Google has agreed to buy DoubleClick for US$3.1 billion in cash, an acquisition that strengthens Google's status as an online advertising powerhouse.
DoubleClick's network of advertisers and Web publishers, as well as its technology to serve ads and manage campaigns, is expected to boost Google's ad business, specifically for display and rich media advertising, which aren't Google's specialties.
Google generates most of its revenue from search engine, pay-per-click advertising, which are text ads that link to advertisers' Web sites, but it has lagged behind Yahoo and others in banner, graphical and video ads.
Google will purchase DoubleClick from private equity firm Hellman & Friedman and JMI Equity and management. The deal is expected to close by the end of the year.
"By working together, we're going to be able to offer a variety of tools for advertisers to do better Internet targeting," said Susan Wojcicki, a vice president of product management with Google, speaking on a conference call with reporters. "Advertisers will be able to spend more and be able to make rational decisions about how they are spending their ad dollars."
The fact that there is such an "obvious alignment" between Google and DoubleClick advertising partners was an impetus for the deal, said Google Chief Executive Officer Eric Schmidt. "DoubleClick has been a partner of ours for a very long time, and some of the most important advertising partners of Google are in fact very big DoubleClick users," he said.
Google officials spoke only generally about product plans. "It's not good for us to speculate right now on what we might do," Schmidt said. "This merger is really part of a global growth strategy for Google. It's a way of solving, in an end-to-end way, problems in search and display advertising."
Effect on Microsoft
Recent rumors had Microsoft aiming to buy DoubleClick for about $2 billion, so today's announcement signals that a bidding war had erupted with Google, said industry analyst Greg Sterling of Sterling Market Intelligence.
The deal is a clear loss for Microsoft and it stands to affect Yahoo as well, because with DoubleClick, Google gets a much-needed boost in display advertising, Sterling said.
Companies such as DoubleClick that link advertisers and Web publishers have thrived in recent years, thanks to the strong growth in online ad spending, said Clayton Moran, a financial analyst with Stanford Group Company, in Boca Raton, Florida, prior to Friday's announcement.
"The facilitators of online advertising have done very well, because demand for Internet advertising has been very strong," Moran said.
He doesn't track DoubleClick because it is a privately held company, but he does follow publicly traded competitors such as 24/7 Real Media and ValueClick. Last year, Real Media's revenue was $200.2 million, an increase of 43 percent from 2005. Meanwhile, ValueClick grew its revenue to $545.6 million, an increase of 79 percent from 2005.
Microsoft's Online Woes
The deal may make it harder for Microsoft's struggling online division to compete with Google.
Despite heavy investments of money, resources and personnel to develop its own search engine and search ad network, Microsoft hasn't been able to come close to matching the levels of online ad revenue Google and Yahoo have achieved. It is painfully clear that Microsoft has failed to benefit as much as it should have from the surge in online ad spending of recent years.
Traffic to Microsoft's Web sites is strong. In fact, Microsoft consistently ranks first in Web site visitors worldwide. However, Microsoft hasn't monetized this traffic properly.
Moreover, Microsoft hasn't been able to compete effectively for traffic in the search engine market, where Google rules, and this has affected its ability to take advantage of search engine ads, which make up about 40 percent of U.S. online ad spending.
After peaking at $8.2 billion in 2000, U.S. online ad spending fell in 2001 and 2002, but it began regaining lost ground in 2003. In 2004 the market finally broke the 2000 record, ending with $9.6 billion in online ad spending. Growth rates in recent years have been in the 30 percent to 40 percent range. Online ad spending in the U.S. reached an estimated $16.8 billion in 2006, a growth of 34 percent compared with 2005, according to the Interactive Advertising Bureau and PricewaterhouseCoopers.
In December, Microsoft's share of U.S. search engine queries was 10.5 percent, while Google nabbed 47.3 percent, according to comScore Networks. In July 2005, Microsoft's U.S. search engine query share stood at 15.5 percent and Google's at 36.5 percent, according to comScore.
DoubleClick, founded in 1996, serves ad buyers such as ad agencies and corporate marketers, and ad sellers such as Web site publishers. It has two main divisions. Its Dart division provides tools and services to both buy and sell advertising, primarily display and rich media ads. Meanwhile, the Performics division focuses on search engine marketing, commonly based on the pay-per-click ads in which Google specializes.