Biz Dev in NYC by Rob Tsai

Hot on the heals of Google’s acquisition of Doubleclick, Yahoo! announced its $680 million purchase for the 80% of Right Media that it did not previously own.

Charlene Li at Forrester has an interesting take on the deal, noting that the exchange layer of the online ad ecosystem is more attractive than the delivery engine layer.

 

1) Smart move by Yahoo!. While this looks like a defensive move against Google’s Doubleclick acquisition, as I note above, this expansion has been in the works for the past year. Depending on your perspective, I think it’s actually an offensive strategy for Yahoo! to build on its dominance in the graphical ad marketplace. Yahoo! is putting a stake in the ground that the future for online display advertising lays in efficient, easy-to-use marketplaces — and it wants to be the trusted intermediary for that future.

So here’s the scenario of how this will play out. A publisher uses Google/Doubleclick’s ad server to show the ads that the publisher sells on Yahoo/Right Media’s ad exchange. Voila - both Google and Yahoo! have a relationship with the publisher. But look who has the relationship with the advertiser — Yahoo!.

Now let’s take a look at the advertiser side. An advertiser uses the Yahoo!/Right Media exchange to find and buy the ad inventory from multiple publishers, then uses Google/Doubleclick’s ad server to deliver the ads across those sites. Both companies have visibility into the transaction, but only Yahoo! stands in the middle.

In both scenarios, Yahoo! stands in the middle as the broker between both publisher and advertiser — Google runs the risk of being only the delivery mechanism. Nice end run on the part of Yahoo!

Here’s a fun little analysis to compare the purchase price of Doubleclick with Right Media, based on impressions.  Yes, I understand the impression metric is a little flawed, given that Doubleclick doesn’t typically charge clients on a per impression delivered, and Right Media’s business model (according to Pat McCarthy via TechCrunch) is to “charge a fee from the RMX Direct ad networks who are bidding for a publisher/blogger’s inventory.”

From OMMA’s April 2007 issue, here’s a report that estimates Doubleclick’s (DART) delivers 290 billion monthly impressions.

From Donna Bogatin’s blog Digital Markets at ZDNet,

How does Right Media attain such goals, while aiming to make a tidy profit?

More than two billion impressions are traded daily through the Right Media Exchange and Right Media gets a piece of each one.

So here’s the summary result of this CRUDE valuation comparison:

If you really wanted to try to back into Right Media’s revenue, you’d have to make assumptions on the average transaction size of each impression on their network (CPM) and their average % fee for each transaction. 

What’s interesting to note is that Right Media’s valuation is only 33% higher on a per impression basis, and Right Media’s growth trajectory is definitely much steeper.  

Another question worth asking, what’s the value story of ad delivery versus an exchange.

From Dan Farber and Larry Dignan:

Pennies matter at Yahoo’s scale. If Right Media can monetize this inventory better just by a few cents it can make a big difference at Yahoo’s scale. Decker said that some Right Media trials showed a 50 percent lift. That’s the equivalent of going from 10 cents per 1,000 pages to 15 cents. Those nickels add up. The Right Media acquisition message was also tailored to Wall Street, which spent a good chunk of Yahoo’s earnings call talking about page monetization.

Wow - 50% uplift is pretty impressive.  With an uplift that large, there’s a lot of value being created to justify Right Media’s fees.   You could probably look to eBay for a benchmark for online auction fees - eBay charges 3.25% to 5.25% in variable transaction fees, but after tacking on fixed fees and Paypal, I bet it eBay can charge up to 8%.   For Right Media, a 5% hypothetical revenue split (within the eBay range) would still yield a 10x return to the seller. 

That’s not quite the right math - as a $1.00 CPM ad going through Right Media would hypothetically garner a 50% uplift or $1.50 CPM.  So a 5% revenue split of the $1.50 CPM would be $0.075 CPM on a $0.50 CPM uplift  - so this would really be a 6.66x return.  Still sizeable and nothing to sneeze at!

All in all - congratulations to both the Yahoo! and to Right Media teams for inking this pivotal transaction.