Raising the stakes in the online advertising market, Yahoo said Monday that it's buying Right Media, which operates a real-time online display ad exchange.
In the deal, worth about $680 million, Yahoo will pay half in cash and half in Yahoo stock, for the 80 percent of Right Media it does not already own. In October, Yahoo led a $45 million Series B financing round in Right Media, which gave Yahoo a 20 percent stake in the company. The deal is expected to close in the second or third quarter.
New York-based Right Media, founded in 2003, launched its automated online ad exchange last year. It allows Web sites to auction off display ad space to the highest bidder rather than having to go through ad networks or agencies that set prices and take a cut. As operator of the exchange, Right Media takes about a 7 percent commission on each transaction.
Yahoo's move comes about two weeks after Google said it was buying online ad company DoubleClick for $3.1 billion. DoubleClick said earlier this month that it is creating its own online ad exchange. Google is the undisputed leader in search-related advertising, but Yahoo is stronger on display, or banner, advertising and now both will own online ad exchanges.
Yahoo executives said Right Media Exchange has advantages because it has an established presence and is open, allowing for anyone to participate and pricing to be transparent. The purchase was not a response to Google's buying DoubleClick, Yahoo Chief Executive Terry Semel said in an interview.
"Yahoo is putting a stake in the ground that the future of online display advertising lays in efficient, easy-to-use marketplaces."
--Charlene Li, Forrester analyst
When Yahoo invested in privately held Right Media last year, "we had the intention of evaluating the business model and the market receptivity. We wanted to learn more about them and how it works," Semel said. Yahoo found that "the inventory we were selling on their exchange was producing better results for us than some other methods." Yahoo will increase its buying and selling on the Right Media Exchange.
Right Media provides Yahoo a third leg of a stool for its advertising business, he said. The first leg is Yahoo's network of publisher Web sites and the second leg involves other advertising partnerships with a consortium of more than 260 newspapers and participating in a pilot online exchange for the buying and selling of cable TV ad time that eBay is building.
Publishers will be able to sell their own advertising or bundle it with Yahoo inventory or other inventory on the exchange, and advertisers will have more inventory to choose from, Yahoo said. About 1,000 publishers are actively using Right Media, Susan Decker, Yahoo chief financial officer and head of Yahoo's advertising business, said in a conference call. "The combination will allow for a more liquid marketplace with a larger pool of inventory," she said. The goal is to offer video and mobile advertising on the exchange in the future, Decker added. Long time coming
Forrester analyst Charlene Li called the purchase of Right Media a smart move by Yahoo. "While this looks like a defensive move against Google's DoubleClick acquisition...this expansion has been in the works for the past year," she wrote in a blog posting
. "I think it's actually an offensive strategy for Yahoo to build on its dominance in the graphical ad marketplace. Yahoo is putting a stake in the ground that the future of online display advertising lays in efficient, easy-to-use marketplaces--and it wants to be the trusted intermediary for that future."
Owning Right Media puts Yahoo at an advantage against Google "in the next big battle for online advertising, display ads that appear on non-search inventory," said Chris Moore, a partner in Right Media investor Redpoint Ventures. "Yahoo has the best display ad sales force on the Web, which is a huge asset."
Kevin Lee, chairman of Did-It, which helps firms buy ads online, said it was unclear how open and transparent DoubleClick's ad exchange would be in comparison with Right Media's. "Will advertiser A know what advertiser B is paying? That's a good question. You don't know that in Google now," he said. "If Yahoo can leverage the sales force and customer support teams then it could be very efficient because the marketer could do one-stop shopping."
Tim Hanlon, a senior vice president at Denuo, a consulting arm of the advertising agency Publicis Groupe, said the Yahoo purchase is evidence of how the growing number of blogs and user-created content sites require greater efficiency in ad sales. "Right Media clearly (has) been squeezing pennies out of digital media in advertising and that very cold efficiency is absolutely necessary as we get more and more shards of digital content," he said. "The only way to monetize an ever-increasing amount of media available is to have a ferociously efficient advertising marketplace."
A DoubleClick representative released this statement in response to a call seeking comment: "DoubleClick Advertising Exchange puts our clients--advertisers, agencies, publishers and networks--in the driving seat, giving them complete control over to whom impressions are sold, what ads are run and at what price. Buyers can modify characteristics like frequency, reach and location and use a range of targeting features to improve campaign performance in real time, including tools that enable them to continuously test and measure."
Google representatives did not immediately return an e-mail seeking comment.
While Google's revenue has been growing by leaps and bounds, Yahoo's revenue growth has slowed, and its first-quarter revenue was less than half that of Google's. Yahoo has been slow to try to turn the tide, too. The release of its new search advertising platform, Panama, was delayed last year, which has affected the company ability to try to narrow the gap with Google in monetizing search advertising. A company reorganization late last year illustrated how Yahoo has been struggling to turn around its performance.