After being knocked for missing out on key online ad deals, Microsoft showed it was serious on Friday, agreeing to shell out $6 billion to buy Aquantive.
The move is the software maker's biggest deal ever, roughly three times bigger than any other purchase Microsoft has made. Shortly after the deal was announced, Microsoft platform and services unit head Kevin Johnson and Aquantive CEO Brian McAndrews took time to talk about the deal.
The pair addressed what it means for Microsoft's advertising efforts, why they think the high price tag is justified and why the folks in Redmond still think Google's planned deal to buy DoubleClick raises antitrust concerns.
Q: What's the biggest hole that this fills for Microsoft?
Johnson: First off, all this is not about individual pieces or components. This is about the totality of Aquantive. This really takes our advertising business to a new level. The online advertising market today is one that is $40 billion worldwide and projected to grow at a 20 percent rate per year over the next few years. It is a significant opportunity.
Aquantive brings help on the advertiser relationship side but not necessarily on inventory. What do you guys still need to do on that side?
Johnson: We are going to focus on more complete, end-to-end solutions for advertisers and agencies and end-to-end solutions for publishers. We're going to do it in a way that focuses on the full range of digital devices and especially areas of emerging media, whether it is phones, game consoles, PCs or IPTV, we think bringing those things together creates great value. Certainly Aquantive has a good reach to advertisers and agencies, but they also have offerings that reach publishers as well.
McAndrews: (Aquantive's) Atlas is a leader in the buy side of technology, campaign management tools for agencies. That is completely complementary to what Microsoft has. On the network piece, obviously Microsoft has a very strong asset in MSN. We bring Drive, which is a very strong network, growing rapidly. If you think of the success AOL has had with Advertising.com, we have that same ability combining Drive with MSN.
"We look at the advertising business worldwide which is more than half a trillion dollars in size and growing. Much of that is shifting to online and we are deeply committed to building a great advertising business."
--Kevin Johnson, head of Microsoft platform and services
You mentioned this was a competitive bidding situation.
Johnson: It was. And we're delighted to have won.
You are paying a large premium (85 percent more than the company was valued a day prior to the deal being announced). Why are you willing to pay such a large premium for this company and willing to take a pass on some of the other deals?
Johnson: We look at the advertising business worldwide which is more than half a trillion dollars in size and growing. Much of that is shifting to online and we are deeply committed to building a great advertising business. This investment in the monetization capability for our future services is key. They are stronger on the buy side, as you point out, and they have a foundation on the sell side (technology for Web site publishers). As a company we've made a strategic bet that we are going to shift more and more things to this concept of software plus service, where we complement our software offerings that run on intelligent devices on the edge of the network with services delivered over the network. Many of those services will be monetized through online advertising.
Despite doing this deal, you guys still are concerned with the antitrust implications of Google's DoubleClick purchase. Is that right?
Johnson: There are some differences between this and Google's purchase of DoubleClick. Google is trying to buy a direct competitor, its most important competitor in the category of delivering ads to Web sites. Microsoft is acquiring a firm that does not compete with us.
If Google were permitted to buy DoubleClick, the combined firm would serve more than 80 percent of ads that appear on third-party Web sites. Microsoft has no technology for serving ads to third-party Web sites today and Aquantive's share of this business, of third-party publishers, is less than 5 percent. Google's acquisition of DoubleClick would eliminate the beneficial competition between those firms. Microsoft's acquisition of Aquantive would not reduce competition at all because Microsoft and Aquantive do not compete at all.
You have talked about all the reasons why online advertising is so important to Microsoft. Would you be similarly open to a large acquisition that would impact things on the inventory side?
Johnson: We look at the work that we are doing with our live services and that's creating great inventory. Last quarter our online advertising revenue grew at 22 percent, which exceeded market growth.
We're going to continue to focus on building organic (growth) and we've made some great progress in that over the last year. It's been one year since we took AdCenter to market, and in this last quarter AdCenter has now surpassed the revenue per search results that we were getting when we were on Overture. We've done a number of acquisitions like Massive to do ad-serving in games, ScreenTonic for mobile. We are going to continue to focus on organic growth and we will do acquisitions that help round out the portfolio.