DoubleClick could snap Google out of its funk

Internet company has shown rare signs of vulnerability

After getting approval from the European Union for its DoubleClick acquisition yesterday, Google Inc. promptly closed the deal and said it is eager to absorb the digital marketing company's technology and services. And who can blame Google for its urgency?

It has been almost a year since Google announced its intention to buy DoubleClick for $3.1 billion, and the consummation of the deal comes at a time when Google is displaying rare signs of vulnerability.

The search company slightly missed earnings expectations for its fourth quarter -- a notable misstep for a company that typically crushes analyst forecasts -- and its stock is off more than $300 from its 52-week high.

Signs of vulnerability

Meanwhile, as it stares at the possibility of a stronger competitor if Microsoft Corp. buys Yahoo Inc., Google has been busy trying to put a positive spin on a comScore report that highlighted Google's Achilles heel; its overwhelming dependence on pay-per-click text ads.

These ads, delivered along with Google search results and in third-party sites in its ad network, make up most of Google's revenue. That's why comScore's report, which said Google's paid clicks had suffered a 7% decline in January compared with December, scared the living daylights out of Google investors.

Google has tried to do damage control by saying that the decrease in paid clicks was due, in large part, to Google's success in improving the quality of its ad delivery, meaning that with more precise targeting, users have to click on fewer ads. Still, Google's stock is down almost $70 since that report came out.

There have been other unwelcome metrics for Google recently. IDC reported that Google's share of the U.S. Internet advertising market dropped slightly in 2007 from the year before. Although hardly catastrophic, reports like that are nonetheless uncharacteristic for Google and raise eyebrows when measured against its stellar performance over the past five years.

Adding to the sense of urgency is that, while Google was waiting patiently for the DoubleClick acquisition to clear regulatory hurdles, competitors like Yahoo, Microsoft and AOL LLC were busy snapping up digital marketing companies and beefing up their capabilities to take advantage of the growing online ad market.

Targeting display ads

That's why the closing of the DoubleClick acquisition arrives at a particularly interesting time for Google, especially since DoubleClick is expected to boost Google's anemic display advertising business and thus allow the company to add diversification to its revenue stream. Probably sensing this, Wall Street yesterday rewarded Google with a 6.3% boost to its stock price, which closed at $439.84.

Top executives are openly committing to a noticeable rebalancing of Google's revenue. At a conference on Monday, Tim Armstrong, Google's president of advertising and commerce for North America, said Google would be "disappointed" if this year and in 2009 it doesn't attain a significant presence in the display ad market, which includes graphical advertisements such as banner ads.

Attempts to accomplish this so far have fallen short. In November, Yahoo ranked first in the U.S. in display ad impressions with a 19% share, followed by News Corp.'s Fox Interactive (16.3%), while Microsoft came in third with 6.7%, according to comScore. Google took seventh place with 1%.

Google also has other initiatives to diversify its ad revenue stream, including projects to capitalize on emerging opportunities like video advertising and in established markets such as radio, TV, print and even billboards.

But clearly, the most immediate and ripe opportunity to reduce its dependence on pay-per-click ads lies in the display ad market, and DoubleClick should have an immediate, direct effect on these efforts.

"DoubleClick makes Google a much more credible player in the display ad segment," said industry analyst Greg Sterling of Sterling Market Intelligence. "Google has had display advertising, but it has been a lesser part of the business. DoubleClick gives them more assets to diversify the ad spend and get more of brand advertisers' budgets."

DoubleClick provides products and services to let Web publishers, online advertisers and ad agencies manage their digital marketing efforts. Its Dart division provides tools and services to both buy and sell advertising, primarily display and rich media ads. The Performics division focuses on search engine marketing, commonly based on the pay-per-click ads in which Google specializes.

"With DoubleClick, Google has more to offer, like a search-and-display ad package that'd be more difficult to do without this acquisition. Google should become stronger and more balanced with respect to the display ad segment," Sterling said.

By the same token, if the integration goes well, Google's current advertising clients and publishing partners should benefit from the fusion of DoubleClick services and tools with Google's, resulting, conceivably, in a single display/search ad platform, single buying environment and single reporting structure, Sterling said.

Privacy remains an issue

Still, as Google motors ahead with its integration of DoubleClick, it must watch its step because it will remain under the watchful eye of privacy advocates in Europe and the U.S. These privacy groups have been vocal about their concerns that the DoubleClick acquisition could give Google too much power to track and profile people's online actions.

Marc Rotenberg, executive director of the Washington, D.C.-based Electronic Privacy Information Center (EPIC), said that although Europe's highly respected competition commission allowed the deal to go ahead, it made clear that its decision had no bearing on whether the deal is in line with European data protection laws.

"It's very important that DG Competition [Europe's Directorate General for Competition] made this distinction. Google is trying to gather support for an international data protection standard that falls far short of Europe's standards," he said.

Monique Goyens, director general of BEUC, a federation of European consumer groups, said she is "disappointed" with the merger ruling and expressed hope that the new Google/DoubleClick entity will rigorously follow European legislation.

"Moreover, given its position, Google has a duty to set an example to avoid a 'race to the bottom' of consumers' privacy rights on the Web," she said in a statement.

The team of European Commission officials that conducted the merger review concluded that the combined company won't hurt competition because Google provides online advertising space on its own sites and, as operator of the AdSense service, serves as an intermediary between publishers and advertisers, while DoubleClick offers ad serving, management and reporting services to publishers, advertisers and agencies. In other words, they don't compete. The only thing a merger review considers is the proposed deal's impact on fair competition.

In a blog posting, Gartner analyst Andrew Frank stressed that Google and other Internet companies can't ignore privacy laws and concerns as they pursue online ad revenues.

Google and other online ad companies face the challenge to "pursue an aggressive agenda of more control and transparency around data collection practices while continuing to grow their businesses," Frank wrote.

Copyright © 2008 IDG Communications, Inc.

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