Let's look at the Google AdMob acquisition, which is pending approval by regulators. I didn't initially cover this topic because AdMob is primarily a display media platform, not a paid search mobile ad platform, and Google already has that. However, I changed my mind because Google rolled out its own Nexus One Android phone, and it's likely that keyword-targeted text ads may become important in mobile devices in the same way they have become an important part of many search campaigns where advertisers have opted into contextual targeting (not just pure search within AdWords).
Additionally, strategic reasons for the acquisition are tangential to search and haven't necessarily been reported or discussed. So, what the heck, we'll cover them here. Some of the numbers I use are illustrative and hypothetical. However, they aren't outside the realm of possibility and plausibility.
It's far too early to determine all the reasons why Google was willing to offer $750 million for a company with a reported annual revenue that's significantly under $100 million. Most analysts' data I found estimated AdMob's trailing 12 month revenue between $30 million and $60 million. Project those revenues forward into a healthy economy in which mobile catches the marketer's fancy and perhaps one could imagine a forward annual revenue number of $100 million. This puts the acquisition at a high revenue multiple by anyone's accounts: 7.5 times revenue.
AdMob's earnings? Let's imagine the scenario that gives it earnings before interest, taxes, depreciation, and amortization (EBITDA).
AdMob raised $47.2 million over the last few years and has probably burned through a significant chunk of it by now. Perhaps the iPhone and other smartphones were the catalyst bringing the company to cash neutrality.
Remember, AdMob is essentially an ad network for mobile advertising. Ad networks in a non-cluttered environment enjoy profit margins as high as 50 percent. As more competition heats up, these margins tend to fall. Google's AdSense ad network has about a 15 to 20 percent margin by most accounts.
If AdMob's annual revenue is in the $50 million range, then at best it could have made $25 million in gross profit after paying its publishers. With 140 employees (even if many of them are highly paid engineers), it's feasible that the company has some earnings. Even if it does, the EBITDA multiple on the purchase is extremely high. With a payback period (assuming we think of the transaction in cash terms rather than stock), this could take many years.
Google's reasons for wanting the company are strategic. Google apparently believes that the market for mobile advertising is important enough to acquire rather than deploy its talented engineers to build a platform similar to AdMob's. These reasons include:
If you're a brand marketer and willing to experiment with mobile advertising, you have a couple of choices. You can go with display advertising (AdMob, Smaato, Ad Infuse, InMobi, Mojiva, BrandPort, Rapid Mobile, and others) or use paid search within mobile. Google AdWords has allowed marketers to select mobile as one of its ad distribution channels for some time. If you aren't sure if you're on or off of mobile, log into your AdWords account and check your campaign settings.
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Kevin Lee, Didit cofounder and executive chairman, has been an acknowledged search engine marketing expert since 1995. His years of SEM expertise provide the foundation for Didit's proprietary Maestro search campaign technology. The company's unparalleled results, custom strategies, and client growth have earned it recognition not only among marketers but also as part of the 2007 Inc 500 (No. 137) as well as three-time Deloitte's Fast 500 placement. Kevin's latest book, "Search Engine Advertising" has been widely praised.
Industry leadership includes being a founding board member of SEMPO and its first elected chairman. "The Wall St. Journal," "BusinessWeek," "The New York Times," Bloomberg, CNET, "USA Today," "San Jose Mercury News," and other press quote Kevin regularly. Kevin lectures at leading industry conferences, plus New York, Columbia, Fordham, and Pace universities. Kevin earned his MBA from the Yale School of Management in 1992 and lives in Manhattan with his wife, a New York psychologist and children.
December 12, 2013
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