Why Did Google Buy DoubleClick?
By: Tony Yiu
Tags: Investing, Data Science, Business, Strategy, Technology

The Digital Advertising Landscape Then And Now

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.

Photo by Edho Pratama on Unsplash

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.

Photo by Ylann Meyer on Unsplash

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.