Just in time for its quarterly week in the spotlight, here comes
highly anticipated second act: display advertising.
Late Friday, the search giant -- which will report first-quarter earnings on Thursday -- announced that it had acquired online advertising tech firm
for $3.1 billion. Consistent with prior statements that it considers its own stock undervalued, Google paid the deal in cash to the consortium of private equity firms that held DoubleClick.
The acquisition will provide a serious boost to Google's efforts in the market for rich, graphic advertising. Until now, the overwhelming majority of Google's revenue has come from the small, four-line text ads served up next to its search results.
"The first, and in many ways the most compelling, argument for this from a Google perspective is that it is accelerating our display advertising business," CEO Eric Schmidt said in a conference call for investors late Friday. The deal would allow Google's efforts to leap forward by several years, as compared with going it alone in display advertising, he added.
But the acquisition marked more than just a major leg up in another big market, Google's management repeated during the call. By combining DoubleClick's strength in the display market with its own lead in search advertising, Google would be able to innovate the entire field of online advertising.
The end result would benefit all parties. Advertising agencies would be able to sell both types of ads to their clients, which Schmidt claims they're clamoring for. "This allows agencies to offer the integration of search and display, Schmidt said. "That integration is something people have been asking us for a very long time."
Advertisers would benefit by having more options in terms of placing their ads, targeting audiences better and measuring their overall efforts on one platform. Users, meanwhile, "benefit from more targeted ads," Schmidt said. "They don't waste their time looking at ads that are not relevant."
The beneficiary of this new virtuous circle, of course, would be Google. And more so than any financial metric, the opportunity to make more money by linking the search and display businesses is what compelled Google to put the hefty price tag on DoubleClick.
"We looked at a variety of financial ratios on a standalone basis, but -- as Eric pointed out -- what we looked at most was the overall revenue opportunity here," said Google Senior Vice President David Drummond. "
We looked at the complement this brings to our brand advertising business, and the other ways this transaction will complement our core business, and based our value of the business on that."
Some on Wall Street agree with Google about the potential of combing the two types of online ad businesses and believe it could even throw open the floodgates for large advertisers.
Bank of America Securities analyst Brian Pitz had forecast that the growth in branded advertising would outpace search advertising in the second half of 2007. "This deal gives us added confidence, as we believe the combined Search and Branded advertising platform should provide large branded advertisers with the accountability and tools they have been seeking with respect to online advertising spending -- a catalyst for accelerating the online migration of advertising dollars -- especially from larger under-penetrated industries such as Pharma and Consumer Package Goods where online represents only 1-2% of total ad budgets," he wrote in a research note on Friday. Bank of America Securities makes a market in Google shares.
Still, Schmidt struggled to explain why now was the right time for Google to snap up DoubleClick. In response to a question about why the deal was happening now, Schmidt said, "When we did a strategic review, which we've done for this year, we realized that the scale of the display ads business was much larger than we had thought." Google's move was driven by an "understanding now of how much larger an opportunity it was and how it could be targeted," he said.
But it's hard to believe that the size of the display market suddenly dawned on Google. After all, not only has the company itself been a participant in the display market, it has also seen competitors such as
Time Warner and
feed off that revenue.
Rather, Schmidt is avoiding stating the obvious about the deal: Google's hand was forced when it was reported that Microsoft had approached DoubleClick about an acquisition. Keeping Microsoft from picking up DoubleClick -- which may well still have a valuable overlap of customers with Google -- had to play a role in Google's move.
And the acquisition shows telltale signs more of a rush brought on by a fierce bidding war than a contemplative move -- even beyond the ballooning price tag. Google didn't have time to fully think through the deal.
Asked about what Google will do with Performics, an online marketing company operated by DoubleClick that counts Yahoo!, among others, as a customer, Google co-founder and President of Technology Sergey Brin said the "complication that you recognized is also one that we have discussed. Unfortunately, with the overall size of this deal and the rest of the DoubleClick business we have really been focusing on, I don't think we have a concrete plan to share with you today." Brin said that Google "will have to figure that out after the transaction closes."
And while it is thrilled about being able to link search and display advertising, Google is not yet clear on where using search queries to target display ads would cause a breach of privacy. Talking about the possibility of such a product, Brin said, "Anything along those lines would have to -- anyway, I don't know. I think there are quite a few challenges with such a plan with respect to how we feel about privacy."
Google's rush to acquire is important for investors because it means the search giant may not be fully aware of the pitfalls it faces. For one thing, many of DoubleClick's customers may not be happy supplying data, such as the rates they charge for ads, to Google, which can share the data with competitors and is itself a competitor of sorts. "While we believe this deal is more about relationships on the advertiser side, we caution that there is a risk of DoubleClick losing significant relationships on the publisher side as a result of the deal," Pitz wrote, highlight a fear that Google seemed to gloss over during its call.
Given that it doesn't seem to have the finer points of its display thrust sorted out, Google is banking on its broader overall philosophy of Internet advertising for guidance. "Since Google's inception, it has always been our intention to present users with highly targeted, useful advertisements when appropriate -- ads that unobtrusively complement users experience," Susan Wojcicki, Google's vice president of product management, posted on the company's blog Friday, in announcing the acquisition.
"We have always believed in, and tirelessly pursued, the idea that serving relevant, unintrusive ads would best serve our advertisers in the long term."
But Google's approach of serving up discreet ads may be much more suited for search than display advertising. In search, advertisers pay only when users click on an ad. But in display, advertisers pay each time the ad is served up to the attention of a user, even if it's not clicked on.
Indeed, display ads have been growing increasingly animated and hard to ignore over the years since that's precisely what advertisers want. DoubleClick, a pioneer in the field of the incredibly-annoying-yet-hard-to-ignore field of popup-advertising, should know all about this.
Investors should hope it doesn't take anything as strenuous as another annual strategic review for Google to discover this aspect of the display market.