Why Are So Many Web Ad Companies Merging Now?

Just a few months ago, with Microsoft's Web services division still waning in comparison with its others, speculation began on whether it was gearing up to address that problem by purchasing an existing ad brokerage. The focus centered on DoubleClick, one of the oldest and most reputable display ad providers on the Web; and before too long, Google responded to that speculation by pre-empting a Microsoft takeover. That started a tidal wave of major players playing catch-up, including Yahoo's acquisition of Right Media a few weeks later.

Last week, amid speculation that Microsoft was scrambling to acquire 24/7 Real Media, another ad services firm, it was pre-empted yet again, this time by established advertising agency WPP Group. So Microsoft ended up spending its $6 billion late last week on aQuantive, which not only has its own digital marketing division (Atlas) but an online ad agency (Avenue A | Razorfish).

These acquisitions are changing both the structure and dynamics of the Web, and will impact not just the way we do business but, to a real extent, the way we generate business online. But will the changes we see resemble what these major players actually have in mind? The business press touts the deals as big fish swallowing big fish to get bigger.

But as history taught us -- more accurately, as history has left indelible marks on our behinds to remind us forever -- the cumulative power and capital of Web-based companies too often add up to less than the sum of their parts.

Besides, if so many ad services companies have the objective of reaching out to the same Web users anyway, then how is their reach extended merely by their having combined?

There's a lot we have to learn about the Web advertising industry. To help us take a refresher course, BetaNews spent some time with the CEO of Burst Media, one of the oldest Internet advertising firms in the business: Jarvis Coffin, whose Burst Network has been placing advertisers with specialist Web sites since 1995. We began by asking Coffin, what should the recent acquisitions mean to us?

"I'll tell you what I believe: I believe that the Google/DoubleClick transaction and the Yahoo/Right Media transaction are symptomatic of a marketplace that is scrambling to put media planning and buying - mostly buying - efficiencies in place, in anticipation of the fact that the advertising online is going to continue to scale," Coffin responded.

He cited figures stating the US Internet economy's total value in 2006 was an estimated $16 billion. Depending upon whom you ask, that could grow to between $25 and $80 billion by the end of 2010. "So it's reasonable to think that, in the next three to five years, the Internet's going to double," Coffin said. "What took us eleven, twelve years to do, we're going to do now in the next three to four years."

Toward the end of 2006, the top 10 Web domains were as follows: myspace.com, yahoo.com, ebay.com, msn.com, aol.com, google.com, facebook.com, craigslist.com, live.com, and pogo.com. These domains represent the counterpart of the print publishing industry's top 10 periodical titles. Notice they're not the top 10 publishers (Microsoft owns msn.com and live.com), but they represent the domains that have the largest combined reach.

"At the end of the year 2006, in the US, 99% of the gross ad dollars got spent on the Top 10 Web properties," Coffin reported. If the Web doubles as a collective property in just five years or less, he believes advertisers are beginning to ask sensible questions, including whether those 10 - or any top 10 - will be the nexus of that growth.

Burst Media CEO Jarvis Coffin

"99% of all ad dollars on the Top 10 Web properties is unsustainable. If you've got X number of elephants balancing on the head of a pin, and you're going to double the number of elephants on that same pin, it isn't going to work. Not without just absolutely corrupting the environment."

If the Web will double as a publisher within the next five years, advertisers are struggling with the question, where will they invest all their money?

"Even [in] keywords, even within the paid search environment - which is dominated, of course, by Google, but also Yahoo's got a big hand in it - we're reaching certain price thresholds beyond which the value curve starts to go backwards," Coffin warned. "And consumers - and you're one of them and I'm one of them - are starting to push back - well, they've always pushed back at too much advertising in too few places. And ad clutter is a big issue."

Yahoo's home page, for example, can't get any bigger than it already is. As a portal to the rest of the sites under the Yahoo domain - and there are thousands of them - the home page becomes less and less effective, and advertisers are realizing this.

"So Google, which has the advantage of $40 - 50 billion in the bank, and one of the largest ad exchanges [and] advertising networks on the planet, is thinking ahead at how they're going to efficiently dispose of brand advertising dollars, display advertising, all those ad dollars that are going to rely on those new technologies. We can't all put it on the home page of Yahoo or AOL or Microsoft. So that's what's taking place here, in my opinion: We're putting the structures in place to buy across literally tens of thousands of destinations on a global basis. And that's exactly what we should be doing, because that's new media."

Next: Bigger footprints in all the right places