The bidding war between Microsoft and Google for Doubleclick highlights a critical shift in the online advertising industry. Search advertising has matured and Google is the undisputed category leader, enjoying phenomenal margins (or monopoly rents as some would argue). Now Google is paying over $3bn to own the largest provider of ad serving software. Why?
On a public conference call to discuss the deal, Google CEO Eric Schmidt stated that a strategic review of the market showed that the display advertising market was bigger than they had previously thought.
Fred Wilson rightly points out that the search advertising market is now so efficient that there isn't much room for advertisers to increase their exposure without paying more for keywords than they're worth. But display advertising inventory is nearly infinite on today's Web -- the only question is how well you can target the ads and meaure their effectiveness. Brand advertisers are starting to realise this, and are getting help from ad networks designed specifically for them, like Adviva (disclosure: Kennet investment), to ensure their ads are placed on reputable sites and targeted to the demographics they want.
As I wrote here (somewhat hopefully) a year ago, more sophisticated display formats (eg, video) and better targeting using behavioural and contextual technologies are drawing previously hesitant advertisers to the web. This will continue to sap the TV and print businesses of ad dollars. We could see a new boom in online advertising as these technologies mature. Google has placed its bet.
And Hellman and Friedman, the private equity firm that owned Doubleclick has wrapped up one of the most profitable tech buyouts ever -- with a gain of perhaps over $3bn. Now that took guts. Just in case you still thought the tech industry wasn't ready for buyouts...