Microsoft-AQuantive deal portends Web video fight

NEW YORK Fri May 18, 2007 4:51pm EDT

NEW YORK (Reuters) - Microsoft Corp.'s $6 billion deal to buy Internet marketing firm aQuantive Inc. is an effort to capture a bigger role in the nascent Web video market and increases pressure on competitors to make acquisitions of their own.

AQuantive will likely have fetched the largest price in a wave of online ad consolidation, but as many as eight more deals could come down the pike for smaller, niche ad plays, with a range of $300 million to $500 million, industry executives and experts said on Friday.

"We're still at the starting line when it comes to online ad deals," said Bob Davis, managing general partner at Highland Capital Partners. "There are large entities ... that will have wished they made a bet a lot earlier."

The deal is the latest in a frenzy of Web advertising acquisitions sparked when Google Inc. agreed to buy DoubleClick Inc. for $3.1 billion last month, followed by smaller purchases by Yahoo Inc. and WPP.

"Every single company is taking a step they have been looking at for years," Dave Morgan, chairman and founder of interactive ad company Tacoda, told Reuters. "It was time to get serious because the valuations were going up a lot. It was pay now or miss the game."

Companies likely to find a dance partner in the coming months include Quigo Technologies, which specializes in contextual ads, Tribal Fusion parent Exponential Interactive Inc., behavioral targeting company Revenue Science and BlueLithium, according to industry bankers and executives.

ValueClick Inc. has also drawn attention, though its disclosure on Friday that the U.S. Federal Trade Commission was investigating its practices could overshadow a deal. Yet its shares surged 8 percent on Friday on the aQuantive news.

Tacoda has also been named as a potential target. "You can't be an online advertising company of scale now and not be considered a target for acquisition," said Morgan.

At stake is a seat at the table in an advertising market dominated for decades by traditional broadcast television. Video entertainment will still be king, experts say, but they will be controlled by the Web for delivery to a set-top box, computer screen, iPod or mobile phone.

NEXT GENERATION OF MONEY

"The next generation of money that's going to come into the Internet is going to come from local (advertising) and from television," said Rishad Tobaccowala, chief executive of new media consultancy Denuo, part of Publicis.

"Given where the future of electronic advertising is, they (Web advertising companies) also basically begin to have the platform for all advertising," he said.

AQuantive helps advertisers serve up and track many varieties of online ads, and is home to the largest interactive advertising agency, Avenue A/Razorfish.

"The work aQuantive has done around things like (video-on-demand) will help complement things we are doing around MSN Video and IPTV (Internet television)," said Microsoft's president of platforms and services division, Kevin Johnson, citing one rationale for the deal.

Johnson estimated the U.S. online ad market to be worth $40 billion, with annual growth of about 20 expected percent in the next few years. The bigger play is for the total $300 billion U.S. ad market, as more media from print to radio come online.

The Internet's central role in video has been fueled by the explosive growth of Google's video sharing site YouTube and new Web platforms being created by traditional media players News Corp. and NBC Universal, or start-ups like Joost.

In this world, Microsoft not only competes with Web rivals Google, Yahoo and Time Warner Inc.'s AOL, but broadcasters like CBS Corp. and NBC Universal, cable operators like Comcast Corp. and phone companies like Verizon Communications Inc., as they move to digital.

"NBC Universal is going to be much more focused on content. With Microsoft and Google, it's a little bit of a different tactic toward the same end," said Jeff Marshall, digital managing director at media buyer Starcom USA.

Some experts see four to six of those players taking major market share, with the rest reaping smaller benefits.

"There is clearly a race going on," AOL Chief Executive and former NBC television chief Randy Falco told the Reuters Global Technology, Media and Telecoms Summit this week.

"This business is more and more about ad-serving technologies," he said. "I felt that we have to be in every space we could possibly be in."

(Additional reporting by Kenneth Li)

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