Analysis of a $6 Billion Deal

Microsoft Storms Madison Avenue

Agency World Has One More Thing to Worry About as Software Giant Snaps Up Digital Shop

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NEW YORK ( -- Madison Avenue, make room for Microsoft.

Last week's $6 billion agreement to buy aQuantive is not just a bid to catch up with Google and Yahoo in ad sales. It also gives Redmond something it hasn't had before: Its very own ad agency. The addition of the highly regarded Avenue A/Razorfish to its portfolio signals that Microsoft,
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'When we think about [Avenue A/Razorfish] being the leading provider of interactive services we look at that asset much like aQuantive did,' said Joe Doran, general manager of Microsoft Digital Advertising Solutions.

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in addition to being a media seller, has crept into the agency business, blurring the once-clear distinctions between those who hawk technology and those who provide marketing services. Perhaps even more stunningly, it smashes the taboo that media buyer and seller can't co-exist under the same roof -- a potential conflict long seen as the reason a holding company couldn't be merged with a media owner.

Whole new set of players
Without any suggestion by Microsoft that a near-term divestment of the agency is in the works, an ad industry still trying to put in place the talent and offerings to grapple with the technological flux sweeping the media world could be forced to consider competition from a whole new set of players. Players that have that very stuff in their DNA, who know, for instance, that understanding how to manipulate a company's search-engine results is becoming as important, if not more so, than scattershooting ads across mass media.

Industry observers who expected the deal were shocked it didn't include an announcement that Microsoft would somehow offload Avenue A with a spinoff or a sale. While insiders seemed convinced it would divest the business, Microsoft was public and definitive in denying there were any such plans. On the contrary, a Microsoft executive emphasized that Avenue A's capabilities actually sweetened the deal.

"When we think about them being the leading provider of interactive services we look at that asset much like aQuantive did," said Joe Doran, general manager of Microsoft Digital Advertising Solutions. "Having that as part of our portfolio will help us embed the voice of the marketer and make sure we're driving the innovation that meets the needs of the marketer."

More than an added perk
Avenue A/Razorfish, whose client list includes Ford Motor Co., Kraft Foods, Visa, JPMorgan Chase and, of course, Microsoft, is the largest buyer of web media and paid search, is highly touted for its website design and is far from an afterthought, even though it's clear the real prize is the ad-serving capabilities of aQuantive. At least in theory, it gives Microsoft soup-to-nuts interactive-marketing capabilities.

"A company could, in essence, outsource its entire marketing to Microsoft," said Matt Freeman, CEO of Omnicom Group's Tribal DDB. "If you look at a trend toward greater scale, automation and centralization toward a platform approach to marketing, like Google AdWords and Spot Runner, then they're doing the right thing with an end-to-end marketing solution that has infrastructure and platform and commerce all built in."

For years now, the major ad players have been scooping up companies that create banner ads and web video, craft social networks and communicate with bloggers. But recently the deal-making has taken on a different color. Interpublic, which has less cash to spend, has been taking stakes in media plays such as Facebook and platforms such as the do-it-yourself ad solution Spot Runner. A day before the aQuantive deal, WPP Group, home of JWT and Ogilvy & Mather, said it would pay $650 million for 24/7 Real Media, an ad-serving platform.

New conflicts
As once-clear divides break down, new conflicts come into play, not least the issues posed by scenarios in which media buyers and sellers reside within the same company. In buying aQuantive and its Avenue A/Razorfish unit, Microsoft is getting a major buyer of internet ads, a company that spends heavily with some of its biggest rivals, like Google. So while the door has swung open for a new model, a huge question is whether it also opens a Pandora's box of regulatory issues and conflicts.

Microsoft's Mr. Doran acknowledged the conflict issue. "We want to make sure all ad agencies understand we don't want that to become a reality," he said. "We'll operate Avenue A/Razorfish at arms' length, make sure they have ability to drive the value for marketers and advertisers and remain independent."

While it's unclear just how much a part of its strategy marketing services will be, Microsoft's move is sure to once again kick up speculation about interveners. In the past decade, companies as diverse as CAA, IBM and McKinsey have made inroads into major marketers' budgets, but none have pried loose the holding companies' grip on the CMO wallet. Whether Microsoft or Google, which is said to be forming its own in-house agency, fare any better remains to be seen, but developments like the aQuantive deal are bound to heighten speculation on just how the agency landscape will change with all this media flux, especially with the tech players' massive market capitalization.

WPPoogle, anyone?

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Contributing: Abbey Klaassen
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