Microsoft, Google, and Others Dueling Over DoubleClick?

The rumors first surfaced in the Wall Street Journal, and then spread like wildfire. All of a sudden it looks as if everyone is interested in DoubleClick. Why? All of the proposed suitors seem to have different reasons.

Let’s start by looking at the bride-to-be. DoubleClick is no spring chicken in Internet years; it was founded in 1996. It grew through the 1990s and became practically a household name in online advertising. That was before the dot-com bubble burst, and online ads took a beating. More recently, private equity investors Hellman and Friedman LLC and JMI Equity purchased DoubleClick for $1.1 billion in July 2005. That purchase led to a turnaround of sorts, making the company a lot more attractive.

DoubleClick is now much leaner. It sold off its email marketing service for $90 million. Just a few months ago, it agreed to sell its Abacus data management and analytical unit. Alliance Data Systems, the lucky purchaser, agreed to pony up $435 million for the unit. What is left is a company that is tightly focused on advertising, that Computerworld describes as “one of the largest ad networks in the United States.”

And what a network it is. Clients can choose from services such as ad management, ad serving, behavioral targeting, and online video. Its Performics division provides online marketing services and technologies for multi-channel partners. DoubleClick also went after the competition, in some cases by buying it. For example, last year it bought Falk, a rival ad serving firm located in Europe.

Its revenues are nothing to sneeze at. The Wall Street Journal quoted  “a person familiar with the matter” as saying that DoubleClick had roughly $150 million in revenue last year, with more than two thirds of that coming from serving ads for publishers and delivering them on behalf of advertisers. On the other hand, the New York Times declared that DoubleClick’s revenue in 2006 was about $300 million, but did not cite a source.

Aside from its traditional advertising business serving publishers and advertisers, DoubleClick owns two other items that might be of interest to potential acquiring companies. One is its small but significant library of patents. The other is the new auction-based service it rolled out. I’ll discuss both of those in a bit. Right now, it’s time to meet the potential grooms.

Microsoft was the first company reported by the media as having an interest in purchasing DoubleClick. The software giant already has its own advertising platform, called adCenter, which it set up in 2005. Microsoft’s plans to spend around $1 billion this year on research and development for its Internet business unit show how dedicated the company is to improving its services in-house.

But that won’t keep it from purchasing technology companies when that makes more sense. Last year, Microsoft bought Massive, a firm whose mission is to place advertising in – of all places – video games. Web analytics firm DeepMatrix represents another purchase aimed at improving a current Microsoft product – adCenter, in this case. That acquisition also looked like an attempt to compete with Google’s Google Analytics offering.

In part, it is pressure from the competition that makes a DoubleClick purchase look like a good move for Microsoft – and for DoubleClick. Mike Walrath, CEO of Right Media (a DoubleClick competitor), notes that many companies are now offering ad management and ad serving capabilities bundled into other services, thus eating into DoubleClick’s core business. A Microsoft acquisition would take some pressure off of DoubleClick, and at the same time, “The deal would accelerate Microsoft’s ability to provide these services like the other major players like Google, Yahoo [and] AOL,” Walrath explains.

The deal is not without its risks. DoubleClick’s Performics division competes directly with certain agencies to which Microsoft sells ad space. So the deal could cause an exodus of clients from DoubleClick. One of the names looming large on DoubleClick’s client list is AOL, and industry observers think the Time Warner firm could end up either leaving DoubleClick or trying to purchase it. Either way, it would not be happy with Microsoft having access to the user data going through DoubleClick’s ad serving system, and AOL isn’t likely to be alone in that sentiment.

Mark Simon at Media Post Publications thinks a Microsoft purchase of DoubleClick is actually a stepping stone to something much larger. He thinks that the software giant’s next big acquisition after the ad serving company will be Yahoo, and that Microsoft needs DoubleClick’s technology to fully unlock the potential of a Yahoo purchase. “As the back-end technology for both AOL and MySpace’s publisher programs, DoubleClick has shown itself to be highly capable at managing large publisher networks,” Simon says. Yahoo, meanwhile, makes a huge amount of its revenue from display advertising; some estimates put it as high as a third or more. A Microsoft-DoubleClick-Yahoo ménage a trois could spell real trouble for Google, according to Simon.

Speculation that Google was considering a DoubleClick purchase emerged shortly after the media took notice of Microsoft’s interest. It is possible that Google may want to purchase DoubleClick simply to prevent Microsoft from doing so. There has to be a lot more behind it than that, though. Google just paid $1.65 billion for YouTube, and DoubleClick’s purchase price is said to be $2 billion – and may go quite a bit higher now that the search engine giant is in the game. Google might be filthy rich, but is DoubleClick really worth that much to the company?

Google is rumored to be working on an ad serving technology similar to DoubleClick’s. Currently, when an advertiser wants to run an ad with Google, he or she must run the creative through Google as well. But a lot of advertisers who are used to doing graphical CPM ads run them through third party ad servers. This is the market that DoubleClick serves. If Google is indeed working on an ad server that could work on sites for Web publishers even when the search giant hasn’t sold the ads, it’s clearly aiming to compete with DoubleClick. In that case, does it make more sense to simply purchase DoubleClick instead?

Google might indeed have its eyes on DoubleClick technology, but it may not be the same technology Microsoft covets. You see, one major area where Microsoft has Google beat is in intellectual property, specifically in patents. This isn’t surprising; Microsoft has been around a lot longer (and for those who count these things, IBM has both Microsoft and Google beat on sheer number of patents). But DoubleClick owns some key patents that could make Google salivate, given the search engine’s current areas of interest.

Seeking Alpha writer Cory Sorice lists five DoubleClick patents that could help Google. These include a 1997 patent that would let Google incorporate advertiser feedback into its system; a different patent that would allow for some very detailed analysis of web site activity; a patent for “delivering, targeting, and measuring online ads;” a patent that could have uses in interactive TV and perhaps even be applied to YouTube’s future; and one other. This is to say nothing of the patents DoubleClick might hold that Sorice didn’t list. If Google has the patent paper behind it, it could more easily forge ahead in these areas. While it seems unlikely that it would get suit-happy to protect those patents, just having them would give it some serious muscle.

Though Yahoo has been mentioned as a possible DoubleClick buyer, it seems much less likely. A purchase by AOL and/or Time Warner seems more likely, since AOL is a major client of DoubleClick and Time Warner would want to safeguard that relationship. They won’t want DoubleClick’s data on AOL falling into the hands of either Google or Microsoft; and whatever other interests those two companies have in DoubleClick the data has to be a huge draw for both of them.

And DoubleClick just launched a new service that should make it even more attractive. It’s an advertising exchange that lets advertisers participate in auctions for online ad space. DoubleClick CEO David Rosenblatt explained that the new system will link its buyers and sellers for the first time. Advertisers will be able to see information about what competitors bid for particular ads, rather like eBay. Meanwhile, online publishers can use the system to make sure they sell their ad space at the highest possible price.

There is a real demand for this kind of service, and it’s something that hardly anyone is doing right now. Right Media has such a service; Yahoo paid $40 million for a 20 percent stake in the company last year. All of a sudden, DoubleClick’s $2 billion asking price may look like a bargain. Dave Morgan, chairman of online advertising network Tacoda, talked about the potential rewards for DoubleClick’s purchaser. “Whoever gets them can immediately turn into an ad exchange business overnight. Two billion dollars will not be a stretch for that.”

Whoever ends up with DoubleClick will clearly gain an advantage. How well they leverage it could make a difference in the field for years to come.

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