Is DoubleClick Clicking for Google?

(Corrects the description of DoubleClick's use of behavioral advertising prior to being acquired by Google.)

Three years ago, Google (GOOG) closed its biggest acquisition ever: The $3.1 billion purchase of online ad powerhouse DoubleClick. Google's goal was to grow beyond search advertising, where it was already dominant, and grab a chunk of the potentially much larger market for display ads—those graphical come-ons that appear along the tops and sides of Web pages. Within two months of the deal, Google's stock soared 35 percent, to $595.

Since then its stock hasn't moved much, closing at $592 on Mar. 9. Google's ad practices have angered privacy advocates and attracted the attention of antitrust regulators in the U.S. and Europe. The competition has changed a lot, too. Back then Yahoo! (YHOO) was the biggest player in the fragmented market for display ad dollars; now Microsoft (MSFT) is a serious contender. Facebook has become a Mad Ave-friendly colossus worth $75 billion by some estimates, and Twitter is poised to grab a larger share of marketing budgets. Even Apple (AAPL) has gotten into the display advertising game with its iAd program for mobile devices.

Google nonetheless calls the acquisition one of its best ever. As of October, it says, display sales were on track to bring in $2.5 billion annually. It also says its display network reaches about 80 percent of all Internet users, and that 99 percent of its 1,000 largest advertisers run display spots as well as text-based search ads. "We have gone from an ambitious, wide-eyed new entrant in the display ad business to a central player in a short amount of time," says Neal Mohan, a former DoubleClick executive who is now vice-president for product management at Google.

Analysts say the success of the deal is hard to judge because a big chunk of that $2.5 billion in annual revenue comes from ads that run on YouTube, which Google acquired in 2006. Citigroup (C) analyst Mark Mahaney says YouTube would likely be doing big business even without DoubleClick, and that Google's display ad network probably generated between $1 billion and $1.5 billion in revenue last year once the video site is excluded. Google doesn't release data about the division's profitability. "It's clear that Google is better positioned as a platform for Internet advertising now that it has a display advertising network," Mahaney says. "I just don't know whether that justifies the price they paid."

Since the DoubleClick deal, Google's display team has developed services and software to help advertisers create, sell, and monitor the performance of their ads, and in the process reinvigorated the online privacy debate. Figuring out which ads work with which Internet users requires the use of "cookies"—small data files that track browsing habits. Cookies are nothing new; companies have been using them—and privacy groups have been complaining about them—for years. DoubleClick was a long-standing leader in behavioral advertising, as this part of the business is known. After the acquisition, Google adopted behavioral advertising techniques by introducing the DoubleClick cookie to the Google Display Network.

"The merger pulled this model that had receded from the public eye and put it squarely dead center of the debate," says Jules Polonetsky, director of the Future of Privacy Forum and a former chief privacy officer at DoubleClick. He says the current wave of "Do Not Track" bills in Congress, which would limit the ability of Internet companies to install cookies, can be traced back to concerns about the DoubleClick acquisition. Google offers users an "ads preferences manager" where they can adjust their online profile or opt out of tracking altogether. (Microsoft and Yahoo have since introduced similar tools.) According to Mohan, for every seven users that adjust their preferences, only one user opts out. "What we find is that the more relevant the ad, the better the user experience is," he says.

The biggest threat to Google's display ambitions may be Facebook. The social network will bring in revenue of around $4 billion in 2011, according to research firm eMarketer, almost entirely from the small, ignorable display ads it runs on its members' pages. Those ads are sold by Facebook itself, which doesn't allow Google into its rapidly growing universe of over 500 million members. Susan Wojcicki, the Google senior vice-president who spearheaded the original DoubleClick acquisition, doesn't appear worried. "Facebook will definitely do interesting things and has an interesting perspective," she says. "But the Web is a really big place."

The bottom line: Analysts say Google's DoubleClick acquisition is hard to value, especially as upstarts such as Facebook's own display ad business grow.

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