Google's Power Play
The search giant extends its Web dominance with a $3.1 billion offer to buy ad company DoubleClick
A gorilla landed in Tim Vanderhook's backyard the other day. Google, the search engine with the Web's fattest wallet, said it would buy DoubleClick, giving Google a major entry into the market for banner advertising. That's where Vanderhook's company, Specific Media, and other middlemen now sell and buy the Web's display ads, and Google is all about machine efficiency that cuts out the middle. "No question, it's startling to see Google and DoubleClick come together," Vanderhook says.
It was startling for everyone, as Google agreed to pay a whopping $3.1 billion, or an estimated 30 times the earnings at DoubleClick, offering a windfall to the private-equity funds that bought the company for $1.1 billion in 2005. The Google offer helped shut out Microsoft and Yahoo!, two other Web giants that also looked to buy DoubleClick, whose technology funnels banner advertising between buyers and sellers. It also underscored the potential that Google sees in fashioning the next cycle of Internet marketing, much as it succeeded in posting text advertising alongside related Web searches and content, making the ads more interesting to Web surfers and more valuable to merchants. "Google didn't pioneer that business, but they perfected it," says Scott Kessler, an equity analyst with Standard & Poor's. The result is surging numbers, including profits and sales that rose more than 60 percent in the first quarter.
Branching out. Google had not, however, excelled in display advertising. "Google was just an also-ran in that market," Kessler says. Graphical ads, while now owning a smaller slice of the Web, are expected to grow faster: Their potential to evoke emotion through rich visuals, video, and audio will encourage more brand-name companies to use the Web. Maybe it is in display advertising, Kessler says, that video has the potential to make sense of Google's last big buy, the $1.6 billion it paid for YouTube, the video site whose purpose for Google still baffles many investors.
In DoubleClick, Google gets the technology that moved banner ads from buyers to websites and returned data on when the ads were viewed and by whom. Google can combine the banner-serving technology with its text system to offer advertisers a full range of Web options. "That integration of search and display is the next generation of Internet advertising," says Paul Keung, an equity analyst at CIBC World Markets.
The potential combination has raised privacy concerns, as Google will accumulate more and more data about consumers and their surfing and buying habits. Competitors, including Microsoft and AT&T, also voiced antitrust concerns. But it's expected that the competitive complaints will, at most, stall the merger; it's hard to argue that anyone can lock up Internet advertising, Keung says: "It's very immature and growing fast-there's plenty of room for someone to come along with a better idea." Besides, DoubleClick is likely to lose many customers, including MSN and Yahoo!, as well as other sites that compete with Google and fear it would learn too much about how they operate.
Google doesn't care, says Richard Fetyko, an equity analyst with Merriman Curhan Ford. "They didn't want the relationships-they wanted the technology," he says. Google itself will want to sell the banner ads, using DoubleClick's system to develop an automated bazaar that directly links advertisers to websites, similar to what it has done with its contextual ads. DoubleClick, in fact, was said to be writing software with such a marketplace in mind, which may have helped fuel Google's intense interest. "Together with DoubleClick, Google will make the Internet more efficient for end users, advertisers, and publishers," Google cofounder Sergey Brin said in announcing the deal.
A more automated approach would threaten ad networks like Specific Media, which buys website space and sells it to advertisers, while also helping manage and measure campaigns. CEO Vanderhook says he remains confident in his system, which tracks demographic data on users that DoubleClick and Google won't have. "We'll look at other products and services, as well, that can help us get even better at what we do," he says.
He'd better, as his company and other Internet brokers now find themselves in the path of Google, which despite its "don't be evil" mantra is a ruthless competitor. "If Google had its way, they would eliminate the ad agencies altogether," Fetyko says.
This story appears in the April 30, 2007 print edition of U.S. News & World Report.