Microsoft's planned acquisition of digital advertising and marketing services agency aQuantive will give the company the tools it needs to dig its heels in as a competitor in the rapidly evolving digital advertising market.
But Microsoft now is under pressure to leverage its pricey acquisition as a range of companies -- including technology competitors such as Google and traditional marketing and advertising players such as WPP Group -- jockey for position to sell ads for emerging channels such as digital and online entertainment, analysts say.
Selling advertising is one of many businesses the Internet has reshaped over the last 10 years, as traditional channels such as print and newspaper are rapidly losing share to the range of ways companies can advertise online.
Google Inc. showed everyone how to sell ads by leveraging search-engine result and has all but sewn up this segment of online advertising, analysts say. But now digital entertainment segments such as interactive games and on-demand television programming are emerging as new frontiers, and Microsoft is eyeing those channels -- where it already has investments such as Xbox 360 and an IPTV platform -- going forward as a way to make up for lost time.
"This is less about search than what comes after search, and they want to make sure they are more well positioned for that," said Forrester Research Inc. analyst Shar VanBoskirk.
"It's very challenging for Yahoo or Microsoft, Ask.com or AOL to really catch up to Google on the consumer side," agreed Greg Sterling, principal analyst for Sterling Market Intelligence in Oakland, California. "I think Microsoft sees itself as having an advantage in other areas, such as IPTV, mobile and games."
aQuantive should play nicely to those advantages, giving Microsoft media planning and buying capabilities, as well as ad network capabilities that can help the company match advertiser campaigns with publisher inventory through aQuantive's DRIVEpm service, said Joe Doran, general manger for Microsoft digital advertising solutions.
The acquisition also will give Microsoft something Google will not get with its intended purchase of DoubleClick - a full-service interactive advertising agency in the aQuantive property Avenue A Razorfish. Doran said Microsoft will keep the agency "at arm's length" so it can serve its customers independently.
AQuantive's Atlas set of products, which allow agencies and publishers to manage, develop and serve up ads directly to online properties, also allows Microsoft to sell advertising for sites other than its own, something it currently cannot do with its adCenter platform. Doran said Microsoft plans to integrate adCenter with Atlas to extend the reach of its own paid-search platform, and has no plans to abandon its efforts in this area.
Few would argue the aQuantive deal is a bad move for Microsoft, but it certainly came at a premium -- an 85.4% premium at the time it was announced, to be exact. Microsoft said it will pay $66.50 per share for aQuantive's stock, which closed Thursday at $35.87. However, by the end of Friday, aQuantive's stock had soared to nearly its proposed sale price, closing at $63.79.
Still, when one considers that aQuantive made only $442.2 million for its entire 2006 fiscal year, while online advertising giant Google made $3.66 billion in just its fiscal 2007 first quarter, $6 billion seems a hefty -- but necessary -- price to pay for a foot in the door of the emerging digital advertising market.
"Microsoft clearly had to do something big to get back into the game given what their competitors have done," said Gartner Inc. analyst Andrew Frank.
Both Sterling and Boskirk said the price Microsoft is willing to pay for aQuantive is not that large if you consider the long-term strategic potential of the deal. "They're making an investment on a large part of the [estimated $600 billion] advertising market, period," Boskirk said. "All of the traditional ads are shifting to digital. From that perspective, $6 billion is pretty inexpensive to pay for entry into that."
But the deal is certainly not a silver bullet for Microsoft, and Sterling suspects the company will have to cough up more cash before the dust settles to ensure it has staying power. "It doesn't solve all of their problems, but this is not the end of the line for Microsoft," he said.
And even if the deal proves successful, Microsoft will still have to contend with Google and the sizeable head start it has in online advertising. Google may currently be a one-trick pony --making the bulk of its revenue through online search -- but that pony shows no signs of tiring. Expanding its ability to sell advertising across more channels and Web sites does not solve the problem of why Microsoft's paid-search advertising business has flagged: people still overwhelmingly prefer Google's search engine to Windows Live.
This trend likely will continue and, aside from the Avenue A Razorfish part of the deal, Google expects to get many of the same advertising assets Microsoft will gain with its aQuantive purchase, This also complicates Microsoft's position, Boskirk said. "I think Microsoft has a lot of responsibility with picking up this business to get their money's worth," she said.