Flurry of Online Ad Industry Acquisitions Begs Questions, Gets Answers

A recent surge in Internet advertising industry consolidation has analysts spouting predictions, once scrappy startups morphing into gluttonous conglomerates, and wee players wondering where they'll land after the shakeout.

The search marketing sector has been the hub of acquisition activity lately. Earlier this year, Yahoo! grabbed Inktomi's Web portal search engine and pay-per-click search firm Overture, which had previously purchased search engine AltaVista, and Fast Web portal AllTheWeb. Now the buying frenzy has expanded to include not only the search segment, but email and affiliate marketing, too.

The most recent happenings: aQuantive's Atlas DMT pocketed search services provider Go Toast; Google garnered Primedia's paid listings unit Sprinks, as well as young search tech firm Kaltix, and Pyra Labs, maker of Web self-publishing software Blogger and Blogspot; AOL caught streaming media search firm Singingfish; ValueClick acquired email marketing firm Hi-Speed Media and affiliate marketing outfit Commission Junction; and Jupitermedia purchased pay-for-placement marketing firm PPCforHosts.com.

Let's not disregard the array of partnerships announced of late. DoubleClick paired up with Flash-creator Macromedia as well as search engine marketing firms iProspect and TrafficLeader. AOL struck a deal with rich media tech company Viewpoint. Terra Lycos partnered with Google, LookSmart with BellSouth, and FindWhat.com with Verizon. FindWhat.com also has an acquisition of UK-based paid listing service Espotting Media pending.

"People are starting to smell success," suspects Greg Stuart, president and CEO of the Internet Advertising Bureau, who believes that these recent deals represent a positive transition that will position the industry for future growth and stabilization.

Despite the arguably imbalanced focus on search, David Hallerman, senior analyst at eMarketer, affirms that recent acquisition activity reflects the fact that "companies are seeing possibilities for expanding their use of the Internet for marketing."

But why now? Besides a few garage-bound small fries, most businesses weren't doing much development over the past couple of lean years. Now that the industry seems to be back in gear, companies must innovate to survive. The immediacy of customer needs precludes most firms from creating solutions such as search technologies in-house, so they'll continue to snatch up products produced by others.

Although he senses "a bit of fear factor behind these acquisitions," Hallerman admits, "Now's a good time for purchasing rather than building from scratch."

Microsoft, however, has the overhead to scout the path less traveled. The company is developing a search technology which is expected to be built into its upcoming version of Windows, Longhorn. Even rumors of a possible Google gobble by Microsoft have been dropped.

It could be just the time of year, suggests Denise Garcia, principal analyst, media and advertising at GartnerG2. "People are closing out their books. It's a matter of spending that money they set aside." For some companies, it's important to complete deals by the end of the year - or they may have unintended financial implications.

Of course, it all comes down to the bottom line. When firms are looking to make cash flow positive deals, sometimes it makes more sense to sell a subsidiary rather than continue investing in it. Or, in the case of Primedia's sale of the Sprinks ad network to Google, to better strengthen the core business. The sale, completed in conjunction with an advertising agreement with Google, enables Primedia to better leverage its site traffic and warehouse of content.

This time 'round, venture capitalists aren't doing much of the funding. Instead, many believe the money is being derived the old fashioned way: by earning it. Garcia's research, for instance, indicates that the acquisitions are in line with the economic recovery. Sponsored search listings company Kanoodle.com, however, did just close a round of VC funding last week.

Industry watchers say this is only the beginning. Some forecast that industry consolidation will center around the brand marketing focused rich media sector, in order to balance the current spotlight on direct marketing-centric search. "I see it not as a backlash against search so much as an evening off," notes Hallerman. Long awaited but yet to come rich media advertising standards from the IAB will also propel acquisition activity in the rich media space, opines Garcia.

The IAB's Stuart contends that search is and will continue to be "huge," but anticipates assuredly, "There are going to be better opportunities in interactive media in the next ten years than in almost any other sector."

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