Not bad for a firm who will generate $70 million in revenues. Even if Right Media had high profit margins, on a multiple of EBITDA, Yahoo still paid well north of 40x earnings. Don’t go trying to figure out the value of your company by multiplying 10x by your revenues or 40x your earnings. If this applied to Microsoft, they would have a value of more than a trillion dollars. Right Media earned what they did because of the received a percentage of the value their technology should bring to Yahoo. That is what this deal is about. Unlike Google’s Doubleclick which extends the capabilities of Google into a new segment, Right Media makes Yahoo better at being Yahoo.
Industry folks, analysts, and even Yahoo’s own employee’s find it all too easy to take shots at the company. The portal once had the leadership role in search – being the largest generator of search queries and, through its Overture division, the largest provider of paid search results. Then came Google, and Yahoo lost its lead in organic search, and its position in paid search with AOL going to Google, and MSN leaving to build its own platform. In a period of three years Yahoo went from number one to perhaps the least relevant multi-billion dollar, number two player in Internet advertising. And, thanks to MySpace, the company has come close to losing relevance in an area it could seemingly always count on for revenue (but not quarter over quarter growth), display advertising.
The Right Media deal has the potential to revitalize Yahoo’s display advertising business. While we always felt that Google made a smart choice by acquiring DoubleClick (P.S. GoogleClick is a dumb name; a $3bn acquisition does not warrant a part of a $150bn company’s name), it seemd as though Doubleclick would have made as good if not a better fit for Yahoo. The company uses Doubleclick’s ad serving technology, and almost every agency, DoubleClick’s biggest client group, currently works with Yahoo. Putting the two together could have created the largest branding powerhouse online. Like the other king of display though, myspace, Yahoo has a large volume of inventory that doesn’t warrant the high CPMs its homepage and other premium placements command. Known as remnant inventory, slight increases in yields can move the overall needle quite a bit, and Yahoo’s portion of this traffic only increases as it takes a growing stake in user generated content.
Enter Right Media, the undisputed champ of remnant advertising. Much like Double Positive with leads, Right Media has had no issues playing the role of display advertising dumpster. As a publisher if you didn’t want, or couldn’t get, a certain price for your inventory, Right Media said put it into their exchange and leverage others’ ad sales to help you monetize it. As noted venture capitalist Fred Wilson said about Right Media’s role in remnant advertising, "that’s because the low end of the market benefits most from the efficiencies that come from an exchange." Or, put more realistically, start with what people don’t want. It makes the job of getting inventory easier. Advertising.com focus on remnant because of market inefficiencies. It started with remnant because that’s what it could get easiest, and I suspect the same holds true with Right Media. As Advertising.com proved though, starting in remnant doesn’t mean you can’t move upmarket – prove you can turn coal into diamonds and soon you will start to have access to more and more of a site’s inventory.
In our minds, Yahoo’s Right Media deal involves three themes – 1) the importance of display advertising, 2) the continued emphasis on exchanges, and most importantly, 3) the relevancy of Yahoo. Regarding the first, as brand dollars continue to shift online, they will want choices other than text. People like to find evidence for the death and/or irrelevance of banners, but the numbers simply suggest the maturation of the vehicle, not the need to sound the alarm. Google sees the importance of display, and Yahoo always has. As for the exchanges, Right Media’s success prompted DoubleClick to create their own exchange, but its exchange has just begun and will take time before it can match the multi-hundred billion impression level of Right Media. Exchanges, though, have shown they can add liquidity more efficiently, something Right Media publishers and networks based on Right Media have experienced. Could CPX Interactive have grown the way it has without Right Media’s exchange underpinnings?
Yahoo did need to secure Right Media in the wake of the Doubleclick acquistion, but in the end, this deal has less to do with Yahoo versus Google and everything to do with Yahoo figuring out Yahoo – what they are good at and where they can compete. Right Media is Yahoo’s version of the AOL/Advertising.com acquisition. In future quarters we will see growth in Yahoo’s display unit with gains attributable to the acquisition. Yahoo shouldn’t exit search or its 3rd party text advertising product, Yahoo Publisher Network, but it can now take lessons learned from Google’s business and apply them to display. Google proved the power of 3rd party inventory, be it syndicating seach results to other engines like Ask and AOL or when they launched their, now dominant, text ad on content site product AdSense.
With Right Media, Yahoo can take a Google-like leadership role in display. They have great ad sales relationships and equally great third party inventory relationships in eBay, their newspaper alliances, and the biggest deal of the year according to Mark Cuban, their recent partnership with Comcast. Right Media gives them a platform for managing theirs and others inventory, premium or otherwise. Yahoo can now become the display ad network. Companies will still sell some of the inventory, but Yahoo will become the provider of choice for managing the bulk of the impressions.
And, if they get out of their own way, they can do this faster and potentially more effectively than Google and the traditionally stodgy, bulky Doubleclick technology. Yahoo needs to let go of the past and embrace its display future.
