Why Did Google Buy DoubleClick?. How This $3.1 Billion Acquisition... | by Tony Yiu | Towards Data Science

What gives a great company that extra oomph or spark? I’ve always been interested in exploring this. In this series of blog posts, I hope to analyze and dissect interesting tech topics from a strategic angle. And hopefully in the process we all can learn a thing or 2 about what it takes to be a great business.
Google announced that it had agreed to acquire a company called DoubleClick for $3.1 billion in 2007. The agreed upon purchase price was almost twice as high as what it had paid for YouTube just a year earlier? What? YouTube is an iconic pillar of the current digital landscape, one of the most visited sites in the world, and a massive revenue generator for its parent company, Google. Even back then, it was clear that YouTube had massive potential — so why was Google willing to pay so much more for a company that at least I had never heard of before?
To understand why this acquisition was such a big deal, we need to first step back and understand the digital advertising landscape. Advertising is a huge industry. In 2019, total ad spend in just the U.S. across all channels (digital, TV, print, etc.) was estimated to be $240 billion. Of that, more than half ($130 billion) was digital — digital ads are ads served via the internet to people searching on Google, watching YouTube, browsing Facebook or Instagram, etc. and includes both mobile and desktop. Digital (especially the mobile portion of it) is also by far the fastest growing component of the advertising market, having relegated TV to second place a few years ago and it’s never looked back since.
But back in 2007, when Google acquired DoubleClick, digital ad spending was still in its relative infancy — digital made up just 12% of total ad spend compared to TV’s 39% (though digital was growing many times faster than all the other types of ad spending).
The makeup of digital ad spend was very different back in 2007 too — 40% of it was paid search. Paid search is when companies bid for the right to show their ads on a search engine’s search results page (by picking keywords of interest and an associated bid amount for each of those words). And Google, the number 1 search engine then just like now, dominated paid search with a 75% share of the market. Why did paid search have such a huge share back then?
The reason for paid search’s early success and prevalence is that it’s easy to use and measure. A little bit of background will help drive home this point.
Traditional ads are characterized by limited inventory — there are only so many billboards by the highway or so many time slots for commercials during that basketball game. And advertisers must show the same ad to the entire audience (everyone watching the Super Bowl sees the same ads) with some exceptions (the local programming portion of a national TV/radio network allows them to bombard us with local ads; but even then the entire local audience sees the same ad). This means that in order to get the best ROI, the ad and its product must appeal to the average audience member. In its nascent stages, digital advertising had the opposite problem. With internet ads, there’s a virtually unlimited supply of individualized ad slots. Every second that someone spends on the internet browsing websites or playing games is an opportunity to serve him or her an ad of a product that is uniquely relevant to that person’s specific interests — all of a sudden advertisers had more potential ad slots than they knew what to do with. The problem was targeting. Without knowing enough about a user, they had trouble identifying those interests and serving up relevant ads, which meant that digital ad campaigns often experienced lower than expected ROIs.
Paid search though was an exception. It’s much easier to target paid search ads because the user clearly states his subject of interest or intent with each search. When someone searches “best place to buy a used car”, that person’s intent becomes very clear (even with little or no prior data about this user). Ads for used cars placed in this person’s search results will have a very high likelihood of clickthrough (clickthrough is when a user clicks on an ad), allowing Google and its search engine competitors to charge a high price, a.k.a. cost per click, for each of these ads.
But paid search doesn’t work for all types of ads. At a high level, advertising (and marketing in general) tries to do one of two things — get people to perform a specific action (such as purchase product A) or build brand awareness. Paid search ads work really well with the former (because even though it’s an ad, it’s also related and relevant information) but not so much with the latter. If I have a reasonably clear idea of what I’m looking for when I perform a Google search, then I probably won’t spare the time to watch a touchy feely video designed to reinforce an existing brand or introduce me to a new one. Rather, I am likely to see these attempts as distracting and annoying. Most people don’t go to Google’s website to browse; rather, it’s the quick first step in their information finding journey.
