Big advertisers driving the frenzied buying of digital media companies

Microsoft’s $6bn (£3bn) purchase of US digital marketing services group aQuantive marks a step-change in the current wave of acquisitions involving digital media companies.

Microsoft chief executive officer Steve Ballmerof said when news of the deal broke (May 18): “Today’s announcement represents the next step in the evolution of our ad network from our initial investment in MSN, to the broader Microsoft network including Xbox Live, Windows Live and Office Live, and now to the full capacity of the internet. Microsoft is intensely committed to creating a thriving advertising business and to partnering closely with all key constituencies in this industry to help maximise the digital advertising opportunity for all.”

Microsoft’s main interest is probably aQuantive’s Atlas-integrated digital marketing technology wing: but aQuantive is about more than just technology. The group is also the parent company of a number of performance media and behavioural targeting businesses – and of the biggest digital advertising agency in the US, Avenue A Razorfish, and five international agencies: DNA, Amnesia, Neue Digitale, e-Crusade and Duke.

Rebecca Jennings, an analyst at Forrester Research says: “This is the land-grab before the market really accelerates. The online advertising and media markets are now large enough for people to be prepared to spend billions.”

Seb Bishop is president of online digital ad network Miva Group. He says: “Microsoft has paid so much for aQuantive because it missed out on DoubleClick, and it has to be more competitive in that arena (ad serving and tracking) – it doesn’t want it to become just a Google world.”

The fact that aQuantive has been taken over will not surprise industry watchers. AQuantive’s share price rose significantly last December, after Publicis, which owns both Saatchi & Saatchi and Leo Burnett, bought digital marketing firm Digitas for $1.3bn in cash. It’s current $66.60 (£33.61) share price is 85% higher than aQuantive’s closing price on the day before the offer was made public of $35.87 (£18.13) a share.

Another group that saw its share price jump in December was 24/7 Real Media, which of course has just been bought by WPP Group for £328.6m. Microsoft was also in talks with 24/7; last week, it seemed that WPP had a lot to crow about by beating the software giant to the punch. Now, the aQuantive deal suggests Microsoft had bigger fish to fry. Not that Microsoft’s news should be allowed to completely overshadow the recent flurry of acquisition activity in the sector over the past two months. Last week, AOL acquired mobile advertising company Third Screen Media and then, a day later, the German ad-serving company Adtech AG.

AOL’s buying spree follows Google’s purchase of ad serving company DoubleClick, Microsoft’s acquisition of French mobile advertising company ScreenTonic, and Yahoo!’s completion of its takeover of digital ad exchange company Right Media.

And these are just some of the recent deals involving marketing services suppliers: there have also been deals involving media owners and/or social networking sites, including Google’s purchase of YouTube, and News International’s MySpace buy. Last June, Interpublic announced a marketing and promotional partnership with social networking site Facebook, and took a stake (albeit less than half of 1%) in Facebook.

Andrew Walmsley, one of the founders of UK digital media buying and planning agency i-Level, says that a lack of “key strategic properties” in the digital marketing industry is driving prices up. As evidence, he points to the multiples that WPP is paying for 24/7, Publicis paid for Digitas and Google paid for DoubleClick. Walmsley says: “The multiple WPP is paying is outside its comfort zone, but I think it’s at least partly because WPP has been under-investing in digital until recently.”

Nick Hynes is the ex-president of Overture Europe, itself, of course acquired by Yahoo!, and is now chief executive of The Interactive Marketing Works. Hynes warns: “There’s a bit of a strange mood going on. I find it a bit worrying – I’ve been here before. I’m not entirely sure that I understand the logic of all of the deals that are being done.”

The big boys are not having it entirely their own way, however: in January this year, AOL offered $900m (£454m) for Swedish-based pan-European digital marketing company TradeDoubler. The deal was recommended by the board, but rejected by shareholders who argued that the firm was worth far more.

There are two reasons behind what appears to be a tidal wave of consolidation in the digital marketing services industry: firstly, global clients want it to happen. The major multinationals have been putting pressure on all of their suppliers to consolidate, because they believe it helps deliver huge economies of scale.

Bruce A Biegel is senior managing director and head of strategic consulting at US consultancy firm Winterberry Group, and chairman of the US Direct Marketing Association’s Marketing Technology Council. Speaking at the Institute of Direct Marketing’s annual conference in London two weeks ago, Biegel said that packaged goods clients want to deal with fewer “buying points” in digital media: “There are currently 400 online ad networks – the big advertisers will wait until there are four to six left. They want aggregation.”

Biegel expects companies like Oracle, Google, Hewlett Packard, IBM, Microsoft and SAP to go on a buying spree over the next few years, and predicts that the likes of Yahoo!, SAS and Alterian will be major targets.

To this list, of course, should be added, as potential acquirers, all of the major international advertising and marketing services groups; and, as potential targets, just about every company currently active in the digital media and advertising space.

Secondly, the convergence of technology means that within the next few years, consumers will be getting the vast majority of their daily media intake through the filter of the PC screen. The explosion in consumers’ consumption of media in digital form has already caused a seismic shift in the marketing world, with some experts arguing that bigger changes are yet to come. As Bishop says: “Video search is effectively the death of the TV channel as we know it. In the future, you will go straight to the website of the company that makes your favourite programme to watch it – and it will get 100% of the advertising revenue.”

Other industry figures point out that what we are seeing is not one single process of consolidation, but a series of them, affecting industries that have become inextricably intertwined because of new technologies.

Tom Hopkins, former managing director of VCCP Digital and now head of business development at technology and interactive media consultancy Conchango, observes: “It’s easy to see it as one pattern, when in fact there are a number of things going on.”

Nick Hynes echoes this: “There are two or more parallel processes going on. I don’t think Microsoft wanted DoubleClick for the same reasons as Google, or 24/7 for the same reasons as WPP. They’ve all got very different requirements. It’s just that they have ended up going after the same properties, but in pursuit of radically different strategies.”

Google obviously wanted to get into social networking when it bought YouTube, although a secondary strategic objective was the expansion of its base of searchable content, with the acquisition of an enormous library of video content. It is questionable, though, whether Microsoft really wants to be owning an ad agency. Similarly, News International’s strategic reasons for buying MySpace would almost certainly have been coloured by the group’s previous experience of print and television media, and the perception that it had to protect that old-style media empire.

As for why advertising agency groups want to acquire digital companies, the answer should be obvious – if not, then Pete Burns, managing director of Edinburgh-based agency Blonde Digital sums it up: “Digital used to be an add-on in the pitch. Now, sometimes, digital is the first thing on the client’s agenda.”

Arjo Ghosh is chief executive of SpannerWorks, the Brighton-based specialist search and social media agency, which was bought by US digital group iCrossing in February. He firmly believes that the consolidation in the digital media world is driven by the recognition that “we are looking at the creation of the advertising model for the next 50 years – perhaps even 100. There has not been a driver like this since the invention of television. People are scared not to be in this space.”