Wade Armstrong

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AQNT: Bad Buy at Any Price

Posted Monday May 21, 2007 in Business

When Google bought DoubleClick, many people predicted a run on the online ad industry. Well, they were right, and they were even on target with aQuantive’s price. Too bad that, in buying aQuantive, Microsoft overpaid for assets that they can’t use.

First: what does Microsoft get?

Don Dodge has a good breakdown of the assets. The key buy in all this is probably aQuantive’s Atlas system, the twin to DoubleClick’s DART system, which lets display advertisers target their ads.

Microsoft also gets aQuantive’s 220B monthly ad impressions.

Microsoft also gets DRIVEpm, which manages display ad placements across a wide range of inventory, for the inventory-holders, and Avenue A/Razorfish, which is a traditional agency.

Where’s the value in this?

The real value is probably in Atlas, which should let advertisers better target their ads to Microsoft’s online properties. If every display advertiser on one of Microsoft’s MSN or Live.com sites has the Atlas tools to optimize their placements, MSN and Live.com will become more attractive

DRIVEpm would be a great buy if Microsoft had a ton of inventory, but they don’t — only 10.9% of the search market, compared to Google’s 60%+. The 220B monthly ad impressions don’t really count, because some, presumably large, segment aren’t in Microsoft’s network (more on this later).

I have no idea what Microsoft would do owning an advertising agency. I assume that Avenue A/Razorfish would be spun off.

How does this compare to the value Google got from DCLK?

Google got two things from buying Doubleclick:

• A system to allow them to place and manage display ads for as much of their inventory as they want, allowing them to maximally monetize their existing inventory and serve their existing advertisers as well as possible, as well as gain new, display-only clients.
• 290B monthly impressions of inventory, addressing the low inventory situation that had earlier inclined Google to buy their way into radio and even try out print.

So, out of one acquisition, Google addressed both short-term (inventory) needs and long-term (doesn’t offer display, only text ads) needs.

Microsoft didn’t get nearly as much. Inventory is a problem that must be solved, ultimately, by growing the Live.com network’s traffic, not by buying traffic on other networks, which is what the bulk of the 220B impressions AQNT places are. DRIVEpm similarly deals with non-MSN, non-Live properties, and thus puts Microsoft in the position of competing with itself. And what possible value could Microsoft find in a creative agency? Everything other than Atlas is a product Microsoft doesn’t want or need.

What would a fair price have been for Microsoft?

Rob Tsai does some quick and clever math that backs out a multiple, and thus a valuation, for Atlas alone and comes up with about $5B — noticeably less than the $6B actually paid. Could Microsoft sell off the rest of AQNT and make a profit? It’s hard to see someone paying for a stand-alone inventory management application and an agency, combined.

At $5B, and valuing the inventory the same, apparently Atlas is nearly twice as good as DART. I don’t know enough about the industry to say if this is true or not, but it strikes me as a large premium given that Atlas doesn’t have a larger customer base advantage.

Even worse, with only 10% of Google’s inventory, one can suggest that AQNT’s value to Microsoft was only 10% of DCLK’s value to Google — making an acquisition worth something more like $600mm. Either way, Microsoft was forced to overpay defensively when it didn’t succeed in buying Doubleclick.

Or, is this a long game?

Atlas is the crown jewel only in the short term. If, in the long term, Microsoft wants to get into being a market, then DRIVEpm is a good buy. If, in the long term, enabling advertisers to design ads is a necessary business, then Avenue A/Razorfish is a good buy.

Under what circumstances could both of these be true? Well, looking at my copy of QuickBooks, there’s a “Google Marketing Tools” button in the middle of the start screen. That’s got to be a big threat to Microsoft — not only does Google lead in current online advertising, its AdWords program brings in more new, small advertisers, and Google is placed dead-center in the #1 small business accounting tool.

Well, suppose you take Office and the new Expression and put advertising dead center in them, using Atlas, DRIVEpm, and insights Avenue A/Razorfish has gained from years of advertising as the tools that let new and established advertisers design and place online ads from their desktop? That’s a compelling suite, potentially, and one that’s philosophically consistent with avenues Microsoft has taken before. It’s also what Microsoft is hinting they’ll do.

But, even in the long game, AQNT is a bad buy. It’ll take years to come out with new versions of Office and Expression to incorporate these new tools, and none of this will fundamentally solve the problem that nobody uses Live.com and thus it’s a difficult property to monetize or even experiment on and learn from. In a matter of years, Microsoft could’ve built its own tools cheaper, and, in a matter of years, the brand names acquired will be worth much less than they are today.

Meanwhile, Google buys Feedburner for just $100m. This helps Google with its inventory problem, and also gets it into new markets that it hasn’t yet learned how to dominate — it’s an experimentation play. That’s a smart acquisition.

Microsoft should’ve paid to keep both DCLK and AQNT out of other’s hands. Since they didn’t, however you slice it, they lose.