After GooTube, Another Big Payout for GoogleClick

Search power Google announced last Friday that it will pay $3.1 billion in cash to acquire Web ad platform DoubleClick from private equity firm Hellman & Friedman, which bought the company almost two years ago for about one third the price and then proceeded to sell of portions of it.

The news ends a month of speculation that either Microsoft or Yahoo! would wind up owning the New York-based ad company, which also owns the Performics search marketing and affiliate management divisions.

But it launches a series of questions. Will Google deploy third-party cookies as owner of an ad network—a practice it resisted as a pure search engine? If so, will knowing not only what users are searching for but what sites they visit on the Web concentrate too much data in one company? Will the company retain Performics’ search marketing business, and does that amount to a conflict of interest? Will a Google-owned DoubleClick be able to retain all or most of the advertising clients it now serves?

And—inevitably—is it time to start worrying that Google’s getting too big?

Google was not named in the early rumors about DoubleClick’s acquisition because the company had been thought to be working on a proprietary platform for delivering display ads. But in a teleconference following the announcement on Friday, Google CEO Eric Schmidt explained that the company had recently come to raise its expectations for online display advertising, and that the number of advertisers who both bought text ads on Google’s search platform and used DoubleClick DART for graphical ads made the buyout make sense.

Google co-founder Sergey Brin added that while “we’ve had a lot to keep us busy in search and search advertising…we can now afford” to branch out into display ads. Google has been testing expanding beyond its dominant search marketing base into numerous offline marketing channels in recent years, including newspapers, magazine and television. But most analysts have placed the company behind Yahoo! in the selling and placement of display and rich media ads.

DoubleClick serves as a digital marketplace for bringing together online display advertisers using banners, graphic ads and videos and the Web publishers who serve those ads through its DART ad delivery platform. The company also tracks clicks on those ads to gauge their effectiveness and sells software that helps online publishers optimize their ad inventory. The company has extensive relations with top Web publishers including AOL, News Corp. (including MySpace), Friendster and Viacom’s MTV Networks.

Early this month DoubleClick announced a test of an auction-based exchange for buying and selling digital ads. Marketers will log into a Web site that will permit them to see what competing advertisers are paying for specific ad placements; publishers will be able to set a floor price for their pages and use the auction to get the maximum return for their real estate. DoubleClick will clear the transactions and transfer payments to the publishers.

Paid search marketing has grown at a faster rate than display advertising in recent years, accounting for $6.76 billion in online ad spending in 2006 compared to $3.34 billion according to a report from eMarketer. But the ability to target display ads to users depending on their Web behavior could make Web display ads more attractive to marketers, particularly large brand advertisers.

And ownership of DoubleClick’s tracking and measurement tools could help Google make sense of YouTube, which it purchased last September for $1.6 billion. “Certainly is a category that could be served with better measurement tools and better targeting,” Brin said. “The combination of the companies together with YouTube will be a better experience for advertisers.”

Questions have been raised as to how Google will integrate DoubleClick’s key services. By buying DoubleClick, Google will acquire its Boomerang technology for delivering cookies, small data tags that signal that a user has visited a specific Web page. When these are delivered by an ad network rather than by the Web site itself, they’re known as “third-party cookies”.

A Google FAQ accompanying the DoubleClick announcement said that company policy has opposed the use of third-party cookies on Google sites “because we could not guarantee the quality of the ad or that it would comply with our format policies.” But partnering with DoubleClick, “we will increase the relevance of ads online so that we maintain a positive user experience while provided [sic] targeted ad opportunities for advertisers and increased monetization for publishers.”

Deploying “tagging” technology on its sites might arouse the ire of privacy watchdogs, but Google CEO Schmidt expressed unspecific confidence that the purchase will foster confidentiality. “We at Google are very committed to preserving people’s privacy,” he said in Friday’s conference. “DoubleClick will help us do that.”

“Overall, we care very much about end-user privacy and that will take a number one priority when we talk about advertising products,” added Brin.

Google associate general counsel Nicole Wong was quoted in the Los Angeles Times as saying that merging the “non-personally identifiable data” collected by Google and DoubleClick—scrubbed of names and e-mail addresses—will be good for both consumers and marketers because it will prevent Web users from seeing duplicate promotions.