That’s where display and video ads come in (when I say display going forward, I mean video as well). Display ads are interactive images or videos that appear when we visit and browse websites (they could appear as a banner, or hover to the side, or even momentarily take over our entire screen). Display ads are the closest thing on the digital side to a traditional T.V. commercial. And today, many of the same companies that spend millions of dollars on television ads also spend just as much or even more on display ad campaigns (delivered via Facebook, Instagram, YouTube, or popular websites like IMDb). It’s the growth in video ads (and to a lesser extent other display ad formats) that’s allowed digital to take so much advertising market share from television during the past decade.
Today, Google is a major player in serving users display and video ads. Odds are that when you visit a random website on the internet (that seems to have nothing to do with Google) and see an ad, it was brought to you indirectly by Google-owned technology. But back in 2007, things were very different.
In 2007, while Google was a paid search behemoth, it had a relatively insignificant presence in display ads. In fact, Google likely viewed its weakness in display ads as an existential threat. Sure, there were some on AdSense, the ad network that matched advertisers to ad slots available on the Google Network (a collection of websites that agreed to let Google figure out what ads to display for them). But the Google Network consisted primarily of smaller websites like personal blogs — and the ads on these sites were much more likely to be banners than videos.
So Google needed to solve a “chicken and egg” problem. Without huge third party websites (content publishers) in the Google Network, it had trouble wooing big brand advertisers like Nike or Chanel. And without the super-premium advertisers that were willing to pay top dollar for video ad impressions (and clickthroughs), Google had a hard time attracting the best and biggest websites to join the Google Network. In the advertising world’s lingo, Google lacked the inventory (ad slots on attractive websites) necessary to attract demand (advertisers looking to launch a major digital ad campaign).
It sounds odd today that Google would have trouble breaking into any ad-related market, but back then there were several reasons for this:
Remember that while it owned the most visited website in the world, the average user actually didn’t spend much time on Google’s search and results pages (once you get the directions, you’re usually in a hurry to embark to your destination).
And Google rightly reasoned that cluttering its main page (and search results pages) with advertising would decrease its credibility.
Finally, the existing structure of the advertising industry was very cushy and profitable for the incumbents. No one was eager to give an upstart like Google (especially one that already owned a monopoly-like position in a related market) a position of power.
At the same time, Google owned some unique and massive advantages:
It had the internet completely mapped out and knew websites better than even the people that created them. That’s why even in 2007, AdSense was already a major revenue generator.
It had access to users’ entire search histories (and emails). At that point Google probably knew more about the average person than any other company in history.
It also knew the website you headed off to after you viewed the search results.
In other words, Google had a treasure trove of data that would be invaluable in helping websites, even very large ones that already owned substantial proprietary data, maximize the value of their display ad space. It also had peerless data about its users’ interests and backgrounds that advertisers could use to significantly increase the focus and return on their display and video ad campaigns. It just needed to solve its “chicken and egg” problem.
From the San Jose Mercury News as news of the acquisition broke:
“In a conference call with analysts and reporters, Eric Schmidt said Google decided to make a bid for DoubleClick after a strategic review revealed that the opportunity to sell display advertising was larger than Google’s executives previously had imagined, and that DoubleClick had done an exceptional job at entering the market.”
The DoubleClick acquisition was a massive coup for Google. In 2007, DoubleClick was a company with expertise in serving display ads and that owned tons of relationships to both key websites and advertisers (who were all users of its software). And perhaps even more attractive to Google, they were right about to establish the DoubleClick Ad Exchange, a marketplace where advertisers could bid for ad inventory (spots on websites where an ad could be displayed) in realtime.
Google went overnight from being a trailer to a leader in display advertising (while preventing key search competitor Microsoft from doing the same). Moreover, Google now had a clear avenue for monetizing its unique and invaluable knowledge of both websites and users. And it could do so as a platform — typically the most profitable seat in the entire value chain.
