Backchannelmedia

Jack Myers Media Business Report, July 10, 2007

Online Industry Consolidation: Frenzy, Evolution or Something Completely New?

By Jerry Weinstein

Is there an Internet bubble forming? Just who benefits from the partnerships of Google||DoubleClick, WPP||24/7 Real Media, Microsoft||aQuantive, and Yahoo!||Right Media, respectively? Is there a clear winner here? And, once the FTC is done with its scrutiny, (only WPP||24/7 seems below the anti-trust radar) how will the media landscape have shifted?

Jack Myers Media Business Report surveyed a range of players and thought leaders to probe these and other questions in the wake of an increase in interactive ad spending for the coming fall. What arises is that this heady surge does signal the opportunity for more relevant ads, greater choices for publishers, and more efficiencies of scale, that is, if the transplants take.

First, let's review: Google purchases DoubleClick for $3.1B. Yahoo! acquires Right Media for $680M. Microsoft ponies up $6B for aQuantive, (representing 2 percent of its market cap) and WPP buys out 24/7 Real Media, Inc. for $649M. That's a whole lotta chairs being shuffled. What's driving this? An overall $230B ad marketplace with online ad sales representing eight percent – with a bullet.

Interpublic's Futures Marketing Group president Bant Breen opines that these transactions have been evolving over the last decade. While these deals made sense for varied reasons they all have a similar challenge: making software solutions interchangeable. Says Breen, "clients want consistent data and services. They're still looking for one solution that works."

JupiterResearch online advertising analyst Emily Riley gauges these deals in the context of the "debate raging about the value of the technology platform itself versus value of insight and relationships about the consumer." Until now, she notes that Yahoo!, MSN, and Google have been destinations. They've purchased technology platforms to spread across their networks, as well as data (and by inference, insight) on consumer behavior.

While Riley doesn't hold that there is a bubble threatening to engulf the online ad sector, Breen considers: "Bubble or not for valuation fees, there are still macro-long term trends proving to be true. Do I think that there's a bubble? There may be some high valuation. Let's call it exuberance but I'm not saying rational or irrational. There's a desire to put down bets on certain areas - technology related to advertising. This signals a demonstrated commitment to systems and technology going forward."

It might be intuitive to expect that out of these sector consolidations, beyond efficiencies of scale, and the peeling off of middlemen, that innovation would be in the offing. But this appears to be a contentious area for discussion. Backchannelmedia Media's CEO Michael Kokernak believes that the technology on offer, across the board, is ten years out of date. "The Internet and TV are about to morph into a powerful communications tool that will have the addressable power and the engagement of the telephone. Today's cookie behavioral targeting will seem unfriendly and invasive compared to what will be coming in the very near future.") While Breen concurs that the technologies have existed for ten years, he deems them as still evolving.

Riley, too, finds the technology stagnant, but in her eyes it doesn't matter. "What you find is that only about ten percent of online advertisers are using the current level of technology effectively. Advertisers don't know what they want out of their campaigns. They need to be more mature before it can take off." David Moore, founder and CEO of 24/7 Real Media, however, holds that his customers are happy. He's quick to point out that his is the only ad server that has integrated analytics and behavior-based targeting. But he does agree that there is much work to be done to take the manual workflow out of display advertising. "Where advertising is concerned, the Web is more competitive that any other medium. For example, while TV buyers might have thirty sellers calling on them, in print a bit less, the average interactive buyer can expect 125 sales pitches. At the end of the day, there remains too much manual labor to sell online advertising. When it comes to purchasing it's too complicated and should be made easier. Sure," he assents, "there's a lot of technology out there looking for an application, but we target better than anyone else."

Tom Chavez, founder and CEO of Rapt Media, which provides media monetization solutions, goes Moore's point one better: "People forget the whole point is to sell stuff." His colleague, Ben Crain, admires Google's acquisition of DoubleClick: "With one move they have a presence in the display ad market overnight. It's powerful and it's disruptive." With regards to Microsoft's purchase of aQuantive, Crain sees it as "a lever to a much bigger play. They don't need to hit the nail, but move the tanker." (Might this be a reference to old tech?)

Stepping back, Jay Sears of ContextWeb, an emerging online ad exchange, offers a few considered long-term consequences of these deals: "We believe that there will be a second round of asset disposition once these deals close. For example, Google will spin off Performix; the market is not happy about them operating their own SEM (Search Engine Marketing) firm. And," he believes, "ad serving will become free. The world's worst kept secret is a Google free ad server."

While there's debate across the industry over the value of these deals in terms of tech, data, and customer relationships, Sears discounts the tech, particularly with regards to Google's acquisition of DoubleClick. "Overall, it's all about the aggregate of data plus customer relationships," he muses. "The footprint is nice, but in the end, if you can't get five cents more per transaction, it doesn't amount to much."

Perhaps Sears' most keen takeaway is that "none of these transactions enable advertisers to follow their customers into the long tail." While AdSense does this with remnant inventory, ContextWeb is about to launch its ADSDAQ Ad Exchange, offering premium inventory. (Details to follow in an upcoming column.) Offering some advice to companies that are reeling from the consolidation, and momentarily pulling tantrums (eBay removed ads from Google's ad network for two weeks) Sears offers: "Frenemy is the new coopetition."

In this brave new world Google and Yahoo! will between them own sixty percent of search inventory. WPP|24/7 Real Media will be the number one buyer of search. And there are those who wager that ad serving is evolving into an increasingly commoditized business. Rapt's Chavez sees two camps: "Those that are scared; waiting for the comet to crash." The other: "We need to move now. We want to be first." What's behind this fear/loathing and pressing need to act? Chavez posits that the lessons of how digital has transformed business will energize cable, broadcast, even print.

Even if FTC scrutiny is only cursory, don't look for any of these deals to be in place before the second half of 2008. One thing is certain, as Moore observes: "The industry recognizes that the lines of competition are blurring. Digital players are themselves launching creative departments, while now the big guys have ad serving solutions, and with these they can exploit their content holdings, particularly in rich media."

The flip side, as noted by Riley, is that just about all online ad companies will be owned by media titans. She cautions, "many of the clients are nervous about privacy and the agnostic nature of ad serving data." While no single leader has emerged from this round, these consolidations will offer greater infrastructure and capacity. Both content providers and advertisers can sit in the passenger seat as the online media space matures, or they can choose to steer, demanding results heretofore unimagined in traditional media.