Tapping online TV ad revenues

After running up an M&A bill of more than $10bn on advertising deals last year, Internet titans are now taking the wraps off some of the platforms built on those acquisitions. This week, for instance, Google struck a content distribution deal with Family Guy founder Seth MacFarlane. Google will distribute a new Internet-exclusive cartoon series using the AdSense platform it picked up through its $280m acquisition of Applied Semantics back in 2003. Additionally, Google launched its Google Affiliate Network, which is essentially a re-branding of DoubleClick’s affiliate marketing product, Performics.

Through the AdSense deal, Google will syndicate two-minute ‘webisodes’ with accompanying advertisements to thousands of demographically chosen websites. Of course, other sites already offer Web video streaming. However, few of them have found a way to offer the content in a profitable way. Consider the online TV network Hulu, a $100m joint venture of NBC and News Corp that streams videos from its stand-alone website. Although it consistently sells out its ad inventories, Hulu still struggles to get viewers to its site, much less run profitably.

One boost to the flagging revenue outlook for this market may well come from online video advertising markets, particularly mobile video markets. While the top players, including Google, keep busy monetizing on previous acquisitions, we expect the scores of smaller players to get snapped up. Among those that might find themselves on a shopping list: VC-backed Qik, which streams live TV and video to mobile phones and enables users to upload content to social networking websites; a similar startup, Myframe’s Flixwagon, which has partnered with MTV Israel; and finally, decentral.tv’s Kyte.tv, based in San Francisco, is streaming video on the iPhone. If any of the big online advertising platforms want to go wireless, we expect they will probably take a close look at one or more of these startups.

Selected Google online advertising deals

Date announced Target Deal value Company description
April 13, 2007 DoubleClick $3.1bn Online advertising and marketing services
April 23, 2003 Applied Semantics $281m Online advertising and analytics platform

Source: The 451 M&A KnowledgeBase

Microsoft makes meaningful buy

Since shelling out nearly $10bn in a year and a half to reinvent itself as an online contender, Microsoft, on July 1, confirmed reports of its purchase of online search and natural language vendor Powerset. Microsoft aims to add Powerset’s Web search linguists, engineers and technology to its Live Search division. On the heels of its $1.2bn purchase of enterprise text analytics giant FAST Search and Transfer in January, Microsoft inked this much smaller deal to enhance its consumer Web search.

Founded in 2006, Powerset released its Web search technology earlier this year. In partnership with Xerox’s PARC (Palo Alto Research Center), the San Francisco startup, which has raised some $12.5m in funding, has been developing search software that reads online text and discerns semantics as well syntax. So far, Powerset’s semantic technology has been publicly tested only on Wikipedia and fellow open source encyclopedia Freebase, both of which have a solid structure that Powerset leverages. The company has also been in talks with major publishing companies about an ad-supported service it has in the works.

With Powerset having been sold to an established technology company to realize its plans, we wonder what that will mean for the rest of the semantic technology companies. Currently, the poster child of the market is Radar Networks, which is backed by $18m in VC. It is developing a semantic social networking application, Twine, which is still in private beta and due to be released this fall. There’s also New York-based semantic search engine Hakia, also in private beta, which has landed over $20m in funding. However, if Powerset, which was often referred to as ‘the next Google,’ got picked up for just $100m (as the rumors have it), then what’s the exit picture for the two remaining rivals, both of which have raised more money than Powerset? Maybe we need to Google the answer.

Selected Microsoft search acquisitions

Date announced Target Deal value Target description
July 1, 2008 Powerset $100m (reported) Semantic Web search engine
January 8, 2008 Fast Search and Transfer $1.2bn Enterprise search software

Source: The 451 M&A KnowledgeBase

Lessons from a big Yahoo

Talk about being thrown straight into the shark tank (or more accurately a barracuda tank): John Burris has agreed to step from the board to the CEO spot at Sourcefire. The appointment comes just two weeks after Barracuda Networks made an unsolicited offer for the network security vendor. We noted that the low-ball bid of $7.50 per share from Barracuda – an aggressive company that lives up to its name – will likely set the ‘floor price’ for any sale of Sourcefire. (Since the bared-teeth bid was revealed, Sourcefire’s long-suffering shares have closed above the offer price in every trading session, finishing Wednesday at $7.92. The $0.42 difference equates to about a $10m gulf between what the market says Sourcefire is worth and what Barracuda says the company is worth.)

The fact that Sourcefire – which had been looking for a chief executive replacement since February – stayed in-house to fill the top spot makes us wonder if the company hasn’t resigned itself to a sale. Don’t forget that Sourcefire was supposed to be sold to Check Point Software Technologies more than two years ago – at a higher price than its current valuation, no less. And although we are far from experts in employment contracts, we saw nothing in Burris’ agreement that would make an acquisition of Sourcefire prohibitively expensive. Certainly nothing like the employee severance plan at Yahoo, which is effectively a poison pill.

Indeed, Burris may well look at the tenure of Yahoo’s Jerry Yang during Microsoft’s unsolicited approach to the search engine as a quick executive lesson in how not to handle M&A. On the no-no list: refusing to talk to a suitor, erecting all sorts of obstacles to consolidation and, above all, continuing to insist that you know best in creating value at a company – even when all evidence points to the contrary. “I bleed purple,” Yang said at one point, using Yahoo’s signature color to demonstrate his closeness to the company he helped found. Yang may see it that way, but Carl Icahn and other Yahoo shareholders don’t particularly care. They’re very clear that blood is red, just as money is green. We think Burris – whose connection to Sourcefire only dates back to March and who previously headed up sales at Citrix Systems – won’t suffer a similar case of color blindness.