Prior to DoubleClick, I imagine the conversation between Google and key advertisers went like this:
Google: Hey Chanel, it's Google again. I know everything about my users and can help you target your brand message better than ever before! Will you consider doing some brand advertising through me?Chanel: Oh sounds great! Can I show a 40 second video starring Charlize Theron on your main page whenever someone searches "purse"?Google: No. That would be super lame. Our users expect our main page to be clean and reasonably minimalist.Chanel: ... Then where can I play my video to ensure that it gets tons of views? It was really expensive to produce.Google: How about on the sidebar of this one nifty travel blog?Chanel: ... <hangs up>
Post DoubleClick, it was no longer necessary to ring up major advertisers. They were probably already on the roster of clients, as well as all the major websites of note. Instead, Google could just sit in the middle brokering transactions, collecting a small toll (and data) from every ad it placed (this position of power was not instantaneous; but rather still took them a few years to fully establish post-acquisition).
This power broker position was also massively synergistic with its existing businesses. One obvious beneficiary was AdSense (and other Google owned ad serving business units) — Google now had much more pull with both sides of the ad market and could take advantage of DoubleClick’s relationships to significantly scale ad inventory and its own knowhow to increase the average ROI of each ad. This created a virtuous feedback loop for Google where the superior performance of its ads attracted more advertisers (demand), which in turn attracted more websites (supply), and so forth, expanding its reach and market power exponentially. At the same time, it could use its entire suite or products like Search, Maps, Chrome, and eventually Android to constantly refine its ad targeting algorithms.
There were also two more areas where the acquisition was a huge win for Google (and a loss for user privacy and market competition):
While it took a few years for them to go all-in on this, Google, via the use of cookies, can track users any time they visit a website that serves an ad via DoubleClick. And because ads served by DoubleClick (or Google itself) became so prevalent in the ensuing years, this amounts to Google knowing pretty much everywhere you go on the web (unless you change your privacy settings).Ironically, Google’s fears that search advertising would stop growing were unfounded. Fueled by Google’s status as the doorway to the internet and eventually the explosion in mobile internet usage, Google continued to rake in billions and billions of dollars from search-related ads. And ad industry participants that wanted (or needed) access to either side of that gigantic market were heavily incentivized to transact on Google’s ad exchange (the one purchased via the DoubleClick acquisition). This ultimately allowed them to build the biggest and most powerful ad exchange on the planet. Being the biggest broker in a 2-sided market (like ad exchanges where the Google brokered transactions between content websites and advertisers) already confers massive advantages because participants on both sides naturally want to transact in the biggest marketplace (so your relative bigness constantly attracts more participants, which makes you even bigger). But on top of that, Google’s proprietary data and search dominance allowed them to tack on additional and unique value to transacting on its exchange.
While it took a few years for them to go all-in on this, Google, via the use of cookies, can track users any time they visit a website that serves an ad via DoubleClick. And because ads served by DoubleClick (or Google itself) became so prevalent in the ensuing years, this amounts to Google knowing pretty much everywhere you go on the web (unless you change your privacy settings).
Ironically, Google’s fears that search advertising would stop growing were unfounded. Fueled by Google’s status as the doorway to the internet and eventually the explosion in mobile internet usage, Google continued to rake in billions and billions of dollars from search-related ads. And ad industry participants that wanted (or needed) access to either side of that gigantic market were heavily incentivized to transact on Google’s ad exchange (the one purchased via the DoubleClick acquisition). This ultimately allowed them to build the biggest and most powerful ad exchange on the planet. Being the biggest broker in a 2-sided market (like ad exchanges where the Google brokered transactions between content websites and advertisers) already confers massive advantages because participants on both sides naturally want to transact in the biggest marketplace (so your relative bigness constantly attracts more participants, which makes you even bigger). But on top of that, Google’s proprietary data and search dominance allowed them to tack on additional and unique value to transacting on its exchange.
Of note is that in 2014, Google launched a private (invite only) ad exchange where premium content publishers (the best websites) and premium advertisers could do deals. This gives big brands on both sides of the transaction more control over the content of the ad and where it appears. In a few short years, Google had gone from the outside looking in to being the one brokering the most prestigious digital advertising transactions... all powered by technology it acquired when it bought DoubleClick.