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Of Mad Money & Ad Networks

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In 2006, according to Internet Advertising Bureau, the advertising revenues reached an all time high of $16.8 billion. In comparison, $11 billion has been spent by various players in buying out ad networks. Don’t be surprised if this number rises even higher. Welcome to the mad-money phase of the eyeball boom!

The latest jaw-dropping move comes from Microsoft that has bought aQuantive, another ad network, based in Microsoft’s backyard, Seattle, for $6 billion and change. The move is a reaction to losing DoubleClick ($3.1 billion) to Google. Earlier this week, WPP bought 24/7 Real Media for $650 million. (The WPP-24/7 Real Media deal is about bringing search marketing services in house, Tim Vanderhook, CEO and founder of Specific Media told us yesterday.)

Kara Swisher is quite impressed by the bold big money move, and points out that what Microsoft paid for aQuantive is

.. more than 10 times is revenue fiscal revenue last year, and, yipes, close to 50 times its cash flow. And that is double what what the Seattle-based parent company to Avenue A | Razorfish was worth on the public market just before the acquisition, a figure that has already been bid up by all the recent activity in the market.

Microsoft’s willingness to pay big dollars and bid aggressively for aQuantive ($66 a share versus mid-$30s trading price) shows that the Barons of Redmond truly believe that advertising will play a big role in its future. How that eventually plays out – remains to be seen.

As an aside, as Microsoft moves away from its more predictable software (OS and productivity suite) based business models into new categories – games, subscriptions and now advertising – do you think some of the predictability in their business model is going to be … to put mildly… be replaced by volatility?

Greg Sterling has more thoughts about the deal after his chat with Joe Doran, General Manager, Microsoft Digital Advertising Solutions.

19 Responses to “Of Mad Money & Ad Networks”

  1. Great post. Might I humbly add that the same concept of compounding interest in tangible capital applies to intangible human capital also? Many of my friends thought I was crazy to get married young, but it only took a few years before I started to look smart for getting hitched to a beautiful, smart, and honest lady before she had the chance to shop around. And social capital in business relationships is systematically underestimated in service-based industries. The customer isn’t always right. But on average, having that policy means compounding on customer loyalty.

  2. Interesting posts. Has anyone ever come across market share/revenue estimates for all of the private players in the ad network space? How big are these players?


  3. Michael Whitney

    I think microsoft will end up being the biggest in ads because they know how to leverage current assets. Google does not leverage their search engine to take other markets. Yeah they make money with adwords, which helped adsense grow large, but how is that helping other businesses like picassa, google earth etc.

    Microsoft will figure out a strategy that will help make ads more relevant then googles, and easier for advertisers to set up, and then make it only work with ie thus reinforcing their own monopolies. Google could use ie as a gateway by allowing people to opt in have the web history be a part of the ad system to make ads more relevant. In today’s age I will allow them to use my history to make the ads more relevant.

    Google doesn’t own anything that can help them in this way. You would not be able to opt out from them doing it with their search engine so privacy warriors would be all over google, but ms would have an easy way to opt in or out, and everyone would prefer them.

  4. I voted for “forget Google they need to beat Yahoo first” as meaning “forget first place, Microsoft needs to rise to second place in this market before they even think about going for number one.”

  5. BJ Upton

    Woof…this values it at a P/E of about 93-94.

    What are they trying to buy here? Would seem that the existing customer base isn’t providing a value that would support such a price tag. Which means they must think that there is some technology here that they must have, right?

    One would think for $6 BB they could roll their own.

    I don’t get it. Perhaps Aquantive execs have incriminating pix of Ballmer using Fiesty Fawn?

  6. The problem with most shareholders are they are unwilling to look past the next quarter. In fact, this is a problem I feel that has contributed to massive slow failures like demonstrated by companies like IBM. Microsoft is doing everything in it’s power to put it’s eggs in all baskets and is trying to fight off what all the haters (why hate anyone?) are saying is going to happen to Microsoft, that they are going to be IBM’d. Not going to happen, there are too many smart factions in Redmond. And before anyone calls me a fanboy, let me tell you this, I’m a fan of no company, I am a fan of consumerism.

  7. I think it’s a great move for Microsoft. I don’t think their accountants will see it that way but look at it this way. Microsoft needs some momentum if they are going to do anything in the online space with advertising. They simply don’t have the raw manpower who specializing in Marketing, deal making, and programing to new emerging audiences.

    Now, if Microsoft was smart, it would buy Joost and connect it to it’s Xbox 360 live service. Internet TV is here folks. In 5 years I bet just as many middle class americans watch their TV over their Monitors as they do their TV.


    A long time GigaOM reader says “thats all folks”

    While I doubt that anybody here cares… I’ve had enough. When it was announced that this site was being funded my expectations were raised but its now clear that this is a publicity site not a “news” site. Taking laptops from Microsoft,”reporter” posing for a pic with Bill Gates…to giving invites to Joost..ugh! Then no real backstory on the engadget / apple mess …..the shark has jumped…..

  9. Robert Dewey

    Hopefully my post goes through this time, lol…

    I voted “other”.

    While MS and YHOO have higher odds, I will never throw out the possibility that a startup (or a future startup) will move in and overtake things.

    I agree with Read/Write-Web – if someone comes out with an advertising network that gives publishers 100% of the revenue (a 20-30% increase from what is seen today), that will really rattle the cages of the big three.

    The focus needs to be advertisers and how to secure a higher ROI.

  10. With the convergence of Internet and TV just around the corner, maybe it’s not such a dumb purchase, however I’m skeptical about how much confidence there will be in Micro$oft in the Internet world, if they plan on becoming the dominant figure over Yahoo and Google, they’ll have to do a lot more than just flash their cash around!

  11. …and overpaying for an ad network because you got beat out for the chance to overpay for some other ad network makes sense because?…

    This will go down as one of the top 20 worst purchases in the last 20 years of business.


  12. GuyNamedNate

    $6 Billion is a lot of cash, its hard to imagine a company that earns $20 million a year and is not a leader being worth that much.

    The next 5-10 years will be especially interesting in the ad space since we’ll all be able to see just how well these kind of deals panned out.

  13. “Volatility”? How about “risk” – as in competing on something closer to a level playing field?

    When pressed into combat where dollar$ don’t guarantee automatic victory, M$oft is so out of practice they’re liable to end up doing a digital imitation of the White House. Lie about your success.

    Or have they already begun that – with the PR campaign about Victorious Vista?