When both the New York Times and the Wall Street Journal choose to a cover a topic, chances are it is a press worthy story. On the rare instances that they cover a story that involves our industry, it generally focuses on growth and the size of the market. This was not the case recently, when a one of the more unexpected non-merger and acquisition related stories was published. The story that captured the news was one that took many of us in the industry by surprise. The central players in the story, Microsoft and Claria, aren’t new. Both have been in the news frequently, and both have also received their share of negative press. That alone might make each hesitant to work with other, which only helps explain the surprise when publications of all types carried the story that Microsoft was considering purchasing Claria.
Outside of our space, Microsoft dominates much of the conversation, but inside the space, it is Claria that receives the lion’s share of the attention. Formerly known as Gator, Claria has a long and not always lustrous reputation in the world of internet advertising. The negatives come from their being one of the earlier purveyors of adware and generally on the slightly aggressive side of the marketing divide. That is to say they grew their business by following the adage that it is easier to ask forgiveness than permission. To their credit, besides being the first major player in the space, they have continually ranked among the best. They have the largest user base, the highest revenue per subscriber, largest advertiser base, best distribution, and the most money. In addition, they have used their profits to build a more tenable business for continued growth and expansion. They were the first of the major adware makers to modify their download process to increase visibility of their terms and conditions. They were the first to start to reposition themselves as an ad network as opposed to the bane of consumers and other websites’ existence. They were also the first to assemble an all-star privacy team including the former Chief Privacy Officer of Microsoft. And just recently, Claria even terminated arguably its largest and most profitable distribution source, Kazaa.
On the surface, Microsoft, in and Claria don’t appear to share much in common. The reaction most people give is why put two companies who have more vocal enemies than friends together. MSN is a combination between Google and Yahoo, part pure search engine and part content driven destination site. Claria on the other hand shows ads. And yet that is precisely why Microsoft has an interest. Claria doesn’t just show ads, they focus on showing relevant ads. Microsoft has no expertise in showing relevant ads. Additionally, they have no expertise in mining user behavior to determine relevancy, both of which are key competencies either possessed by or gaining momentum at Microsoft’s chief rivals, Google and Yahoo.
What separates Microsoft from its rivals is not just technology or a lack of it. Many companies have great technology. Google not only has great technology but they make sure it solves a relevant problem. Like Google, Yahoo combines technology and market awareness into a machine that earns billions yearly not off of licensing but ad sales. Microsoft’s core competencies lie in software sales and licensing. It is no surprise that it has yet to do what Google and Yahoo have thus far done very well. It also helps explain why Microsoft has yet to gain significant share from Google or Yahoo. And organic efforts alone are not likely to help close the gap in the time frame they desire.
With Yahoo pushing into behavioral targeting and social based searches, Microsoft looks to slip even further behind. Fortunately for them, they do have access to an incredible cash reserve and the willingness to use it in order to speed up their learning curve. While not obvious at first, Claria possesses several of the assets that could help Microsoft keep up or even gain ground. Chief among them is Claria’s tracking, targeting, and experience making sense of their invaluable data. For Microsoft to get ahead in search, they can’t afford to simply index the web. They need to push ahead and make sense of the web in a manner that current methodologies make difficult and time consuming. From a monetization standpoint, relevancy means not just the appropriate content but ads. Additionally behavioral targeting, not contextual targeting is viewed to provide results more closely aligned with users’ and advertisers’ needs.
With Claria laying the foundation towards their being a broad player in the internet marketing sector, they have opened up the possibility of a company such as Microsoft even having an interest in their business. It stands to reason that much of their broad strategy has been this exact gamble, i.e. the long process of repositioning themselves to appear more palatable to the public and private markets. Microsoft also stands to benefit. They could get Claria at a favorable point. Claria, while highly profitable, has yet to fully morph into the company people will receive openly. Their strategy of growing into an ad network is an ingenious but untested one. Were they successful in that transformation, Claria might not consider a sale or be priced outside of what Microsoft wants to spend. Microsoft is not a media company, but their rivals have become one, and among the major media players they stand the most to gain from the acquisition of a Claira. Certainly, Microsoft has weathered far worse publicity storms than the one that might erupt were this transaction to be announced. Let’s not forget that while Claria has access to 65 million desktops, Microsoft has access to billions. What would stop them from being Claria’s next big bundle partner, especially if they are one in the same. All of the sudden, the loss of Kazaa doesn’t seem so bad.
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