With big buy, Microsoft joins online-ad flurry

Robert A. Guth, Kevin J. Delaney, Suzanne Vranica And Emily Steel, Wall Street Journal

Microsoft Corp.'s $6 billion deal to buy an online-ad specialist called aQuantive Inc. puts into high gear a race between Madison Avenue and a new guard of technology businesses that are trying to dominate the unbridled market in brokering Internet advertisements.

The deal -- the largest in Microsoft's history -- follows recent acquisitions of Web-ad companies by Google Inc., Yahoo Inc. and traditional advertising agencies. The emerging consensus: The online-ad market is maturing around an oligopoly of huge companies that sell and place the ads users see online. Placing those ads is increasingly seen as the business model that will fund almost everything on the Internet -- from search portals, news sites and video downloads to Web-based software services such as word processing.

The deals also highlight the deepening conviction that the automated-advertising approach championed by Google will draw more ad dollars from traditional media and play a larger role in how TV, radio and print ads are sold. Hundreds of thousands of advertisers buy online ads using the Web sites of Google and its competitors, providing some details about what they're willing to pay and where they want their ads shown. The automated systems act as brokers by finding places for the ads on Web sites.

The catalyst for the recent wave of deals was Google's agreement last month to buy ad-services company DoubleClick Inc. for $3.1 billion. The company inserts ads on Web pages as users call them up on their computers. It also provides tools and services to agencies to help them manage online advertising.

Just 24 hours before the Microsoft announcement, advertising giant WPP Group PLC said it agreed to acquire online ad firm 24/7 Real Media Inc. for $649 million. Among other things the company helps advertisers place ads alongside computer users' Web-search results. WPP forged that deal as a counter to Google's DoubleClick acquisition, say people familiar with the matter. Meanwhile Yahoo Inc. recently announced it was buying the remaining 80% of closely held Right Media Inc., which operates an online ad exchange, for $680 million.

"A lot of people are trying to out-Google Google," says Steven Kaufman, senior vice president at Digitas Inc., a Boston digital-marketing company. Digitas was bought by the French ad giant Publicis Groupe SA in January for $1.3 billion.

Advertisers long relied on traditional agencies to link them with newspapers, television and radio, a business model that the Internet is exploding. Google helped change the rules by linking ads to Internet searches -- in many cases eliminating the intermediary role of ad agencies.

Those search-related ads now make up roughly 40% of the roughly $20 billion U.S. Internet ad pie. Internet-ad sales overall have nearly tripled in the past five years. They represent 7% of overall U.S. ads, up from 3% five years ago, according to eMarketer Inc.

Automatic systems that Google helped pioneer to place search-related ads are now brokering display advertisements and other digital ads on a host of Internet-connected devices, including PCs, mobile phones and videogame machines.

Based in Seattle, Wash., and founded in 1997, aQuantive is a holding company for several online advertising businesses, including Avenue A/Razorfish, one of the largest online agencies. Central to the Microsoft deal, say people familiar with the transaction, are aQuantive's systems for helping advertisers, ad agencies and Web publishers. AQuantive's Atlas division helps them manage and serve up online ads. And its Internet ad network DRIVE Performance Media buys blocks of online ad space and resells them to advertisers. AQuantive expects revenues of up to $615 million in 2007, according to guidance given in its latest quarterly earnings.

"This takes our advertising business to a new level," said Kevin Johnson, president, of Microsoft's Platforms & Services Division "It is a big bet in advertising monetization for the long-term growth of the company."

AQuantive's co-founder and chairman, Nicolas Hanauer, will reap at least $290 million from the 5.6% of the company's common stock he owns, not counting unvested options and restricted stock that he holds, according to the company's latest proxy statement. Mr. Hanauer is a long-time executive of a bedding company, founder of a chain of framing stores and early investor in Amazon.com.

The deal marks a new willingness by Microsoft to use its huge cash reserves to buy growth. The company's core PC software business isn't enjoying the same breakneck growth it had for decades and the stock has been trading in the same narrow range for roughly five years. Meanwhile, after years of antitrust battles that constrained it from doing big deals, Microsoft is no longer considered invincible -- especially as Google grows more powerful.

People familiar with the company say Microsoft Chief Executive Steve Ballmer is much more open to bigger deals. In a call yesterday with analysts, Microsoft Chief Financial Officer Chris Liddell said that Microsoft is "willing to use the strength of our balance sheet" to "aggressively accelerate our growth and support our strategic initiatives."

Still, the deal will test Microsoft's ability to integrate a major acquisition. Microsoft traditionally held little regard for the advertising business, and its techie culture was resistant to some of the early moves by the company into online advertising. That has largely changed over the past two years as it has built out its online ad sales staff and made online advertising a much more central, albeit still small, part of its business. AQuantive's 2,600 employees have more of a freewheeling start-up and advertising-world culture than exists at Microsoft.

