Google's DoubleClick Strategic Move

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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."

With Robert Hof and Arik Hesseldahl.
Holahan is a writer for BusinessWeek.com in New York.