« Neil Derrough on Don Imus in 2005 | Main | Wrong Numbers »
April 14, 2007
Google Buys DoubleClick
Bill Grimes is a frequent contributor to Media Curmudgeon. Bill is the ex-CEO of ESPN, Univision, and Multimedia, and he was a partner in the successful investment fund B&G Media. He has been very good at identifying financial performance problems and economic trends. Here is what Bill had to say about Google buying the world's largest ad serving company, DoubleClick for $3.1 billion:
"I remember when a billion dollar company was an enterprise with about that amount in revenues and a 25% profit margin. DoubleClick has revenues of $300 million, which means that Google is paying about 11 times revenue and about 42 times cash flow. That, for a rather mature company, is hugely unusual and priced to the max.
I am flabbergasted at what Google paid; note it is double (no pun) the amount a private equity firm paid for DoubleClick just a year ago. This acquisition by Google plus the nasty mess it is in with media companies over copyright infringement by YouTube (Viacom's law suit, e.g.) suggests strongly to me that we are now seeing the decline of a company that dazzled investors and technology and media industries. As Don Henley wrote in a wonderful but obscure Eagles song: 'Call someplace paradise, kiss it goodbye.' Watch Google stock begin a long, slow decline."
Google's stock closed Friday at $466.74, down about 9 percent from a high of $513 last November. If you own any Google stock, now, according to Grimes, who is a smart investor, would be a good time to sell.
I agree, not only because of the DoubleClick purchase, for which Google overpaid, in part, I'm sure, to keep it from going into the hands of Microsoft, but also because Google is trying to do too much, especially by trying to sell broadcast, cable, and newspaper advertising. For example, last year Google purchased dMarc, a company that sells radio remnant advertising, for $1.2 billion, and its attempt to sell radio airtime to date has been disappointing, according to a recent NY Times story.
Google also ran into a main-stream media buzzsaw when it bought the high-traffic site YouTube that posted videos containing copyrighted content from Viacom (MTV, Comedy Central), CBS, ABC, NBC, and Fox that it didn't pay for. CBS seems to have worked out some kind of a deal with YouTube to get some compensation, but Viacom has filed a $1 billion copyright infringement lawsuit. This lawsuit and continued copyright infringement pressure from the television networks will make it difficult, to say the least, for Google to convince the networks to let it sell their ad inventory.
Google will remain the dominant search engine and seller of keyword advertising, but it will have trouble branching out into display advertising and selling broadcast and cable time, which is typically negotiated face to face among people who have built relationships with each other (agencies and networks, e.g.). The TV networks and big cable channels don't want to submit their inventory to online auctions such as Google employs and disintermediate their own salespeople and ad agencies, they want to negotiate and be able to package less desirable inventory and cross-platform inventory in with high-demand prime time programs in order to maximize revenue.
Furthermore, Google sells on a cost-per-click basis and broadcasting and cable sell on a cost-per-thousand basis, and it will be quite a while before broadcasting and cable give up that model and before Google understands it.
Google's buying of DoubleClick was primarily a defensive move to keep it away from Microsoft, (see Henry Blodget's blog--yes, that Henry Blodget--he writes well and with insight). When a company plays defense instead of offense, it's not an especially good sign of future growth, and Wall Street will notice. So, sell your Google stock. Don't get greedy and wait for it to go up to $600. Remember what happened to AOL in 2001.
Posted by Charles Warner at April 14, 2007 03:38 PM
Comments
Paul Talbot ![[TypeKey Profile Page]](http://www.mediacurmudgeon.com/nav-commenters.gif)
at April 15, 2007 01:11 PM writes:
Another thought.
Google probably understands that its core search business is vulnerable on more than one front.
Even if a superior search alternative, such as whatever may be happening with wiki, doesn't challenge Google in the near term, another proverbial elephant lurks in the room.
This elephant is content. Beyond organic search results, Google doesn't own any content.
It essentially sells advertising in and around content it neither owns or controls.
A volatile, rapidly evolving environment could easily prove highly disruptive.
Media Curmudgeon at April 15, 2007 11:59 AM writes:
Excellent comments and insight, Bruce. Thanks. Google's know-it-all attitude and buying binge reminds me of AOL in the 1998-2001 period and its most arrogant and disastrous purchase--Time Warner.
Media Curmudgeon at April 15, 2007 11:55 AM writes:
Bruce Braun writes:
"Great observations by both you and Bill about Google and DoubleClick. Interestingly, DoubleClick mirrors Google in their earlier days. DoubleClick was one of the first ad-serving and online ad networks to emerge. It achieved tremendous success and then, after the IPO it began buying a number of other companies,such as Abacus, in an attempt to corner every aspect of the online ad market.
Like Google, DoubleClick was a technology company that saw itself as without peer, successful and drinkers of its own Kool-Aid. Technology was everything and relationships were a distant third. After at time, the industry became fearful of DoubleClick's domination plans, arrogant attitudes and indifferent service. As much as DoubleClick proclaimed a "separation of powers" between the ad serving division and the ad selling network, skepticism abounded. How can you trust a company that serves your ads (and thus knows every detail of every campaign, starting with prices) to keep that information confidential from the ad network who was coming into your agency to negotiate campaigns?
When I ran sales for Sabela Media, which became 24/7 Media's ad serving division, we used to refer to DoubleClick as the Borg, from Star Trek. "Resistance is futile...be assimilated!" Describing DoubleClick as predatory in those days would have been kind. Its approach was to promise everything in the sales cycle, undercut every deal it could by selling at a loss if it would gain them the business. That was the way it was circa 1999-2002.
On a Friday in December of 1999, Sabela was set to close a second round of financing for $3M. On that closing day, we were hit with a process patent lawsuit by DoubleClick. The suit was totally bogus but DoubleClick knew it would 1) cost a bundle to defend 2) probably kill our financing round (it did), and 3) cripple a small but formidable competitor with better technology. The very next Monday, Kevin Ryan, DoubleClick's CEO called us as asked if we would like to sell for far less than the 11X revenue or 42x cash flow ratios of the Google deal. We agreed to give Kevin the three-fingered salute and set about cutting a deal with 24/7.
Eventually DoubleClick had to sell off or close most of the businesses it acquired and spin off the ad network sales business. The original founders all left the company and the new management scaled it back into a more pure ad serving business. Advertising Exchange, a recent product is yet another in the line of automated media buying technologies and is probably an attraction to Google."
Media Curmudgeon at April 15, 2007 11:03 AM writes:
Thanks for the comment, ChuckG. You make an excellent point about DoubleClick serving ads for Viacom's MTV, whose copyrighted content often appears on Google's YouTube. It's ironic but not unusual in the media business in which conglomerates such as Time Warner have divisions, like Warner Bros. television, that sell programming to competitors. This situation was elaborated on in a book titled Co-opetition by Brandenberger and Nalebuff.
ChuckG at April 14, 2007 09:13 PM writes:
Good insight on this post, and definitely contrary to most of the analysts I've seen so far that are already riding the "Google can do no wrong" bus.
The $3B price is simply stunning. Before the announcement I would have bet the price was decreasing from the rumored $2B asking price because of the threat of client attrition (at least on the publisher side). If you look at their client list, there is plenty of friction with this change of control.
The lawsuit situation between Viacom and Google becomes even more interesting because via DoubleClick, Google now owns MTV Network's ad serving platform.
Post a comment
Thanks for signing in, . Now you can comment. (sign out)
(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)Printer-Friendly