Google's Grip Tightens

A thumbs-up to its DoubleClick merger means an even more powerful search giant is coming.
Author:
Publish date:

Closing its

DoubleClick

acquisition would be a huge win for

Google

(GOOG) - Get Report

.

And a Federal Trade Commission ruling last week that the deal doesn't violate antitrust laws is a major coup for the search engine giant.

While the transaction still has to be cleared by European Union regulators -- who are expected to deliver a verdict by April 2 -- the FTC decision is likely to influence the EU to rule in Google's favor.

With DoubleClick under its roof, Google will be able to sell advertisers search and online display ads together -- a more powerful combination than selling either type of ad individually.

Microsoft

(MSFT) - Get Report

and

Yahoo!

(YHOO)

already offer customers both types of ads. But given the market share that Google and DoubleClick command in the search and display market, respectively, Web rivals would have a tough time keeping up with the combined heft of the two companies.

For starters, DoubleClick would make Google the overnight leader in the display ad serving market.

DoubleClick is currently the biggest player in the roughly $800 million display ad-serving market with a 40% market share, according to Oppenheimer analyst Sandeep Aggarwal. That will complement Google's strength in the search market, where the company commanded a 59% market share of search queries in November, according to ComScore.

"DoubleClick is emphatically the No. 1 player in the display ad market and has incredible market power," says Joe Apprendi, CEO of online ad network Collective Media. "In fact, that's why Google is so excited about this particular acquisition."

Of course, investors expect growth from Google as well. The company's shares closed Wednesday at $710.84, up 54% on the year, giving the stock a price-to-earnings ratio (P/E) of 34. The company also has a P/E-to-growth ratio of 1.3, meaning that analysts expect it to grow earnings about 35% a year for the next five years.

Bringing DoubleClick into its fold will be critical for Google's effort to meet those steep expectations.

Selling display and search ads together will give Google a powerful sum greater than each of its parts. Each form of online advertising is more effective when used in tandem -- and advertisers want to see the impact that spending on one type of format is having on the other.

According to a 2006 study by aQuantive (now owned by Microsoft), users who saw both display and search ads from the same advertiser were 22% more likely to click on an ad than users who saw only one form of advertising.

Flashy banner ads can help spark interest in a company or product, convey an advertiser's message, or catch a user's eye in a way that text ads can't.

Indeed, Google has thus far been at a disadvantage when compared to rivals like Microsoft and Yahoo! because it has not been able to offer display and search ads together.

Advertisers also want to know whether their spending on display ads is driving search queries as they intend. Bringing DoubleClick in house will help Google solve that problem.

"If you are spending a lot on display advertising, you want to see that people are getting curious, and that they are going out there and searching for the things you want," says Kevin Lee, the executive chairman of search marketing firm Didit Search Marketing. "It's a way of letting you know that your creative display advertising is working, and having it on one dashboard through the same vendor is a better solution."

And the synergy works both ways. As a part of Google, DoubleClick could take its dominance of the display ad-serving market to the next level, Lee points out.

DoubleClick is creating an online ad exchange -- an electronic marketplace that connects buyers and sellers of online advertising -- similar to the one being rolled out by Right Media, which was acquired by Yahoo! in April.

Online ad exchanges have tended to focus on so-called remnant inventory, the leftover scraps that fetch lower rates when compared to the premium spots generally sold by an online publisher's salesforce.

But DoubleClick has designs to sell ad spots generally considered too high-end to be in the usual fodder for ad exchanges, says Lee. Thus the vast scale of advertisers who use Google -- the company has 500,000 clients, he says -- will help entice publishers to put higher-priced ad space onto DoubleClick's system.

With so many bidders, an advertiser may well get higher rates than it could on other exchanges -- or through its salesforce -- but could cut out the commission.

The higher-priced ad spots would create higher fees for DoubleClick -- and allow the company's exchange to stand out in an increasingly crowded marketplace.

Putting together Google and DoubleClick, in other words, would allow the two market leaders to dominate their arenas in new ways.