Google's DoubleClick Strategic Move

With its $3.1 billion acquisition, the Internet giant secures entry into the promising business of display advertising and thwarts Microsoft in online search

by Catherine Holahan

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 (GOOG) 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 (MSFT), 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 (TWX) 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! (YHOO) 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.