Google Buys DoubleClick

In the conclusion of a bidding war said to have lasted for weeks, Google beat Microsoft to purchase ad serving company DoubleClick for $3.1 billion in cash. The move leaves Google’s competitors reeling, and opens up striking possibilities. It is not without its risks, however.

The original rumor surfaced in the Wall Street Journal, and at that time it was Microsoft who was put forward as DoubleClick’s suitor. Several other names quickly emerged; we covered the whole situation and its various potential permutations just last week here on SEO Chat. I was somewhat skeptical that Google would purchase DoubleClick because of rumors (still unconfirmed) that the search engine giant was working on an ad serving system similar to DoubleClick’s, and also because Google had recently paid $1.65 billion for YouTube. At the time, I didn’t think that Google would lay out the rumored asking price of $2 billion, especially when it might have its own competing system in the works.

I don’t mind admitting I was wrong. The record-breaking acquisition must surely have left Microsoft and the other firms competing for DoubleClick’s hand nothing short of flabbergasted. Microsoft will not comment on the deal. It is expected to close sometime later this year.

Is this a good deal? Phil Wainewright over at ZDNET, writing almost two weeks before the deal was completed, was amused that DoubleClick was even up for sale, especially for the original asking price of $2 billion. "Whoever buys DoubleClick at that price will not see a repayment on their investment. Therefore I surmise that Google will win the alleged bidding war with Microsoft to acquire the company, since Google has a track record of throwing large piles of cash at iffy acquisition targets." While Wainewright called the winner accurately, he may be exaggerating the importance of the factors that make the deal an iffy proposition (and I’ll be discussing those later).

In its press release, Google lists several groups that benefit from its acquisition of DoubleClick. To quote directly, it sees these benefits:

  • For users, the combined company will deliver an improved experience on the web, by increasing the relevancy and the quality of the ads they see.
  • For online publishers, the combination provides access to new advertisers, which creates a powerful opportunity to monetize their inventory more efficiently.
  • For agencies and advertisers, Google and DoubleClick will provide an easy and efficient way to manage both search and display ads in one place. They will be able to optimize their ad spending across different online media using a common set of metrics.

But the biggest winners out of this deal, of course, are Google, DoubleClick and private equity firms Hellman & Friedman and JMI Equity. Google is doing more than outflanking Microsoft and the other rivals for DoubleClick; it is continuing a string of purchases to set itself up as the go-to place for advertising, on or off the web.

DoubleClick is a natural fit for Google. According to DoubleClick CEO David Rosenblatt, the two companies share a "common vision" as "Internet companies of the same generation." They also share offices in the same building in New York, and "There are former DoubleClick employees who are at Google and vice versa," according to Rosenblatt. Indeed, the two companies have been partners for a long time. Weighted against that kind of propinquity, one wonders if Microsoft realistically had a chance.

It’s no secret that Google has been trying to expand its ability to offer and automate advertising into different media. It purchased radio ad company dMarc in a move, say some analysts, to bring AdWords/AdSense style auction-based advertising to radio. It has been experimenting with print advertising in magazines and newspapers. It is widely expected to move into TV advertising as well, having made a deal with EchoStar Communication’s Dish Network "to create an automated system for buying, selling and measure the impact of TV ads," according to CNET. There are rumors of an upcoming deal with DirecTV and more than one agreement (so far content-based) with CBS.

And DoubleClick brings a brand-new advertising platform to the table: an online auction style exchange that is open to any web publisher or ad network. The new service was announced right in the midst of the rumor frenzy of who was bidding to purchase DoubleClick. The platform was originally projected to become DoubleClick’s chief cash cow in five years.

But DoubleClick fits in as an online play, one that adds strength in one area where Google is week: display and banner ads. Yahoo actually beats Google here, but possibly not for long. Many companies that advertise in this fashion look to a third-part ad server, and DoubleClick leads the market here. Yahoo owns a 20 percent share of a DoubleClick rival. By owning DoubleClick, Google will see customers coming to them for ad serving even if the ads are not shown on Google’s own network.

So the deal gives Google access to DoubleClick’s advertising software. Combine that kind of information with Google’s various algorithms, and you open the door to ever more relevant advertising. But this goes beyond algorithms. If Google had created its own DoubleClick rival, it still wouldn’t have had something that DoubleClick has worked years to build: the relationships with web publishers and advertisers that can make or break the business.

It’s true that many of Google’s advertisers are also familiar with DoubleClick. According to Google CEO Eric Schmidt, many of them use DoubleClick’s software for buying, selling and tracking digital advertising. But not all of them will be entirely comfortable with Google in control of the ad serving company.

DoubleClick has more than 1,500 customers. They include AOL and other companies that might not be happy about Google having access to their data. And there could be issues concerning conflict of interest. As the New York Times pointed out when the deal was announced, "If DoubleClick’s existing clients start to feel that Google is using DoubleClick’s relationships to further its own ad network, some Web publishers or advertisers might jump ship." That would decrease the value of the purchase.

But perhaps it wouldn’t decrease it by all that much. Some have commented that keeping DoubleClick out of the hands of Microsoft is worth billions to Google all by itself. Since it’s already trying to compete with Yahoo in the display advertising arena, keeping a potentially powerful competitor out of the field, or at least delaying its entry, is worth quite a bit.

And then there are the synergies to consider. According to Charlene Li, a Forrester analyst, Google "can leverage the relationships they have between display, search and transactions (with Google Checkout) better than anyone else can, and that justifies the premium price they paid. In that way it was a ‘must-buy’ for Google."

DoubleClick has a privacy skeleton in its closet. Back in the 1990s, it tried to combine online and offline consumer data, and to track activity and target ads based on those profiles. This caused quite a bit of controversy, as did the ad targeting service it launched in 2000 and scrapped not long after. More recently, DoubleClick settled state and federal lawsuits that accused it of violating the privacy of Web surfers. What does this mean for a company like Google, which has stated repeatedly that it cares about these issues?

"Overall, we care very much about end-user privacy and that’s really going to take the number 1 priority when we contemplate new products," said Google co-founder Sergy Brin. He was responding to a question concerning whether Google would make search result information available to display advertisers so they could target it with DoubleClick’s system. If the point of the purchase was to allow for more targeted display ads, Google may be in for a serious challenge as to how to achieve this without violating anyone’s privacy.

Then there’s the question of whether display ads are even relevant in general anymore, never mind targeting them better. Wainewright has described DoubleClick’s model of serving banner ads as "so last century — indeed, Tim O’Reilly even put DoubleClick at the top of his list of Web 1.0 examples in his seminal 2005 essay ‘What is Web 2.0.’" He believes that the future is pay per action advertising.

The future isn’t quite here yet, though Google has invested in that area as well with its new pay per action service. But even so, is there any reason for DoubleClick’s software to be limited to banner ads? Once it’s folded into Google’s system, it’s quite possible those engineers at Google will be able to expand it to work with different types of ads, across different types of media. (I’m willing to admit it won’t be nearly as easy as I make it sound; after all, I’m a writer, not an engineer). If DoubleClick’s software turns into a backbone, it will be very hard to call it "outdated."

In purchasing DoubleClick, Google bought two things that will help increase its dominance of the online advertising field: relationships and technology. While we may not see the immediate effects, there’s no doubt that the acquisition will pay off over time. Indeed, five years down the line, the $3.1 billion purchase price might look like a bargain. 

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