Microsoft Means Macro Change For Ad World

In what is proving to be the most concentrated--and highest-valued - feeding frenzy of digital advertising services companies ever, Microsoft today announced a deal to acquire aQuantive, Madison Avenue's last big independent digital shop, for $6 billion. The deal comes on the heels of a breathless buying spree that has included Publicis' $1.3 billion acquisition of Digitas, Google's $3.1 billion acquisition of DoubleClick, and various smaller, but nonetheless important strategic buys that are reshaping the infrastructure of the digital marketing services industry.

Microsoft's move represents a double-threat as aQuantive is both a huge advertising services company via its Avenue A / Razorfish unit (representing roughly two-thirds of aQuantive's revenues), as well as a formidable ad-serving business via Atlas. Both represent important strategic diversifications for the software giant, which has tried and failed to gain a dominant position in the online industry beyond the browser market. MSN continues to be an also-ran in both search and publishing, and Xbox, while a wildly successful videogame platform, hasn't proved to be the Trojan horse Microsoft had expected it to be into online content and advertising services.



In terms of the ad server market, Microsoft's deal takes out Atlas, the last remaining server with scale, and comes on the heels of DoubleClick's acquisition by Google, AOL's acquisition of Adtech AG and WPP Group's acquisition of 24/7 Real Media. The result is a strange new breed for digital marketing mongrels: Microsoft, a software giant is now part ad agency, part ad server. WPP Group is now part ad agency, and part ad server. And while Google disavows that it is morphing into an ad agency, it is certainly beginning to offer traditional media services functions, and now owns the biggest ad server in the market.

It's also unclear what Microsoft's ownership of an ad agency will mean for Avenue A / Razorfish's relationships with its clients, or Microsoft's relationships with other agencies. But Microsoft chief Steve Ballmer says it is all par for the new Madison Avenue course. "The advertising industry is evolving and growing at an incredible pace, moving increasingly toward online and IP-served platforms, which dramatically increases the importance of software for this industry," he said of today's deal, adding that it, "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 maximize the digital advertising opportunity for all."

But the deal also means that Microsoft is now competing directly with conventional advertising agencies, much as other big media companies have begun doing in the past year, including Meredith, the big magazine publisher and broadcast concern that has acquired not one, but three digital marketing agencies: O'Grady Myers; Genex; and New Media Strategies. AOL, meanwhile, has acquired Third Screen Media.

As far as deals go, Microsoft's is the biggest yet, but even at $6 billion it represents a mere pittance -- 2% -- in terms of Microsoft's $293 billion market value. Interestingly, that's about the same percentage of Google's $147 billion market cap that its $3.1 billion DoubleClick acquisition represents. By comparison, WPP's $649 million acquisition of 24/7 Real Media was downright dilutive, representing 3.5% of WPP's $18.8 billion market value.

Does the frenzy make sense? Just ask WPP's Sir Martin Sorrell. When someone posed him that question during Thursday's conference call on his 24/7 deal, he implied it might take more than 24 hours, or even seven days to bear fruit. "Just wait," he said. "Be patient. Be a little bit patient."

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