Ad Wars: Google’s Green Light

The official marriage of search- and display-ad titans Google and DoubleClick may take a while to pay off, but it deals a blow to Microsoft now

The long-awaited completion of Google’s $3.1 billion purchase of DoubleClick will kick off a new online advertising battle that may rage for years to come. Yet it may also take years for the search giant to gain a foothold in what’s shaping up as the next front in the $20 billion online ad industry: the resurgence of display ads, those colorful but oft-ignored “banners” and videos that run along the tops and sides of Web pages.

On Mar. 11 the European Commission blessed the deal with no restrictions despite opposition from rivals and privacy advocates worried about one company having too much data about people’s online activities. The green light from the European Union’s executive arm came nearly three months after the U.S. Federal Trade Commission gave its go-ahead and nearly a year after the deal was first announced.

With the final regulatory hurdle removed, Google closed the deal immediately, taking over the company that places billions of ads per day on thousands of Web sites worldwide-further concentrating the online ad industry into fewer powerful hands. Google, Yahoo!, Microsoft, and Time Warner’s AOL have spent billions to snap up a variety of ad companies in the past year or so.

Targeting for Banner Ads, Too
Google’s purchase of DoubleClick joins two ends of the online ad spectrum at a critical time. Search ads, those columns of tiny text that run alongside Internet search results, have come to dominate the industry’s growth as Google has perfected its technology for targeting the right users with the right ads. That shift has come at the expense of display ads, whose share of the online market has fallen from 58% in 2001 to just 21% today.

But new technologies are starting to offer the same kind of targeting potential for banner and video ads as well. And with more users switching the focal point of their Web surfing from search engines to social networks such as MySpace and Facebook, banners and boxes may gain new appeal among advertisers. “We’re in the midst of the third chapter of online advertising, and it’s all about display ads,” says Paul Levine, vice-president for marketing at ad network AdBrite.

The DoubleClick purchase will deal a double whammy to Microsoft. More than ever, the software giant will be pressured to prevail in its unsolicited $45 billion bid to buy Yahoo, the acknowledged leader in online display advertising. And Microsoft’s struggle to wrestle that deal to the ground—which could last until Yahoo’s next board meeting, possibly not until June or July—will distract the two Google rivals for months. That will give Google precious time to integrate DoubleClick into its business.

Schmidt Blogs About the Deal 
What’s more, the European Commission’s clearance of the Google-DoubleClick deal won’t let Microsoft off the regulatory hook in its bid for Yahoo. Microsoft might have benefited had the EC come down hard on Google, bolstering the argument that Google is such a fearsome force that a Mircosoft-Yahoo combination would help keep the market in balance. But sources in Brussels say it’s unclear to the EC that a Microsoft purchase of Yahoo would increase competition, as Microsoft has claimed. In fact, the EC’s current antitrust investigation into Microsoft focuses in part on Microsoft’s alleged bid to quash competition on the Internet, so its proposed acquisition of Yahoo would probably be painted as more of the same.

For the time being, then, Google may be able to steal a march on its prime rivals. Google provided little immediate color about its plans for DoubleClick beyond a brief statement and a blog post by CEO Eric Schmidt. But it’s clear Google sees the deal as a way to expand well beyond its mainstay search-ad business, where growth has been slowing in recent quarters. “Advertisers and publishers who work with us have long asked that we complement our search- and content-based text advertising with display advertising capabilities,” Schmidt wrote on Google’s official blog, most likely referring to an online ad dashboard it has discussed with advertisers and ad agencies. “DoubleClick gives Google the leading platform for display advertising, enabling us to rapidly bring advances to the market in technology and infrastructure that will dramatically improve the effectiveness, measurability, and performance of digital media for publishers, advertisers, and agencies.”

For all the attention on the deal, however, the DoubleClick buy is likely to have little impact on Google and the ad industry in the short term. For one thing, DoubleClick’s revenues, believed to be under $200 million a year, won’t add much to Google’s expected $16 billion in sales this year. That may be why Google’s stock rose a relatively modest 6%, to $439.84 a share, still far below its high of $747.24 last November. And most of that gain arguably was driven by a strong day in the stock market, where the Nasdaq composite index rose nearly 4%. “It’s still a very small piece of Google,” says Clay Moran, an analyst at Stanford Group.

Indeed, many ad experts think it could take Google years to leverage DoubleClick’s technology and relationships with advertisers and publishers into a formidable position in display ads. Google is believed to be less interested in DoubleClick’s main ad-placement business than its staff of ad experts and thousands of clients that use DoubleClick tools. “By no means does this turn them into a guaranteed powerhouse,” says Kevin Lee, executive chairman of search-marketing firm Didit. “But it does put in place a foundation that may give them a huge leg up in creating the next generation of Internet advertising.”

Privacy Concerns
The biggest uncertainty—for advertisers, publishers, consumers, and Google—is how much and how well Google will tap DoubleClick’s data on Internet users to target ads with the kind of precision that has made Google’s search ads so lucrative. Unlike search ads, which are targeted based on what people are searching for—often products they’re looking to buy—the placement of display ads has been relatively untargeted, more like traditional brand ads on TV and in print.

But new technologies and data-collection techniques have been developed to target display ads at Web users based on who they are and what they’re doing as they surf the Web. That prospect is what frightens privacy advocates—and what has kept advertisers and publishers from targeting display ads more aggressively. So far, Google hasn’t engaged in this so-called behavioral targeting, which shows ads to people based on what they do on Web sites. In fact, Google has said it has no plans to mix DoubleClick user data, which it says is the property of DoubleClick’s clients, with the search and other user data it already collects. So it’s unclear at this point how much benefit Google will derive from that data.

Still, some analysts are assuming that Google will crunch at least some of DoubleClick’s data with the information it collects from its search, e-mail, and other services so it can target display ads more effectively. That would let Google command higher ad rates. “Google will now have behavioral data from search, e-mail, video, and Web usage on network sites,” JPMorgan (JPM) analysts wrote in a report after the deal closed. “We believe this will allow the company to provide much better ad-targeting, leading to increased [ad-placement rates] on DoubleClick sites.”

Privacy advocates are continuing to lobby U.S. and European regulators to consider such data collection and usage in antitrust proceedings-or at least to place limits on what may be collected and how it may be used. “We have to change antitrust policy to have a particular sensitivity to data collection,” says Jeffrey Chester, executive director of the Center for Digital Democracy in Washington. For now, though, Google is free to explore the wider world of online advertising