Ordinary Advertising

One of my most perspicacious readers, of which I have more than my fair share, was inspired by a recent post to offer up this seemingly obvious, but all-too-often overlooked perspective on mergers & acquisitions. (You can read his entire comment at “1+1=0″.) What Tom pointed out was that whenever a company of “real” value acquires one of “perceived” value, the results are frequently lamentable.

I thought this would be a good screen for evaluating the recent offer by Microsoft (a company of unquestionable “real” value) for Yahoo! (a company that may be a little long in the “perceived” department). To be fair, on the real side of the ledger, Yahoo has some holdings–like its stake in Alibaba–that could be easily converted into cash by MSFT. It also has a ton of e-mail and IM users, although hardly $44.6 billion worth. And it has a well-known name, some great engineering talent and positive cash flow. None of which would explain the 62% premium in Microsoft’s initial offer, though.

Which gets us to the “perceived” value side of the equation. Clearly, Yahoo has some strengths in social networking and video-sharing that Microsoft would probably love to get its mitts on. However, these are areas that have not proven to be readily convertible into cash, as Google’s very own Sergey Brin remarked in one of the Wall Street Journal articles I’ve been studying lately: “We have had a challenge with the social networking inventory as a whole and some of the monetization work we were doing there didn’t pan out as well as we hoped.”

So we’re left with what is supposedly the crux of the appeal this acquisition has for Microsoft, again from the Journal: “…a Yahoo acquisition could make Microsoft a more viable one-stop alternative to Google for advertisers and media companies looking to spend money and distribute their content online.” In other words, at the end of the day it’s all about distribution? Well okay, up to a point I can understand that. Google, I gather, has a remarkably efficient platform for placing ads all over hither and yon. (Assuming it’s hither.com and yon.com.) So I can see why this would be something Microsoft lusts after, especially having “…paid $6 billion last year for the advertising specialist aQuantive, (which) already sells ads on popular sites like Facebook and Digg, as Yahoo does on eBay, Comcast and the sites of hundreds of newspapers.” as I read in the New York Times.

Still, this fixation on who can be most effective at distributing advertising and other forms of content online starts to make this sound like a FedEx versus UPS battle. With advertising and content being the boxes and Microsoft and Google vying for who can “absolutely, positively” do the best job of getting them where they have to be. Except advertising isn’t boxes; it’s what’s inside the boxes. And that’s what I think all of these guys are still missing.

If the New York Times is right in saying that what this whole Microsoft/Google battle royal is ultimately all about is determining, once and for all “…who will dominate the booming online advertising business.” then sooner or later, one of these firms is going to have to come to grips with the actual quality (and performance) of the online advertising being distributed. (And I don’t think that’s something which will be wrestled to the ground by the online “ad agency” Avenue A/Razorfish that Microsoft inherited when it acquired aQuantive.) To me, this is the key area where the online advertising model is still so desperately in need of help.

What makes me so sure? That “21/7″ notion I used as a lead to this piece. (Yes, and I’ll bet you never thought I’d get around to tying that back in.) Apparently, according to an article in this past Sunday’s New York Times business section, there’s this curious variation of Pareto’s principle (the “80-20 rule” for you non-economist wannabes) dogging the online advertising business whereby despite the fact that people spend 21% of their media-consuming time on the Internet, only 7% of advertising is going there. And why on Earth might that be? Given the online advertising industry’s penchant for metrics by the long ton and accountability up the yin-yang, this disparity makes no sense. Unless…

Unless, despite their protestations to the contrary, many advertisers remain unconvinced that advertising on the Internet is delivering value commensurate with its audience size. As well they should be, if you ask me. Because I don’t believe the vast majority of Internet advertising as it’s presently construed does “dick” to use the technical term. Sure, it appears with the reliability of a Swiss watch–thanks to Google’s technological prowess, soon to be joined by whatever Microhoo cobbles together–and it alternates with the periodicity of a traffic light. But is anyone stopping to pay much attention? I guess a few people. But enough to justify Microsoft’s bid for Yahoo? No siree.

Not until someone figures out how to do Internet advertising extraordinary enough to put an end to the “This decade only…2/3 off!!!” 21/7 media sale will an advertising and content distribution system be worth what Microsoft’s proposing to pay for Yahoo’s “perceived” value.