The headline of this post ends with !? because Yahoo!’s name includes a “!” and the sentence is in fact a question.
But, even were it not the case, upon finding out that Yahoo! had shelled out $680M for the 80% of Right Media it did not own (after paying $45M for 20% of the company six months ago), any headline would have been followed by !?$%$(*&#.
The Business Model: Do ya get it?
When Right Media launched in 2003, I got a call in my capacity as VP of Ad Sales of an online publisher. Right Media told me what they did: in the words of a current executive, Right Media is ”an enabler that provides tools and techniques to participants and creates a virtual space to do business more efficiently. We serve like a stock market, we price display ad inventory and allow participants to discover as much as players allow to be discovered within the ecosystem and we make the data transparent…”
In 2003, I spoke to a couple of brothers who worked at Right Media, they wanted me to grant them a portion of our ad inventory for them to price and auction off to other networks. We did 250M ad impressions per month, and we sold out some 75% of the ad inventory, the remaining 25% we doled out to networks. These networks paid us anywhere from $0.25 CPM to $1 CPM. On the premium inventory, I’d be able to sell that for anywhere from $1 CPM to $20 CPM.
CPM stands for cost per one thousand of ad impressions. For more on CPM and other terms, as well as a landcape of all of the participants of the online ad ecosystem, click here.
A Practical Example
At the time I was as cordial as could be, but I did not have much time to allocate to Right Media’s offering, because we generated $190,000 per month from the 75% of our ad inventory that we sold out to advertisers large and small, and made about $10,000 from the networks. Even if that grew 100%, to $20,000, I figured that my time would be better served focusing on the 75% of premium inventory that we had.
To some extent, I was right. To some extent, I was wrong.
We had 250M ad impressions, selling out 75% to premium advertisers was feasible. When you are a large publisher with billions of ad impressions, you tend to sell out even less. At the end of the spectrum, for sites like MySpace and Yahoo!, you sell out a lot of less and are left with remnant inventory.
Long Tail of Ad Inventory
Yahoo! sells out a lot more of their inventory as premium compared to MySpace, the reasons for that are numerous, but one major one is that MySpace is user-generated content and less desirable to advertisers. If you add all of the variables and consider that today user-generated content accounts for more aggregate traffic than adult content does, you start to understand that times have changed, and many people found value in Right Media’s - and networks’ in general - offering.
Right Media, knowingly or unwittingly, was positioning itself for the burgeoning traffic coming from the explosion in user-generated content. This is not to say that all of Right Media’s business emanates from user-generated content, it’s to demonstrate one source of demand for Right Media’s offering, an exchange matching buyers with sellers of ad inventory in an auction format.
That last part, my friends, is the key. What eBay did for Pez dispensers, Right Media sought to do for the $20B online ad industry. In other words, the ad inventory I represented was largely irrelevant to Right Media, but the large majority of the ad inventory that was to mushroom online would be a perfect fit for Right Media.
Times, They Change
Fast forward that to yesterday’s announcement that Yahoo! was paying $600M+ for Right Media’s 80% that it did not own.
Don’t get me wrong, I am not saying the deal was a bad one, I am saying that as both a writer covering the space, someone who had worked with Right Media in the past, a shareholder in Yahoo! and a web entrepreneur positioned in online advertising, I fell off my chair.
Some people like Fred Wilson shouted hooray, others did the opposite, questioning the rationale:
“Now that they’re owned by one of the largest sellers of space on the Web, does that make Right Media less of a middleman?” said Jeff Ratner, North American digital director of MindShare Interactive. “Will I find more of my inventory winding up on Yahoo as opposed to somewhere else?”
I am not sure, maybe, who knows? All I know is that Yahoo! has a lot of impressions, of which little is premium. Yahoo! needs a better way to monetize this long tail (hate that word, because people apply it to everything, but it does apply here…) inventory. As a Yahoo! shareholder, that gets me excited, but the flip side is that Yahoo!’s CFO Sue Decker was quick to add: “Yahoo’s shareholders shouldn’t expect to see profits from this investment until at least 12 months after the deal closes, if the companies follow through on their immediate intentions to improve the marketplace, then media planners, buyers and publishers may see the changes quickly.”
Hmm, that’s a lot of “if’s” for a company that quadrupled in value in six months. Of course, Right Media itself has soared in size, particularly since the Yahoo! 20% investment.
According to itself back in February 2007:
“Right Media Exchange revenue has increased 81% over the past six months, with 566 billion ad impressions traded during the period.”
The milestone represents only a partial measure of Right Media’s broad, substantial growth since it formally launched the Right Media Exchange last summer. In that period, the company has also seen a 50% increase in headcount, a 49% increase in Exchange membership and an 84% increase in impressions served. Over one trillion impressions have been served on the Exchange since the company launched its auction platform in April of 2005.
“All signs point to the fact that the digital advertising market is embracing the exchange model,” said Right Media CEO Michael Walrath. “Buyers and sellers on the Right Media Exchange are getting a fair opportunity to develop new relationships, increase scale and drive more value, and they’re clearly taking advantage of it.”
