Failed Deals and Ad Targeting Controversy Drew Attention in ’08

The business of online advertising made headlines in 2008 like never before. News of Microsoft’s bid for Yahoo, Yahoo’s ad deal with Google, and ISP-based ad targeting hit mainstream news outlets, exemplifying a coming of age for the sector. But its increasing relevance to consumers and businesses made it that much more vulnerable to government inspection and the economic downturn.

On February 1, Microsoft set the tone for what would become a year dominated by big moves and speculation. The firm’s stunning $44.6 billion bid for rival Yahoo dwarfed its seemingly enormous $6 billion acquisition of aQuantive the year before. Microsoft knew it needed to do something huge to catch up with Google and become the dominant online ad player it hoped to be, and that something was to try to swallow Yahoo.

Yahoo was caught off guard. The business world was abuzz with prognostications about what the potential acquisition could mean for search marketing — and more broadly — all digital media firms and advertisers. Ten days later, Yahoo told Microsoft the offer “substantially undervalue[d] Yahoo.”

But that was only the beginning. The rumor mill churned with gossip about other potential Yahoo suitors including Time Warner and News Corp. Plus, Yahoo hadn’t said “no” to Microsoft. Yahoo angled for more money, and eventually Microsoft reportedly upped its bid another two dollars per share to $33. Yahoo’s board apparently wanted even more.

Microsoft CEO Steve Ballmer put his foot down in April; he threatened his company would take the case to Yahoo’s shareholders if the Yahoo board hadn’t approved the bid in three weeks. More rumors swirled throughout the spring until June, when the companies officially ended merger discussions. Still, during the acquisition talks and even now, there remains speculation that Microsoft could buy Yahoo’s search business.

Google and Yahoo Stir More Controversy, and Government Intervention
Among the reasons Ballmer gave for the collapse of the merger talks was an unexpected bond between Yahoo and Google. In April, Yahoo announced it would begin a two-week test of Google’s search ads on its own results pages. Microsoft immediately cried foul, contending that the Yahoo-Google search collaboration would result in unfair control of the search ad market.

Mere hours after the Microsoft/Yahoo discussions came to a close in June, Yahoo announced it would expand its deal with Google. Yahoo hoped the agreement would bring in ad revenue through search results the company had not been able to monetize well. But first, the deal would have to pass a formidable barrier: the U.S. Department of Justice. The partners said they would wait up to three and a half months for the DOJ. to analyze the deal’s potential impact on competition in the search ad market.

Members of Congress soon started poking around, too. U.S. Sen. Herb Kohl, a Wisconsin Democrat heading the Senate’s antitrust panel said he and his colleagues would review the deal. U.S. Rep. Joe Barton, a Texas Republican, sent a letter to Yahoo CEO Jerry Yang, noting concerns “not only about the effect of the partnership on the online search advertising market, but also about the protections for Yahoo user data.”

During a July Senate Judiciary Antitrust, Competition Policy and Consumer Rights subcommittee hearing, Senators questioned Yahoo and Google about the partnership, suggesting it could help Google squash the competition and prove harmful to advertisers. And to make matters worse for the partnership, the Association of National Advertisers and the World Association of Newspapers both expressed strong concerns about how a Yahoo-Google link-up would affect their constituencies of advertisers and publishers.

And all along, even European officials questioned the deal’s effect on overseas businesses, despite the fact that the partnership was to be implemented only in search results shown to U.S. and Canadian users. In September, the European Commission said it was conducting a preliminary investigation, looking into competition-related aspects of the relationship.

But it was the U.S. government that brought down the deal. After the partners agreed to delay the ad partnership to accommodate the investigation, a DOJ. antitrust lawsuit threat convinced Google to put a fork in it once and for all. “Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners,” wrote Google SVP, Corporate Development and Chief Legal Officer David Drummond on the firm’s Public Policy Blog in October.

Big Deals Spur Privacy Concerns
But competition concerns were only the half of it. Microsoft’s proposed acquisition of Yahoo, as well as the would-be Google-Yahoo pairing had privacy advocates up in arms. “Should Yahoo! accept Microsoft’s offer, the subcommittee expects to hold hearings to explore the competitive and privacy implications of the deal,” wrote Senator Kohl regarding the Senate Antitrust Subcommittee, after Microsoft bid for Yahoo.

