The EU Delays Google's Ad Buy

European officials want more time to review the proposed DoubleClick deal, and critics in the U.S. hope the FTC is paying attention




by Catherine Holahan (Business Week)

Sheer size has helped Google (GOOG) dominate much of the world's $30 billion online advertising market. But the search giant's massive reach is proving to be a liability in Europe. On Nov. 13, the European Union's antitrust authority held off on approving Google's proposed $3.1 billion acquisition of online ad company DoubleClick, opting instead to subject the transaction to further review.

The European Commission's move, which extends the decision deadline until Apr. 2, is a setback for a deal that would broaden Google's already considerable ability to determine ad placement not only on its own search engine—the world's largest—but also across untold sites across the Web. Google may have to jump through additional hoops to win approval for the deal, whereas rivals Microsoft (MSFT), Yahoo! (YHOO), and Time Warner's (TWX) AOL are moving ahead with similar acquisitions that have already passed EU muster (BusinessWeek.com, 10/1/07). "We can't just treat this as just another competition case," Sophia In't Veld, a Dutch member of the European Parliament, says in defense of the decision.

Approval Still Likely

Google was quick to cry foul. "We are obviously disappointed by the European Commission's decision to extend its review of our acquisition of DoubleClick," Google Chairman and CEO Eric Schmidt said in a statement. "We seek to avoid further delays that might put us at a disadvantage in competing fully against Microsoft, Yahoo, AOL, and others whose acquisitions in the highly competitive online advertising market have already been approved."

The Google deal will most likely also get a green light—but not before European officials take measures to prevent the enlarged company from exerting undue control over the market. "It could lead to additional conditions being placed on the combined company's actions, which could compromise Google's efforts to fully exploit the DoubleClick value," analysts at securities firm Stifel Nicolaus wrote in a Nov. 13 note. Only 3% to 4% of mergers reviewed by the EU in the last several years have been subjected to the second level of scrutiny, according to the Stifel analysts.
Pleased Opponents

Opponents of the merger are hoping the additional review will influence the U.S. Federal Trade Commission, which is also examining the deal. Like the EU, the FTC has approved comparable deals by Microsoft, Yahoo, and AOL. "The European Commission decision has sent a friendly European wind to prop open the doors at the FTC," says Jeff Chester, executive director of the Center for Digital Democracy, one of the 35-plus groups urging the commission and the FTC to impose restrictions on the merger. Other opponents include the International Advertising Assn., the World Federation of Advertisers, and Google competitors Microsoft, Yahoo, and Ask.com.

The concern is that Google would amass too much data on its users and their online habits. It already has a vast storehouse of information on what people using its Web search tool are looking for, and it uses that information to place ads alongside users' search results. The fear is that owning DoubleClick would improve Google's ability to use that data to place targeted ads on other sites, too. To date, the information DoubleClick collects on clients' site visitors is owned by the clients and is not shared.

Targeting + Reach = Ad Dollars

Google's girth is the primary reason it has attracted more opposition than its competitors. Google already has the most popular search engine in the U.S. and much of Europe, and it controls more than 75% of the $8.3 billion U.S. search advertising market, according to a recent eMarketer report. Google also owns YouTube, the largest video site on the Web, potentially giving it access to a significant slice of the nearly $2 billion online video advertising market. And it has deals to serve ads on some of the Web's most popular sites (BusinessWeek.com, 8/8/06) including the leading social site, News Corp.'s (NWS) MySpace.

Google isn't alone in expanding its sphere of influence with such partnerships. During the past few years, the fight for online ad dollars has become a battle of bulk. Audiences have become scattered across the Web due largely to the emergence of sites such as MySpace and Facebook, which let users create countless pages of their own content for public consumption. Little wonder that Internet companies are clamoring for advertising alliances with social networks. Microsoft, for example, recently paid $240 million for a stake in Facebook (BusinessWeek.com, 10/25/07) that enables it to serve ads on the site.

But the most important way online ad giants have sought to increase their influence is through the acquisition of ad networks. Because these networks serve ads on sites across the Web and often monitor the kinds of sites visited by unique computers, they are able to promise marketers large audiences comprising people likely to be interested in what they are selling, or at the very least give marketers information about the people who have responded to their campaigns. It's that power, and the potential to increase it, that spurred Microsoft to buy aQuantive for $6 billion and Yahoo to shell out about $1 billion for Right Media and BlueLithium.
Privacy Concerns

If the deal is approved, DoubleClick's large network of participating Web sites could expand Google's already extensive ability to serve ads off its own site—and render rivals incapable of competing with the Goliath for ad dollars. Why would a marketer bother, for example, to work with a small ad network that can only deliver ads to a relatively small audience on less popular sites, when it can buy the ability to reach a million members of its target market on premier Web sites across the Internet?

Further complicating the issue is the possibility that Google eventually could gain access to the user data DoubleClick collects for clients—information Google could use to better target ads to specific consumers on sites across the Web. "The Google-DoubleClick merger is truly unique because you are merging the global search leader with the company that delivers billions of data-collecting cookies to the world's largest corporations," says Chester, of the Center for Digital Democracy. "We have to be concerned about the creation of these private ministries of information…[this] handful of data-collecting giants could ultimately collude with the government and business."

Chester's privacy concerns also apply to recent acquisitions made by Microsoft, Yahoo, and AOL. But so far, those companies' individual shares of the online advertising pie have been too small to attract regulatory scrutiny. Google will argue it shouldn't be singled out for providing a search advertising product that Web surfers and publishers alike want to use. After all, users can switch to another search engine at any point. For that matter, so can advertisers. But with Google serving as the one-stop shop for ads placed nearly anywhere on the Web, why would anyone want to?