There are currently 127 network, advertiser and publisher members with seats on the Exchange, including Yahoo!, Fox Interactive Media and LookSmart. Exchange members represent over 6,000 buyers and 13,000 sellers. More than 175,000 creatives are currently active in the Exchange.
There are cases where Right Media has done wonders, ZDNet points to Tickle.com as an example where it saw a 771% spike in revenue. That’s not bad at all. I wonder how much the $10,000 I generated from 25% of our non-premium inventory would grow at a growth rate of 771%. Of course, demand for online ads have changed quite a bit since then, but you get my drift.
Value is in the Eye of the Beholder
Is Yahoo! getting something valuable? Of course.
Would I pay $800M for it? Well, as I said yesterday, iVillage fetched $600M, MySpace parent Intermix got $580M and my former one-time employer IGN got $650M from News Corp. Of course, this was all over two years ago. Last month, Google paid $3.1B for privately held DCLK.
Wait a minute… Right Media too is privately held… could it be suddenly that public shareholders are showing restrain while their private brethren are not? Of course, Right Media and Doubleclick were acquired, not by public shareholders directly, but by managers of these, at Yahoo! and Google respectively.
When the Google/DCLK deal went down, I wrote aplenty on that:
- Google Buys Doubleclick for $3.1 Billion; Blocks MSFT Acquisition
- Questions in Wake of DCLK/GOOG Deal; MSFT/YHOO Repercussions?
- Two Variables in DCLK/GOOG Deal: Dart for Publishers/Advertisers; All Cash Deal
- Why GOOG’s DCLK Makes Little Sense (To Me)
- DCLK Winners: Hellman & Friedman; Losers? DCLK’s Shareholders?
- aQuantive Under Spotlight
One of my main points of contention in that deal was that saying that DCLK gave Google an “in” into the display business was akin to saying that MSFT was in real tight with ad agencies because agencies use powerpoint in client pitches, in other words, DCLK’s strength was in software, and not media, ever since it unloaded its media business to MaxOnline/L90.
One reader of this blog who agreed was Right Media’s own Vice President Bennett Zucker, as he commented to one of the old posts.
I’d argue that Google was practically reckless in paying so much for DCLK, and Yahoo! showed some eagerness to maintain its lead in display advertising, and perhaps arguably fear as well, and Right Media did the sensible thing for its shareholders by gladly accepting this offer. Their venture capital backers Redpoint must be ecstatic, as are the staff at Right Media.
I spoke to Bennett today about the deal.
Hailing from the world of publishing, Zucker serves as an evangelist for Right Media’s exchange, trying to convince publishers to give it a try. He’s also served some time at Tacoda (wouldn’t they love an exit like this one, by the way?) in the area of behavioral targeting…
I asked Bennett:
Q: What on earth transpired between last fall and this spring besides Christmanukwanza?
A: “We had been working with Yahoo! for a year before the 20% investment materialized, and Yahoo! did a lot of tire kicking before it became a customer. Yahoo! has since been trading a lot of its non-premium, and I mean deep, real deep inventory on the exchange. And, the result validated things and they were really successful.”
Q: Did other companies show an interest to invest or buy them afterwards?
A: “Once that happened, the floodgates opened and all lingering doubts evaporated.”
Q: What was it that made Yahoo! value you so much more today than they did six months ago?
A: Sue Decker pointed out three things in her analyst call yesterday:
1 - increased value of YHOO’s own inventory;
2 - extend YHOO’s inventory across the Web;
3 - create new businesses working together.
Q: Do you expect changes in structure, personnel?
A: We had aggressive hiring plans, and they got more aggressive. CEO Michael Walrath will now report to Sue in Sunnyvale.
Q: Is this an answer or challenge to Google, or are we all supposed to think it’s not?
A: We were working with Yahoo! months before Google and Doubleclick closed, so while it is certainly related in some ways, it’s not totally coming out of nowhere.
Q: Fair enough, but isn’t this an acknowledgment or admission by Yahoo! that they see little growth in their core premium inventory and need to look at non-premium?
A: Clearly there is a lot of value in boosting rates on non-premium, which runs deep on Yahoo!, but I would not rule out high-end opportunities.
Q: Are we in a period of euphoria? I mean, Yahoo! paid what they did for you, good for you. But today we hear that MSFT might buy TFSM for $1B, which is madness, it was worth $400M on Nasdaq two weeks ago… I would not call it a bubble, because stock prices of TFSM, AQNT (a stock I own) and VCLK actually fell because an analyst at Citigroup cut the rating for AQNT… which shows some common sense… but don’t you get a sense that something is off?
A: Well, we certain are happy and euphoric. We will obviously eventually reach a limit. But in the end we feel that we can do a lot with Yahoo!
As a Yahoo! shareholder that just paid a chunk for your business, I sure do hope so.
Interestingly, while everyone got excited about this, the main story of the day - in my humble opinion - was Comcast’s deal with Yahoo! That was a great one. Read more about the details here. Of course, the irony of it all is grand, Yahoo! just got the right to sell ads on Comcast, which means a little bit more of premium ads with a helluva lot of non-premium inventory… having Right Media in-house might make that deal even better.
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