double POSITIVE Marketing Group, Inc.

I was at Barnes and Noble with my daughter Sunday morning when I picked up the latest issue of Wired magazine. I’ll have to admit it was the photo of Jenna Fischer from The Office that grabbed my attention, but it was the article about “radical transparency” that makes it worth opening the magazine. While I had never heard those two words together to describe the idea, transparency is certainly one of the “Web 2.0″ general principles.

The Wired magazine article titled “The See-Through CEO” talks about Redfin, an online real estate brokerage firm, as an example of a company that practices radical transparency in everything it does. In fact, the company’s business model is based on radical transparency. The article explains:

“Redfin was trying to turn the industry upside down by refunding people two-thirds of the commission that real estate agents normally charge. Customers loved the idea… But agents hated it for destroying their fat margins, so they began blacklisting Redfin, refusing to sell houses to anyone who used the service.”

Redfin’s own website explains its revolutionary process like this:

“Redfin pays its agents on customer satisfaction, not commission, so our agents’ interests are always aligned with those of the customer. And Redfin is the only brokerage to offer a 100% customer satisfaction guarantee, even if a transaction is complete. If you’re not happy with the way a deal went down, we won’t get a cent.”

Wow… a money-back guarantee in the real estate industry. What’s not to love?

The company’s CEO began to blog about the dirty little secrets in the real-estate industry. The old-school agents, the article explains, unleashed very critical attacks on the same blog. Redfin lashed back. But customers loved the masochistic behavior, and Redfin’s business began to explode.

Some industries have become transparent thanks to the Internet whether they like it or not. In the automotive industry, for example, I can walk into a showroom with research I’ve done on the Internet and have every tool at my disposal to get the best deal. I know the MSRP and dealer invoice price. I know about any incentives and dealer holdbacks. And I know the price at which the dealership down the street is willing sell me the same car. And being the reasonable person I am, I know that the dealership needs to make a money on the deal. Simply put, I know everything that I need to know to get the best deal, period.

But that is not the case in the mortgage industry. Even with Lending Tree’s “when banks compete you win” model, its hard for consumers to ever compare their options apples-to-apples. Why? Well, I’ve heard it from plenty of loan officers including some who now work for our company — there are just too many ways that a mortgage broker can take advantage of a consumer. Loan fees, discount and origination points, rates, and the yield-spread premium — all can be used to increase margins on a deal. Unlike buying a car, the deal is just too complicated for most consumers to understand. Borrowers may see what’s going on when the documents hit the table, but by then it’s too late (or too gut-wrenching) to walk away from the deal.

Until there is a Web 2.0 business model that brings true transparency to the mortgage industry, consumers will continue to be at a disadvantage. Oh, but it’s going to happen, and the industry will fight it. But like we’ve seen in so many other industries, it’ll be impossible to stop such powerful market forces at work.

Post By
Sean Fenlon

Headlines read…

http://news.google.com/news?hl=en&ned=us&q=doubleclick+google&ie=UTF-8&scoring=d 

• Google to buy DoubleClick for $3.1 billion in cash

• Google Pays Exorbitant $3.1 Billion For a $100 – $150 Million DoubleClick

• Google Buys DoubleClick, Leaves Microsoft Way Behind

• Google-DoubleClick: Get ready for the fallout

• Google’s Biggest Acquisition: DoubleClick, for $3.1 Billion — Almost DOUBLE the YouTube deal

• Ad firm DoubleClick fetches $3.1 billion 

Now let’s do the math beyond the headlines…

 

By my math, the price paid by Google for DoubleClick (after DoubleClick’s cash-balance add-back), is at least 10X the DoubleClick top-line 2006 revenue.  In case you are wondering, that is a BIG multiple for any company with a profitable history or otherwise historically measured on earnings.  While this information is interesting water-cooler talk, the more interesting angles points towards Google’s new philosophical direction(s).  With the $3.1 Billion acquisition of DoubleClick, Google philosophically entered the world of Private Equity more so than the world of display advertising (I’ll address the latter in a moment).

 

Private Equity firms execute deals because the “math” supports the decision.  In Private Equity buyouts, the deal elements such as management team mojo, strategic fit/value, and core values of the acquired company take a back seat to back to the question of “if we pay X, and very few trends change fundamentally, what is the probability of a respectable Y ROI.”  In other words, it’s more science than art.  Any partner (read: scientist) at a Private Equity firm that can consistently drive and deliver deals that return 25% IRR consistently will achieve rock star status.  Very few other measures beyond ultimate ROI vis-à-vis IRR will play a roll.  In this current acquisition scenario, if Google only provided “helpful” value (arms-length introductions, advice, etc.) to DoubleClick, they will easily realize a 25% IRR.  Thus, it is Private-Equity-esque math that makes the Google/DoubleClick deal swallow-able. 

 

Now, there is the other philosophical direction to consider – display advertising.  DoubleClick is in the same space as Google – Internet Advertising and Online Marketing – but they are in completely different sandboxes.  Relatively speaking, display advertising inventory is significantly less valuable than search or even contextual advertising inventory.

 

Many will argue that display advertising is not such a stretch for Google, as companies have run display advertising campaigns through their Adwords accounts (across the display-enabled Adsense publisher network) for years.  However displays are files.  The interpretation of the files are not nearly as literal and not nearly as relevant as true text.  Text is the DNA of Google:

 

• Google cut its teeth as no-revenue text-based search engine.  Search terms are text.

• Google’s first and still primary profit center came from trigger advertisements that were highly-correlated to the search term (as determined by the human-based market).

• Google extended this core offering into “contextual” search, where the static content of a web page was essentially inferred down to a few keywords, and advertisements were displayed based on the inference. 

• Ask any search marketer, however, and you’ll hear how Google’s contextual advertising causes the volume to skyrocket and the quality/conversions to plummet relative to the user initiated search.

• The most important feature regarding conTEXTual advertising, however, is the root term “text.” 

• Text ads based on text terms remains somewhat relevant, even if they’re only being inferred from a static page, as opposed to being implied by a live user.

However, display advertising (despite the sophistication of behavioral targeting, optimization, etc.) is fundamentally different than both contextual advertising and especially user-initiated search.  Google has been instantly catapulted into a world where quantity is king and quality is only a mild indicator, even though the Google roots are quite the opposite.

 

Having said all of that, here’s where we’re all wrong with respect to the Google deal to buy DoubleClick…

 

Google has the luxury of placing five and ten year bets.  If Google is bullish on the DoubleClick acquisition to reap rewards 5-10 years out, none of my words (nor any other non-insider voice) will be of much value in assessing the deal.  However, if the CEO of DoubleClick shorts his stock and buys an NBA team, I believe we can officially declare Bubble 2.0 is upon us. :-)

 

SPF

p.s. in the past, I have been asked if my choice of the name DoublePositive was in any way affected by DoubleClick.  The answer is no.  In the spirit of full-disclosure, the name DoublePositive was more influenced by the term “Double Opt-in” than anything else.   Also, look for follow-ups on “What will Google do with Performics, the Affiliate Network acquired by DoubleClick years ago, and still operating under its own brand” and “How Much of the Google/DoubleClick Deal Have to do with the Microsoft angle”