With its plan to purchase Tacoda, AOL will take on Google, Yahoo and Microsoft in the swelling online advertising market
AOL, once a leader on the World Wide Web, is lately playing catch-up—most recently in the acquisition arena. On July 24, the company announced plans to acquire Tacoda, an advertising company that tracks what people do on the Web and uses that information to determine where to place online ads.
The terms of the deal were not disclosed, but a source familiar with the acquisition put the price at around $275 million in cash. Time Warner (TWX)-owned AOL also will gain Tacoda's roughly 100 employees and its chairman and co-founder, Dave Morgan, an online advertising veteran.
Ramping Up the Battle
The announcement follows close on the heels of similar acquisitions by AOL's bigger rivals. In April, Google (GOOG) said it will spend $3.1 billion for DoubleClick, which places and then tracks the performance of targeted advertisements for many of the Web's largest sites, including AOL (see BusinessWeek.com, 4/14/07, "Google's DoubleClick Strategic Move"). Then, Yahoo! (YHOO) said it will buy the 80% of online-ad exchange Right Media it doesn't already own for $680 million, and later, Microsoft (MSFT) put up $6.1 billion for ad network aQuantive (AQNT) (see BusinessWeek.com, 5/18/07, "Microsoft's Big Online Ad Buy").
AOL hopes Tacoda and an earlier acquisition of Advertising.com will give it the added heft it needs to compete with the big boys for online ad dollars. According to eMarketer, the online advertising market in the U.S. will swell to about $20 billion this year.
Tacoda tracks visits to key pages on some of the Web's most popular properties, including The New York Times (NYT) and Kelley Blue Book. It then uses the information gleaned from those visits to send related, targeted ads to specific computers whose users are clicking on high-traffic sites throughout the Web. So, for example, Tacoda can deliver a car ad to a computer that has recently looked up the average price of a new four-door sedan on an autos site, even when the computer user has moved on to a different site. "This is really about expanded reach, great publisher tools, and our belief that it will help us grow," says Mike Kelly, president of AOL Media Networks, the division responsible for AOL's advertising business. "AOL is giving us a chance to get big fast," says Tacoda's Morgan.
Maintaining Control of Ad Dollars
Ad networks such as Tacoda have grown in importance for Web titans seeking to remain key destinations for advertisers in an increasingly competitive Web landscape. AOL and Time Warner's other online properties attract more than 123 million unique users per month, ranking just behind Yahoo and Google in terms of individual visitors, according to June statistics compiled by comScore (SCOR). However, in recent years, AOL, Yahoo, and other so-called portals, which aggregate information and features from around the Web, have struggled to command as much of their audiences' time.
These days, many Web surfers, particularly young ones, would rather spend time on social networks such as Facebook and News Corp's (NWS) MySpace, as well as blogs, video- and picture-sharing portals, search engines, and a host of other user sites that depend on content generated by users. Advertising dollars are following the audiences. AOL, Google, Yahoo, and others see ad networks, and their ability to place ads on a variety of Web sites through revenue-sharing partnerships and other deals, as a way to keep control of ad dollars by becoming one-stop shops for advertisers looking to get in front of mass audiences wherever they are on the Web.
Tacoda also promises to give AOL another way to use information on users to sell highly targeted, higher-priced ads on both its own network and across the Web. Though AOL and Tacoda have not fully worked out the details of their information-sharing relationship, Tacoda could potentially use what it knows of AOL users' Web-surfing behavior to place ads on other sites with which it has relationships. Tacoda could also serve highly targeted ads in fixed places on AOL properties to computers it recognizes from visits to other sites in its network.
The promise of additional information and tracking capability has helped fuel earlier ad-network acquisitions from competing Internet giants (see BusinessWeek.com, 5/21/07, "Behind Those Web Mergers").
Direct to TV
To be sure, the ability for AOL to increase the amount of information it has on users may alarm some Web surfers and privacy advocates. Similar—albeit larger—proposed acquisitions have aroused opposition from privacy advocates and government agencies such as the European Union. The Federal Trade Commission is now reviewing the proposed Google, Microsoft, and Yahoo acquisitions (see BusinessWeek.com, 5/30/07, "Much Ado About DoubleClick"). Tacoda and AOL will also face regulatory review before the merger can go through. The companies expect to complete the acquisition by the end of the year.
Morgan stressed that Tacoda will continue to keep information anonymous, monitoring computers only by the number on a tracking tag, or cookie, picked up by their computer when they visit a Web page in Tacoda's network. The company spent much of the day after announcing the acquisition assuring clients that their data is still their own and that AOL, a potential competitor to some of Tacoda's customers, does not have a new window into their inner workings. "We have been spending a lot of time today talking to our publishers and the ad agencies that are our clients," says Morgan. "They recognize the more scale that Tacoda has, the more value that we can deliver for them."
Perhaps the biggest long-term potential of the Tacoda/AOL partnership isn't online at all, but on television Morgan has long looked toward a future where TVs all have Internet Service Provider addresses. In such a world, information on Web surfing behavior could be synched with the TV and used to shoot targeted ads straight to the TV. The television ad market is expected to top $46.3 billion in 2011, roughly when Morgan and others expect the merger between TV and the Internet to start occurring. "We are going to take things one step at a time," says Morgan. "But we hope that what we are doing here on the PC will translate to the TV."