Of Mad Money & Ad Networks

In 2006, according to Internet Advertising Bureau, the advertising revenues reached an all time high of $16.8 billion. In comparison, $11 billion has been spent by various players in buying out ad networks. Don’t be surprised if this number rises even higher. Welcome to the mad-money phase of the eyeball boom!

The latest jaw-dropping move comes from Microsoft that has bought aQuantive, another ad network, based in Microsoft’s backyard, Seattle, for $6 billion and change. The move is a reaction to losing DoubleClick ($3.1 billion) to Google. Earlier this week, WPP bought 24/7 Real Media for $650 million. (The WPP-24/7 Real Media deal is about bringing search marketing services in house, Tim Vanderhook, CEO and founder of Specific Media told us yesterday.)

Kara Swisher is quite impressed by the bold big money move, and points out that what Microsoft paid for aQuantive is

.. more than 10 times is revenue fiscal revenue last year, and, yipes, close to 50 times its cash flow. And that is double what what the Seattle-based parent company to Avenue A | Razorfish was worth on the public market just before the acquisition, a figure that has already been bid up by all the recent activity in the market.

Microsoft’s willingness to pay big dollars and bid aggressively for aQuantive ($66 a share versus mid-$30s trading price) shows that the Barons of Redmond truly believe that advertising will play a big role in its future. How that eventually plays out – remains to be seen.

As an aside, as Microsoft moves away from its more predictable software (OS and productivity suite) based business models into new categories – games, subscriptions and now advertising – do you think some of the predictability in their business model is going to be … to put mildly… be replaced by volatility?

Greg Sterling has more thoughts about the deal after his chat with Joe Doran, General Manager, Microsoft Digital Advertising Solutions.