NEW YORK On Thursday WPP's Martin Sorrell quibbled with the word "transformational" to describe what he preferred to call his "modest" $649 million proposed purchase of 24/7 Real Media. Just one day later, Microsoft's Bill Gates proved him right by revealing he would shell out a stunning $6 billion to buy aQuantive, owner of one of the largest digital ad agencies, Avenue A/Razorfish.
At the center of these moves is the undeniably crucial role of technology in advertising. Once on the periphery, technology is now front and center, figuring out what ads to show and how they performed, collecting user data that's invaluable in ad targeting.
Historically, a company either bought or sold advertising. But that distinction is blurring as media, technology and advertising companies rush to position themselves to benefit from the shift of money from traditional to digital media.
Should both deals go through, they would make for some strange bedfellows, at least by traditional standards.
With aQuantive, Microsoft will be one of the largest customers of Google, Yahoo and its own properties. Its Atlas ad server is used by agencies to run campaigns on other sites, while the DrivePM network will buy ad space from publishers to resell to other advertisers. Likewise, WPP will operate an ad network that counts its own agencies as well as those of competing holding companies as clients.
"I think [Sorrell] looked at our model and said, 'Boy, technology is really important,'" said Brian McAndrews, CEO of aQuantive. "So he did something that would be considered unconventional."
Microsoft is betting big on the aQuantive model, which would be its largest purchase ever. (The deal places a value on aQuantive that is greater than all of Interpublic Group.)
The company plans to combine its technology firepower with aQuantive's ad-serving and ad-network businesses. Atlas is used by agencies and advertisers to manage their online campaigns. Using the data Atlas collects, DrivePM buys excess Web inventory from publishers and resells it to advertisers looking to reach specific audiences. Microsoft execs said they would use this data-rich platform to run ads on MSN's remnant ad space. It will also link these with its adCenter platform, which aims to be a one-stop shop to run messages across several forms of digital media, from Web sites to cell phones to video games to Internet protocol TV.
"What we're hoping to do, in much the way aQuantive has done, is take the voice of the marketer they get directly from their customers and embed it in building the right tools and services that make the buying process better, easier and smarter and more efficient," said Joe Doran, general manager of Microsoft's digital advertising solutions unit.
But aQuantive is more than a tech business. With Avenue A/Razorfish, Microsoft would be in the unusual position of both buying and selling online ads. The decade-old agency is one of the largest buyers of digital media, reporting $542 million in billings and counting Google, Yahoo and Microsoft as its top customers.
"The real question is what does Microsoft do with the agency," said Bill Gossman, CEO of Revenue Science, a behavioral ad technology firm. "That's probably to be determined."
McAndrews dismissed such concerns, noting that aQuantive itself was in that position when buying inventory from DrivePM. "It works because the media online is so accountable and measurable that people understand: If it works, it stays on the plan," he said. "If it doesn't work, it doesn't stay on the plan. The kinds of conflicts you might talk about we've been managing for years successfully."
Yet several observers said the conflicts would mount, and Microsoft would sell off Avenue A/Razorfish, either to an ad holding company or a private equity firm like General Atlantic, which controls AKQA. "It just doesn't make total sense, Microsoft wanting the agency business," said Aaron Kessler, an analyst with Piper Jaffray.
Still, for now Microsoft is edging into the agency business as WPP is moving to control its own media inventory and embed technology into its business.
One part of 24/7's business is straightforward: WPP gains a search agency arm. Yet its other two businesses, a publisher rep network and ad-serving technology, are distinctly new areas for WPP. For the first time, an ad holding company will own a network that sells ads on behalf of publishers.
WPP is "fundamentally changing their philosophy," said Stewart Barry, an equities analyst with Think Equity. "They're leaving behind old legacy views and taking risks and doing things they haven't done before."
Sorrell downplayed how much of a shift this is, but acknowledged that the changing digital media world requires holding companies to take new approaches. "This adds a third dimension" to our business, he said in a conference call announcing the 24/7 deal. "There are now three legs: creativity, media and, last but not least, the application of technology."
WPP is left to figure out how it can link its own systems with 24/7's publisher-focused businesses. While 24/7 has both an ad server and network, they're not regarded as top notch, and they're different from aQuantive's. Atlas is an advertiser-side server, used by agencies to run campaigns, while 24/7's OpenAdStream is a publisher system used by sites like Forbes.com, USAToday.com and Weather.com.
Mark Read, CEO of WPP Digital, said the company would look to turn 24/7's technology into an ad server its agencies could use. This would also allow WPP agencies to stop using rival systems, like Google-owned DoubleClick and Microsoft-owned Atlas. Sorrell has expressed unease with running client campaigns through DoubleClick for fear Google could use the data for its benefit. The same would hold true for Atlas under Microsoft.
What's more, Read hinted that WPP might look to change 24/7's media network, which packages publisher inventory for brand advertisers, into an arbitrage model like DrivePM. It would then buy ad space outright and use search information and prior campaign data to serve targeted ads, said Dave Morgan, chairman of Tacoda, a behavioral targeting ad network and founder of a company that formed 24/7.
WPP's deal "is a recognition that in the digital world the rules are different," said Morgan. "Rather than sit on the sidelines and watch companies like Microsoft and Google rewrite the rules, they're going to do some writing themselves."