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Three billion dollars? On Apr. 13, Google announced that it would pay $3.1 billion for the advertising outfit DoubleClick. Just two weeks ago, as reports surfaced that the company could go for $2 billion, the price was considered lofty but justifiable. Now, Google (Wedding Dress, Bridal Show, Wedding Invitation, Wedding Gown, Wedding Cake, Wedding Reception Location, Wedding Planning, Wedding Photography, Wedding Idea and Bridal Registry at Bride.com) is forking over 20 times DoubleClick's estimated revenues of $150 million. And it's paying triple the amount that private equity firm Hellman & Friedman spent when it purchased DoubleClick in 2005—before selling off a couple of pieces of the business.
So why the sky-high price? It may be less a function of DoubleClick's current worth and more about what it can strategically provide for Google—and what it could have done for Microsoft (Web Page Under Construction), a rival bidder (see BusinessWeek.com, 4/3/07, "Google vs. Microsoft: Vying for DoubleClick").
DoubleClick has something that Google, for all its money and smarts, doesn't: a vibrant advertising business for banners, videos, and other so-called display ads often intended more to promote brands than to generate immediate sales. "DoubleClick currently has relationships with virtually every major online publisher and more than half of the online ad agencies," says Dave Morgan, chairman of TACODA, a targeted advertising network. DoubleClick counts Time Warner's (- Always The Best!) Sports Illustrated, Friendster, and Viacom's (VIA.B) MTV Networks among its customers. Google, on the other hand, has made much of its billions by serving tiny text ads related to searches for relatively smaller businesses hoping for some kind of immediate interaction with a customer.
The Smart Play—the Only Play

Forrester analyst Charlene Li described the deal as a must-have for Google. "It's a lot of money, but who cares? This is one of the things they had to buy," she says. "They were not making any headway" on display ads.
In a call following the acquisition announcement, CEO Eric Schmidt characterized the deal as helping Google gain a greater foothold in the display advertising market. "It is accelerating our display advertising business," said Schmidt. So far, search rival Yahoo! (Coming Soon!) has been the main player in display advertising on the Web. Google's display efforts to date, like its attempts to expand outside of search in general, have been marginally successful at best. "Google has been a one-trick pony for a long time focusing on just search," says Bill Gossman, CEO of targeted advertising network Revenue Science. "This is a way to give them another trick."
Google clearly thinks that trick could be a multibillion-dollar one in the near future. During the call, Schmidt and Google co-founder and Technology President Sergey Brin emphasized the importance of display advertising. "I think we have thought that display advertising has been important for several years," said Brin. David Rosenblatt, DoubleClick's CEO, told BusinessWeek.com that the market could be equal to—or even bigger—than paid search. "We could see a similar kind of growth rate as search had," says Rosenblatt.
Banner Potential for Display Ads

Paid search advertising will account for more than 40% of the $19.5 billion expected to go to online advertising this year, according to a Mar. 7 eMarketer report. Google grabs about two-thirds of the search advertising market. Much of that growth has stemmed from the ability of search engines to find consumers who have demonstrated an interest in a certain product.
Display advertising, which is often broken up by the medium, has not been as vibrant as search in recent years. In an October report, eMarketer put the display advertising number at $3.34 billion for 2006 and expected it to grow to $4.5 billion by 2010. Meanwhile, paid search advertising accounted for $6.76 billion of online ad spending in 2006 and was projected to grow to $10.3 billion by 2010.
Gossman believes that display will grow faster than expected because of increased targeting capability. Display advertisers have typically sought to place their ads on pages where the content is related and thus likely to attract interested consumers. For example, an SUV marketer would stick a banner on an autos site. Ad networks and search engines such as Google can now target banner ads to customers who have demonstrated an interest in content related to the ad, even if the page has nothing to do with the advertiser's product, says Gossman. As a result, brand advertisers are becoming increasingly interested in display ads, says Gossman. In fact, Gossman and others believe that display ads are poised to begin taking advertising dollars away from the television advertising market.
Microsoft's One That Got Away

Rosenblatt says that DoubleClick will gradually start to leverage Google's targeting capabilities with its customers. Google's ability to match ads with consumers will be particularly helpful for publishers that have inventory they can't sell through their in-house sales force, says Rosenblatt.
The other big benefit of buying DoubleClick for Google is keeping it out of Microsoft's hands. At the moment, Microsoft poses little threat to Google's search advertising business. Its share of Internet searches has been on the decline and dropped to less than 10% in March, according to an Apr. 11 Hitwise report (see BusinessWeek.com, 4/2/07, "Where Is Microsoft's Search?"). As a result, advertisers looking for the biggest potential audience go to Google, not Microsoft.
DoubleClick could have changed that for Microsoft. DoubleClick serves ads on both Time Warner's AOL and News Corp.'s (NWS) MySpace, two of the Web's most popular properties. Google has the rights to provide search ads on both those sites—it bid aggressively to do so, agreeing to pay nearly $2 billion to both companies (see BusinessWeek.com, 8/8/06, "Google Gets Back into MySpace"). But if Microsoft had acquired DoubleClick, it could have had a competitive position at the two companies, jeopardizing Google's expensive search agreements. It could also have given Microsoft a much greater search share. "Microsoft definitely needs agreements for search advertising," says Matt Rosoff, an analyst at Directions on Microsoft.
Even More Power for Google

In the end, however, getting a greater search share just wasn't worth $3 billion-plus for the software giant. "Maybe they would have looked at the acquisition at a lower price, but you have to look at Microsoft's overall business and what they could have spent that money on," says Rosoff. "It is much more important for Google—advertising is their core business."
To advertising industry executives, such as Gossman and Morgan, Microsoft's unwillingness to pay such a price showed that the company isn't as serious about the market as Google. "Google is really serious they want to dominate digitally advertising and they don't want to lose," says Morgan. "Google has no intention of losing."
But is a win worth $3.1 billion? It just may be—provided DoubleClick's valuable clients are not scared away by the presence of the increasingly powerful Google. That's a big if. On the conference call, some analysts raised the specter of antitrust authorities not approving the deal. (Both parties don't feel it's an issue.) And already, many media companies, some of whom are DoubleClick clients, have been vocally wary about Google's increasing strength in the advertising industry and its aspirations to become involved in offline ad delivery (see BusinessWeek.com, 4/9/07, "Is Google Too Powerful?").
Rosenblatt says that he is excited about the prospect of using DoubleClick's relationships and Google's targeting to sell offline ads in the future. He also believes that DoubleClick clients will see the deal not as a threat, but as a tool that makes advertising easier. "I think they will see this as a best-of-breed combination—the leading platform technology provider and the leading monetization engine."