Google and Microsoft are squaring off in a fight for the online ad outfit DoubleClick that shows Internet advertising is moving far beyond search. The three leading search engines—Google (GOOG), Yahoo! (YHOO), and Microsoft (MSFT)—are competing to become one-stop shops for companies that want to advertise across the Web. To achieve that goal, Net players need more than a ton of traffic on their own online properties and the ability to match up tiny text ads to search queries. They also need to sell ads on popular Web sites beyond their borders and obtain more user information.
That's where DoubleClick comes in. The real value of the New York company lies in its ability to place banner ads and video ads on Web sites scattered across the Net and then track the people who look at them. The firm has more than 1,500 clients, including major online publishers such as Time Warner's (TWX) AOL and News Corp. (NWS), owner of the popular MySpace site. "DoubleClick already has thousands of relationships with top-quality publishers around the world, and that is something that I don't think Google or Yahoo or Microsoft could have unless they spent years and years trying," says Kevin Ryan, the former CEO and co-founder of DoubleClick who is now CEO of ShopWiki.
Such relationships would be valuable to any Internet player. But they're particularly important to the large search engine providers because they have their own stables of advertisers that are looking for new opportunities on the Web. "I'm surprised a deal for DoubleClick hasn't happened earlier," says eMarketer analyst David Hallerman. "It's really classic marketing: Once you have a customer it is easier to sell more to them." DoubleClick, and the other parties reportedly discussing acquisitions, declined to comment for the story.
Extending a Search Engine's Reach
DoubleClick's value may be on the rise, too. BusinessWeek.com has learned the firm is poised to unveil a new advertising exchange. Currently, DoubleClick delivers and tracks ads on sites with which the advertiser has an existing deal. As an exchange, DoubleClick would facilitate deals between publishers and advertisers that have not yet worked together. So, say, a toy seller on DoubleClick's site looking to reach out to former online customers could buy space on a parenting site that, at that moment, is being visited by a user who recently visited the toy seller's site.
In the hands of a search engine, such a capability could become even more powerful. Search engines have data on the queries performed on their site and can deliver ads next to search results. But they can't deliver ads when the user who performed the search leaves their network of sites. With an exchange, the search engine could potentially buy space on other sites where their users go, serving ads on the fly as their users appear. The search engine would be able to extend their reach and add value for their own advertisers.
Yahoo realized this potential in October when it spent $45 million for a 20% stake in Right Media, a marketing technology firm similar to DoubleClick (see BusinessWeek.com, 3/6/07, "Right Media's Big Ambitions"). Right now, Right Media enables Yahoo to get higher prices for ads on its lower-cost inventory, such as user-generated sites, by allowing more advertisers to bid, on short notice, on that space. Right Media CEO Mike Walrath would not say whether Yahoo is buying space on sites outside its network visited by users who search or surf on Yahoo. However, the company has expressed interest in doing so. "I think it's intuitive," says Walrath. "They have the sales force and the data. They need access to the inventory."
Microsoft Most in Need
Yahoo's stake does not give the company preference in an acquisition for Right Media, says Walrath. Should Microsoft or Google lose the bid for DoubleClick, they could turn to Right Media or another DoubleClick competitor as an alternative. Walrath says the company would be open to discussing a deal, provided Right Media was preserved as an open exchange.
A DoubleClick purchase by Microsoft or Google would enable either company to compete more aggressively with Yahoo in the display advertising market. However, Walrath, a veteran of DoubleClick, believes his exchange has an edge on anything that DoubleClick could immediately offer.
Microsoft may have the most need for DoubleClick's capabilities and relationships. The third-place search engine behind Google and Yahoo, Microsoft does not have the volume of queries to make the kind of money Google and Yahoo do from putting related text ads next to search results. Unlike Google, it also doesn't have a vibrant network of partner sites on which to serve ads. And Microsoft doesn't have the relationships with AOL and News Corp.'s MySpace that Google outbid it for in 2005 and 2006, respectively (see BusinessWeek.com, 8/8/06, "Google Gets Back into MySpace").
In addition to bolstering its inventory on which to serve ads, a partnership with DoubleClick could give Microsoft an opportunity to strike a deal with AOL or News Corp., says Dave Morgan, chairman of TACODA, a firm that targets advertising across the Web. Morgan was formerly the chairman of Real Media, before he sold it to 24/7 Media (TFSM) for $1.9 million in stock in 2001. "If Microsoft buys DoubleClick, it puts them in the advantaged position of knocking Google out of AOL and MySpace in the next two years," says Morgan. "That piece alone is probably worth an incremental billion dollars."
Potential for Backfire
Google's interest in DoubleClick may be largely to prevent Microsoft from acquiring it. Though DoubleClick would give Google a considerably larger presence in the display advertising space and new advertiser relationships, Google is already testing a display advertising network. The search giant could, arguably, leverage its existing advertiser base to get its own network off the ground. However, Google doesn't want Microsoft gaining traction in the space and undoubtedly wants to protect deals such as its $900 million agreement with News Corp., which gives it the right to serve search ads over three years to the audience on MySpace and several other Fox Interactive properties.
An aggressive acquisition by Google, however, could backfire. As the ad-serving tool for sites such as AOL and News Corp., DoubleClick has information on large publishers' advertiser relationships that many online sites don't want in the hands of the imposing Google (see BusinessWeek.com, 4/9/07, "Is Google Too Powerful?"). If Google acquired DoubleClick, it would have to clarify how it would, and would not, use the information—or some of DoubleClick's biggest customers could bolt. Ryan says the threat is real.
"All the big players now want to be able to expand and have the critical mass to sell beyond their own site," says Ryan. "But it is a tricky balance."