Ok, it's getting pretty frothy in the online ad space, what with the recent $3.1B DoubleClick acquisition, WPP buying 24/7 RealMedia for $650M, and now Microsoft buying aQuantive for an astonishing $6B.
That's over $10B in M&A activity in the last month. Why is this happening? As Phil Wainwright points out:
The same way that the internal combustion engine took the horseless carriage and turned it into something no one had ever anticipated, the Web is turning advertising into something we could never previously have imagined.
The Web [has] provided the context in which you [can] selectively advertise, and a mechanism for tracking response.
The ability to tailor messages and to track and interpret responses depends on having large databanks of past behavior by similar prospects in similar contexts. Scale is a huge determinant of success, and therefore the would-be players are eagerly buying up scale.
Microsoft is woefully late to the party but they have the consumer traction to make huge progress in a very short time. Think of all the Xboxes out there, the 20oM (?) Hotmail users, the 100M (?) users of MSN spaces, Windows Live Messenger, etc. -- all of which pale in comparison to their ownership of the desktop (Windows and Office).
An informative piece I read on the aQuantive merger was the Ad Age interview with Joe Doran of Microsoft, where he points out (regarding ALL of their software I believe):
More and more people will look to those being free and the one primary way of funding those is advertising. We're very committed to building the software and a monetization platform that allows us and others to monetize software services. That'll be critical to us.
I've seen multiple posts, like from Kevin Kelleher over at GigaOM, in which they erroneously think of this acquisition as buying revenue/earnings. In my opinion, Microsoft doesn't care about the revenue stream nor AQNT earnings, and this deal was not valued on that basis. It had to have been valued on the basis of how much revenue/earnings could be generated once Microsoft flips the ON switch for all it's ad serving initiatives, across all its properties, using the capabilities provided by AQNT.
88% of AQNT gross revenues are from services to marketers and agencies -- services. Microsoft isn't a services company! Though this is of value to MSFT in terms of their ability to understand their big budget customers, the real value is the ad network, and in their ability to serve the Long Tail of advertisers. In this acquisition they not only get software which allows advertisers to manage their online campaigns and metrics (not only within MSFT properties but across competing properties as well), but also ad serving, behavioral and auction technology. As Joe Doran points out:
We believe with the volume we have as a publisher and by committing that volume to DrivePM we can build one of the largest, most efficient, highest-yielding ad networks in the world.
Microsoft is in the game and this won't be the last big acquisition they make.
As this guy points out, the lines between software, the internet, marketing communications, and creative execution (in an advertising sense) are blurring rapidly. When I think about Internet ad spend per household (only $217 -- compared to $980 for newspapers, $576 for direct mail and $980 for telemarketing), and the deep profiling/targeting capabilities of the Web, I know we're really only just getting started and now is a good time to be in the online advertising business.