The move comes amid growing angst within the top ranks of Microsoft that the company is falling behind market leaders in online advertising. Despite recent heavy investments into online advertising and Internet-search businesses the company has lost market share to its key rivals, including Google and Yahoo. Mr. Ballmer in recent months has grown more agitated that Microsoft isn't making a more significant mark, according to people familiar with the matter. Microsoft's loss of DoubleClick to Google was a failure that irked Mr. Ballmer, those people say.

Under the all-cash deal Microsoft will pay $66.50 a share, or roughly $6 billion for aQuantive. It's a surprising 85% premium over aQuantive's closing price on Thursday, a sign of the heady competition for top-tier online-advertising assets. Faced with rival bidders, Microsoft bid high to assure it wouldn't lose aQuantive after missing out on DoubleClick, say people familiar with the matter. AQuantive handles a broader set of advertising services than DoubleClick, which may partly justify the higher price tag.

Microsoft's deal shows how the lines between media companies, technology firms and advertising agencies are blurring. Some marketers said that Microsoft's ownership of an ad agency like Avenue A/Razorfish would put it in competition with some of the ad agencies it has been courting for ad spending.

Attempting to assuage such concerns, the software giant said it would allow Avenue A/Razorfish to continue to operate independently. Microsoft sees the agencies -- at least for now -- as allies in a greater fight against Google. Microsoft executives yesterday morning outlined the deal to top management at leading ad agencies including WPP and Publicis.

Alexandra Aleskovsky, general manager of Weight Watchers International Inc.'s WeightWatchers.com division, said Avenue A/Razorfish President Clark Kokich called her yesterday to say that the agency's relationship with clients wouldn't change following the acquisition.

The issue of Silicon Valley's encroachment on the ad world remains a sensitive one. Over the past 18 months, Madison Avenue has embarked on an Internet dealmaking binge fueled by big marketers' shifting of dollars online and away from traditional media. Take, for example, General Motors: The car maker's spending on television declined 15% in 2006 to $1.38 billion, while spending on newspaper ads plunged 60% to $232.1 million, according to ad-tracking service TNS Media Intelligence. Meanwhile, the company's spending on the Web rose 16% to almost $130 million, according to TNS.

The advertising industry is determined to prevent Internet giants such as Google and Yahoo from snatching up this Internet-ad spending and leaving Madison Avenue in the dust. There's also an element of envy: The big ad holding companies who own the agencies have seen their own valuations pale in comparison with the digital behemoths on the West Coast, and are hoping that by changing the mix they can capture some of this luster.

Google's moves onto the traditional turf of agencies, with its efforts to broker TV, radio and print advertising, are helping spur them into action. "That is a real threat to our business" over the long term, says Eric Bader, senior vice president, director of digital connection at MediaVest, the media-buying firm owned by Publicis Groupe. Madison Avenue "is in defensive mode," he adds.

Publicis' January purchase of Digitas was followed last month by Interpublic Group of Cos. snapping up Reprise Media, a search-engine marketing firm.

WPP Group PLC's agreement to purchase 24/7 Real Media Inc. for $649 million on Thursday marked the most aggressive step yet by the advertising industry to take a piece of the technology part of the online-ad business. With the 24/7 purchase WPP, which works on behalf of marketers such as Ford Motor, IBM and Unilever, now has the ability to sell ad space on publishers' Web sites.

"About 10 to 15 years ago we were clearly a creative business, then about five to 10 years ago, the media buying and planning business became more important," Martin Sorrell, WPP's chief executive, said yesterday in an interview. In the last five years, "the technology piece has become more important. ...creative media and technology have all come together."

The consolidation rush is also being driven by advertisers' desire to reach broad swaths of Internet users through a single ad buy. Despite the Web's promise to give advertisers a seamless way to place ads and measure the effectiveness of ads, buying online advertising can often be a bewilderingly complex task for marketers accustomed to buying time on a handful of TV channels. Different Web publishers use different systems to run online ads, requiring Web marketers sometimes to manually track each piece of their ad buy independently. Marketers are looking for one dashboard that delivers information about their ad buy, automatically.

"As you start spending more money online you have to go to a lot of places to execute your online marketing," says Joe Tripodi, chief marketing officer for AllState. "A lot of what we do right now is spend a little here and spend a little there, that can be difficult."

AQuantive, which had to survive cutbacks after the dot-com bubble burst, soon built a track record of making smart investments, analysts say. For example, before the digital marketing industry was focused on search marketing in December 2003, aQuantive acquired Go Toast, a Denver-based company that helps online advertisers manage search-related marketing campaigns and now operates under the name Atlas Search. In 2004, the company took a gamble in acquiring for $160 million the largest independent interactive agency at the time, Razorfish, a battered survivor of the dot-com bust. It seemed like a risky move. But when the Internet ad boom kicked up again, the combined Avenue A/Razorfish became one of the largest Web agencies.

More recently, aQuantive has expanded internationally, snapping up shops in Europe and Asia. It put resources behind emerging technology such as online video. "They've shown an ability to become leaders in where the market is going next even though at different times their moves have been considered unpopular," says Stewart Barry, a media and Internet analyst at San Francisco-based ThinkEquity Partners LLC. [via]