Google's acquisition of dMarc Broadcasting, an online ad placement and radio station automation developer, makes a lot of sense. It's a great price if it underperforms expectations and adds another pipe of advertising inventory to support the company's audacious expansion of its media presence.
First off, dMarc Broadcasting is a pretty ordinary business as Web companies go. It is an online interface for placing ads on a network of 500-plus radio stations that was launched last year. Advertisers log in and upload a radio spot, pick where they want it to go and get reports about on-air play.
The company makes money coming and going, selling services to radio stations, which automate their ad insertion process, and taking some portion of the ad revenue placed by advertisers. In addition to the online ad placement system, it also provides station automation services to 4,600 stations through two subsidiaries. In some ways,Google's only motivation is to create more page views and access more inventory in traditional media, which doesn't entirely line up with the company's need to connect people with information in a world where traditional media is melting down. you can thank the company for making local radio more indistinguishable, as it allows stations to run almost on automatic.
dMarc will only say that the online ad system has exceeded revenue projections in its first year of operation, but it looks like a solid business. When integrated with Google's auction-based AdWords system, dMarc will likely make radio ad pricing more efficient. The claim the two companies make radio ad metrics more accountable, however, is a stretch—the system can only verify airplay, not listenership, which remains the purview of companies like Arbitron.
At $102 million, the least Google will eventually pay, dMarc appears to be a steal. As the company meets undisclosed ad revenue targets over the next three years, its shareholders will receive up to $1.1 billion more. Google only pays if dMarc's business develops as promised, so it's not a risky investment at all; at full price, however, the deal's not cheap because the radio advertising market is shrinking and there is mounting evidence that people will pay for audio content without advertising.
Of course, the deal was met with another round of pronouncements that Google has grand ambitions. It does, always has. The question is whether it can continue to tap new inventory for its advertising at a reasonable price and there is little evidence that anyone is willing to sell out cheaply to Google. AOL sold just five percent of its shrinking self to Google for $1 billion.
Certainly, most content owners aren't jumping at the deals Google offers. Consider that one popular radio personality, Howard Stern, has been paid seven times the base price Google is paying for dMarc to populate a satellite radio channel and Google's quest for inventory looks daunting. Getting ad inventory near popular content is expensive and, when it comes to stars, is always in the form of guarantees, not promises they'll make money on the come.
Google's entire business depends on expanding inventory. Its only motivation is to create more page views and access more inventory in traditional media, which doesn't entirely line up with the company's need to connect people with information in a world where traditional media is melting down.
As more of the information Google links people to becomes paid placement, the content surrounding those ads become increasingly important to engaging people. Instead of commoditizing everything, as Jeff Jarvis argues Google AdWords does, the drive by Google toward accessing more inventory makes the content more rarified—paid and free results begin to contend with one another, and that is the limit to cheap inventory.
Just like a real estate developer who builds a block of commercial property into a major success finds that surrounding land is more dear, Google's following a surprisingly typical evolutionary path. At some point, the location with the most potential upside falls outside the developer's sweet spot and they are back at square one. Google's eventually going to meet with the price pressure of supply-and-demand, too.