The companies’ reputations counter-cut each other on the privacy question. While privacy groups have warned about the search data Google retains, they also applaud its refusal to hand that data over to the Justice Department in 2005. In late March, Google announced that it would put a 24-month limit on the retention of that data, rather than keeping it “as long as it is useful.”

But DoubleClick’s reputation on privacy is more turbulent. Within a few years of its 1996 founding, the company encountered protests from watchdog groups over attempts to link real user names and Internet addresses to Web surfing behavior. That drew investigative attention from state attorneys general regarding DoubleClick’s cookie practices. The company negotiated a settlement in 2002 that imposed more candor about the data it stores on site visitors, told visitors how to disable cookies, and set a three-month erasure deadline on that information.

Google seems at least to be aware that combining even scrubbed records about searches and surfing could constitute a public-relations stumbling block. Asked about the privacy issues at this week’s Web 2.0 conference in San Francisco, Schmidt pointed out that “If we lose our advertisers’ support or end-user support, the company goes kaput.”

Ironically, the Google Pack software suite offered to users includes an application that deletes the cookies dropped by DoubleClick. Asked at the Web 2.0 conference if Google would continue to offer that third-party app, Schmidt implied that yes, it would. “We’ll figure it out,” he told the audience. “It’s a pretty good application.”

The deal also risks being judged anti-competitive because it combines two ad vendors who dominate their respective digital markets. Microsoft general counsel Brad Smith told Reuters that “this proposed acquisition raises serious competition and privacy concerns. We think this merger deserves close scrutiny from regulatory authorities to ensure a competitive online advertising market.”

AT&T and AOL owner Time Warner—in which Google holds a 5% stake—have also expressed worries about the deal, and an antitrust investigation by either the Justice Department or the Federal Trade Commission seems likely.

But Schmidt has played down the impact buying DoubleClick would have on online advertising, saying that marketers will still have plenty of other options for their display messaging. At Web 2.0 Expo, he even joked about the irony behind the companies who are crying anti-competitive. “Microsoft? AT&T? Give me a break,” he scoffed.

Irvine CA-based Specific Media serves up demographically targeted display ads through both behavioral and contextual networks. Specific co-founder, president and CEO Tim Vanderhook points out that Google’s entry into display ads could actually increase the appeal of smaller companies like his.

“On the advertising side, no one, and certainly not the big brands, wants to consolidate their ad budget with a single player,” he says. “That’s going to prove to be Google’s biggest misstep, the notion that they can be a one-stop shop with search, banners, print, video and broadcast. I just don’t believe there’s any such thing. On the flip side, I think a lot of [Web] publishers are going to be wary of giving a lot of contextual ad inventory to Google and now supplementing that with graphical inventory. They too are getting wary of putting all their eggs in one basket.”

However the antitrust issue plays out, the inclusion of Chicago-based Performics in the DoubleClick buy probably raises some conflict of interest questions with advertisers. Along with its affiliate-network management functions, Performics runs a search marketing division that deals mostly with pay-per-click ads. While Google’s FAQ page on the acquisition says there are no plans at this time to sell off Performics, the company can’t be blind to the impropriety of a search engine owning a search marketing firm.

Observers think it’s likely Google will divest the SEM part of Performics, while perhaps retaining the affiliate marketing division, one of the largest in the industry with a roster of marquee brands. That too would have an ironic twist: When Google introduced its landing-page quality score last July, some affiliate networks claimed the company was out to hurt their business model. Google’s recent test of a cost-per-action ad product was also taken by some as an attempt to poach business from affiliate networks, which also operate on the model of payment for a conversion.

Founded in 1996, DoubleClick followed an early strategy of acquiring related businesses in the online marketing space. After buying the company in July 2005 for a reported $1.1 billion, Hellman & Friedman put it on the market again in 2006 for about twice that price. The owners then sold the Abacus data management division to what is now Epsilon in December 2006 and sold its e-mail solutions division to the same buyer in February 2007. The company had revenue of about $300 million last year.