$12bn 'land grab' reshapes world of online advertising

Michael Sainsbury
May 24, 2007

FIRST it was the second wave of the internet, widely known as web2.0, powered by broadband speeds, armed with interactive technology and enhanced video capabilities. Now it's (dotcom) boom 2.0.

As the internet has finally started to deliver on its promise as the global (and Australian) media platform of the 21st century, extraordinary deals worth $12 billion have been sealed in the past six weeks.

This time the targets are not the online e-tailers - most of which collapsed through lack of interest - but the digital advertising software platforms, agencies and website networks that power the revenues of the web.

"It's a land grab," Shane Murray, chief executive of Australian digital advertising group Viva9.com, said.

And these deals have the potential to shape the Australian and global online media industry.

"In the the first dotcom boom, technology companies were separate from the media companies," Mr Murray said.

"Now that there is vertical integration, it's about adding value and providing the best value for advertisers."

What the big internet players are trying to do is create integrated businesses comprising buyers, sellers and the software platforms and behaviour measurement technologies that sit between them.

And many believe that much of the present deal frenzy has been driven by the fear of a company that emerged only towards the end of the first, truncated dotcom boom, Google.

"The prevailing dynamic is of fear created by the Google-DoubleClick deal," Ian Lowe, chief executive of listed local digital advertising group Facilitate Digital, said.

"This has seen the land grab reach nonsensical proportions as media players are buying technology, media buyers are buying technology and media buyers are buying media players."

Google muscled into the market in April with the $US3.1billion purchase of DoubleClick, only to be outspent last weekend by arch-rival Microsoft, which splurged $6 billion on aQuantive, a group with similar assets.

In between, advertising group WPP spent $649 million buying 24/7 Real Media and Yahoo paid $680 million for Right Media. And then there's the $1.2 billion that another advertising conglomerate - Publicis - paid forDigitas.

Google's Australian spokesman Rob Shilkin was reticent to make any comments on the group's strategy beyond a short statement. "For users it the acquisition of DoubleClick will mean more relevant, targeted and useful advertising," he said. "And for customers the acquisition of DoubleClick will deliver the integration of all types of online campaigns more effectively, combined with faster product innovation.

"We believe recently announced acquisitions are evidence of the rapid pace of change and healthy competition in the advertising industry."

The recently acquired companies hold an almost bewildering array of assets.
Most run the sophisticated internet software platforms known as ad servers. These straddle the online advertising equation as they are the conduit between the advertisers needing to put their ad on the internet site and the publishers who need the ads displayed.

The aQuantive purchase sparked a share price run on Facilitate - up 12 per cent in one day on Monday - as Facilitate also owns ad serving software.

Lowe is coy about any approaches the company may have had and Viva9 is still considering whether it will make its own public offering.

It's not just the software and advertising parts of web 2.0 that are booming: so are the broader internet marketing groups.

Also this week, local digital services and marketing conglomerate BlueFreeway, which only listed late last year, upgraded its profit forecasts.

Revenues will increase from $17.1million to $19.4 million for the 2007 second-half period. The company said the earnings upgrade has been driven by organic growth in the initial 10 companies that made up BlueFreeway at the time of the initial public offering in December 2006, reinforcing the many benefits of themodel.

"BlueFreeway has been born at a time of an unprecedented shift away from traditional media, and as such has realised growth via its one-stop-shop offering through its corporate sales team," the group's chief executive Richard Webb said.
"While the company has made, and will continue to make, accretive acquisitions, this result demonstrates that our foundation companies continue to grow and become more efficient, and are well-placed to benefit from unprecedented growth in online marketing and advertising spending."

There is more basis for confidence in the internet now than there was back in the halcyon dotcom days. Locally, online advertising topped $1billion last year and its growth is outstripping ad growth in traditional media by a factor of four or five. There certainly appears to be something of a bubble at play.

"aQuantive is a very serious business as its recent revenue growth and profitability show," said David Bradshaw, principal analyst at technology research specialist Ovum.

"But still, an 80 per cent premium on the share price and almost 14 times last year's revenue: how can it be worth this much to Microsoft?

"The answer is only if Microsoft can use this purchase to drastically improve its share of the online advertising market, which some estimates put as high as $40 billion in the last year."

And increasingly revenue is not just about eyeballs and website traffic but about how you target website users. In Australia, the big media sites such as Ninemsn, Yahoo7, eBay and the more traditional media groups account for up to 90 per cent of traffic.

Better software, and an advertising industry that now understands the medium better, is starting to deliver on the targeted advertising that the world wide web promised for smaller publishers.

"There are two main factors that drive success in the online advertising business, the strength of your web presence and how effectively you monetise that web presence," Ovum's Mr Bradshaw said.

Viva9.com business development chief Peter Bojanac agrees.
"It's all about how much money have you made me? Show me the money," he says. "We provide free ad serving, we think it's a commodity. We are winning clients left, right and centre. It's not so much about the technology, but performance.

"We have multiple network partners worldwide. Publishers pay us only only for the lead we generate for them. At the end of the day, the client doesn't have any risk."

That sounds like the future the internet has long promised. The question is, when the music stops at the end of the latest acquisition round, who will deliver it?