The Banner Is Back

Early last year I spent a couple posts talking about search versus banner advertising and suggested that banner ads were going to come back strong after years of playing second fiddle to search/CPC. That was the thesis behind my badly executed Yahoo (YHOO) trade.

Yesterday’s announcement of Google’s (GOOG) $3.1bn acquisition of Doubleclick says to me that the banner is back, big time. And here’s why. There is infinite demand for search/CPC inventory at a price. Search/CPC is bought on a measured ROI basis. If you know what a click is worth to you, you’ll pay up the that price for as many as you can get. But beyond that, you can’t buy more.

Many marketers have reached the point that they can’t easily buy more search. It’s getting harder. Keyword markets are becoming efficient and supply and demand are coming into balance. Of course, that alone doesn’t mean that all the other money will move into banners. Banners also need to produce measured returns.

But, banners carry branding value that text ads don’t. The return on investment measure is not as cold and hard with banners. And the big branded advertisers that are leaving TV and print in search of better performance on the internet want to be able to brand with their ads. And they want to control where those ads are run. They’ll pay more for those two features.

So branding/banners may grow faster than search/CPC in the coming years, or at least grow as quickly.

And for Google, the law of large numbers is catching up to them. How do you grow a monster at monster growth rates? Get into the other big bucket of money on the web. And the best way to do that is the buy the infrastucture that serves up all these banners. Doubleclick. New York’s best known internet company.

The big winner here is Hellman and Friedman, the private equity firm that the guts and brains to buy Doubleclick for $1.1bn including (I think) $400mm of cash. They sold off the email business to my former portfolio company Epsilon Interactive for something like $100mm and owned the ad serving and related businesses for net $600mm. That’s a 5x in a couple years and a $2.5bn gain if my math is right. And maybe they used leverage as well. If so, it could have been much more. Well done!!

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