Microsoft’s proposed acquisition “underscores the need for both the [Federal Trade Commission] and the Congress to enact policies that will protect consumer data online,” stated dogged privacy advocate Jeffrey Chester, executive director at the Center for Digital Democracy.

While the DOJ. focused on competition questions surrounding the planned Yahoo/Google search advertising partnership, others raised data security and privacy concerns. Privacy groups including the CDD, in addition to state and federal legislators worried — despite assurances to the contrary — that Yahoo and Google would be able to form a massive database of consumer information that required new safeguards to protect personal identities.

The heat was on the industry’s largest companies, and at the same time, the economy was dragging down ad prices and shrinking overall ad budgets. Although online advertising wasn’t hit as hard as other types, growth slowed quite a bit in ’08. According to the Interactive Advertising Bureau and PricewaterhouseCoopers, the rate of growth between Q3 2007 and Q3 2008 was less than half that of the same period between ’06 and ’07.

ISP Ad Targeting Draws Controversy and Policy Potential
Though both the Microsoft-Yahoo and Google-Yahoo deals never came to fruition, privacy advocates, lawmakers, and regulatory bodies had additional fodder this year in a new online ad industry niche. ISPs in the U.S. and U.K. were in discussions with companies such as NebuAd, Phorm, FrontPorch, and Project Rialto, and some were testing their ad targeting technologies. Essentially, the firms enable ad targeting through behavioral user data collected by ISPs.

In May, NebuAd got a letter from Congress. It had been prompted by a notice ISP Charter Communications sent to its customers, telling them the company planned to track their Web site interaction as part of an opt-out pilot program that would provide them with more relevant advertising.

“[P]rivacy issues and how this venture is consistent with communications privacy laws must be addressed before the company moves forward with this plan,” wrote Democratic Rep. Edward Markey of Massachusetts and Rep. Barton, the ranking Republican member of the House Committee on Energy and Commerce, to Charter President and CEO Neil Smit. The following month, Charter backed away from its ad targeting plans, and another NebuAd test partner ISP, CenturyTel Communications, decided to hold off on implementing the system.

Across the Atlantic, Phorm had begun working with British Telecom, and planned to launch a test of its ad targeting system in the spring. But it would take months for that to happen. Meanwhile, officials in the U.S. and Europe were very interested in the burgeoning business of ISP-based ad targeting.

“If my ISP said to me, ‘We have a proposition: Is it OK if we give everything you do to another company?’ I’d say, ‘Of course it’s not OK…. The answer is no, capital N-O,’ ” said Democratic Senator Byron Dorgan during a Senate Commerce, Science and Transportation Committee hearing in July.

In August Congressmen Barton, Markey, and others were back at it. They sent missives to a slew of ISPs along with AOL, Google, Microsoft, and Yahoo demanding answers to a series of inquiries about their online ad targeting practices. “We are interested in the nature and extent to which you engage in such practices and the impact it could have on consumer privacy,” noted the letters.

The European Commission held a meeting regarding online data collection and usage in June attended by U.K. and European consumer groups, legislative and trade bodies, and online ad industry firms. “Now is the time to strike a balance between effective use of data, and consumers’ privacy,” said European Commissioner for Consumer Protection, Meglena Kuneva. “Trust is the currency of the online world.”

The U.K. government indicated less concern about Phorm’s ISP-based ad-targeting technology, which was finally tested by BT in late September. “After conducting its enquiries with Phorm, the U.K. authorities consider that Phorm’s products are capable of being operated in [a legal manner],” stated the U.K.’s Department for Business, Enterprise and Regulatory Reform. Now, Phorm’s system is set to roll out across BT’s entire network.

But things are far from hunky dory for Phorm and NebuAd. Both firms lost their original CEOs this year, and several ISPs have indicated they have no plans to implement behavioral ad targeting systems.

The rise of ISP-based ad targeting, along with controversial dealings among three of the largest online ad firms in 2008 positioned the industry for continued government intervention next year. The Federal Trade Commission indicated as much in September. “This is a very juicy policy issue in Washington,” said Eileen Harrington, deputy director of the Bureau of Consumer Protection for the FTC at a September IAB event. The longer the debate goes on, she suggested, “the more likely policies are going to develop.”

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