Microsoft doesn't need an ad agency

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There has a lot of ink spilled in the past few days on Microsoft's announced $6 billion acquisition of aQuantive. The spectrum of opinion ranges from total skepticism to rabid enthusiasm, with no clear consensus anywhere in sight. In this article, I'll try to add a dash of clarity to the discussion, beginning with one of the big questions on everybody's mind: Now that Microsoft owns an ad agency, what is it going to do with it?

What Microsoft got for $6 billion

AQuantive's assets represent three different business groups: its ad agency (Avenue A/Razorfish), a tools division (whose most notable product is Atlas DMT), and a division with an ad-brokering division called DrivePM. For the last financial quarter, Avenue A/Razorfish brought in the majority of the revenue ($83.3 million vs. $49.1 million for the other two groups.)

At first blush, it would seem that Microsoft's main interest would be in Avenue A/Razorfish, because it's an established digital agency with a large client list and several thousand smart people who know digital media inside and out. In my view, however, this interpretation is exactly wrong. Why? Because the last thing that Microsoft needs is an ad agency, even a profitable one.

Microsoft doesn't need an ad agency

Nothing in Microsoft's history indicates that it wants to be in the position of owning an ad agency. The problem it faces, and it's not a small one, is the conflict of interest that occurs when an agency is both a rep and a seller of media. In the ad world, this is the biggest no-no that exists, and it's one that Microsoft will find it impossible to step around.

Microsoft has never historically put itself in this position. For example, Microsoft has never owned a Value Added Reseller, even though that might give it temporary market advantage. Microsoft's whole business model - its "corporate DNA" - is selling tools (whether development tools, productivity tools or other tools) to everybody and anybody.

The value of an ad agency, whose value proposition to clients is being able to put their ad dollars in places where they can do the most good without being beholden to the media owner, is completely negated by such a conflict. Any assurances that aQuantive/Avenue A will be run "at arms length" fall far short of the credibility needed to instill the kind of trust needed to grow and maintain healthy advertiser-agency relationships in the long term.

Microsoft's DNA is tools and developers

While owning an ad agency makes no sense to Microsoft, aQuantive's tools represent something that it can use, extend and embrace, especially Atlas DMT, a widely used ad management tool used by many major ad agencies (and many SEM agencies as well). Integrating (and sometimes killing) tools and tools vendors is part of Microsoft's DNA, and it fully understands the advantage it will gain by being able to exert control over the industry-standard ad management console. Couple this with wide adoption of Silverlight, its next-generation ad production suite, and you have the core components of an end-to-end ad management solution that can interface neatly with Microsoft's other applications and provide the kind of long-term revenue stream that Microsoft craves.

Microsoft can use such an end-to-end platform to simplify and refine the process of creating multichannel digital marketing campaigns, a process that has been clunky and required an armada of incompatible tools. Once the industry has standardized on this toolset, all Microsoft has to do is connect the pipes to the emerging platforms it's really interested in dominating, such as in-game advertising and IPTV. This is where the real money is to be made in the next five years, as dollars from traditional media finally begin to flow into the digital domain. Just as the folks who make computers have to fork over $35 or $40 to Microsoft to equip their boxes with XP or Vista, the folks who make ads will fork out small fees to Redmond whenever someone makes an ad, or perhaps when people interact with such an ad. Like a bank, Microsoft will make pennies on every such transaction: billions of them.

Whither Avenue A/Razorfish?

I am highly doubtful that Microsoft will hang onto Avenue A/Razorfish, because of the conflict of interest that is inherent in such a merger. As I've indicated, Microsoft's interest is in controlling access to the tools required to execute next-generation digital advertising, not in the agency business. But it is also possible that Microsoft will take advantage of the fact that it now owns a stable of very talented people to expose them to its new tool set and effectively turn them into Silverlight evangelists. Being able to mobilize such a group to create cutting-edge, cross-platform commercials would create a critical mass for Microsoft's tools, a requisite for market success. Whether Avenue A/Razorfish's staff can be convinced to lay aside their Macs, Photoshop, and Flash and become adept at creating digital masterpieces in Silverlight is a cultural, not an operational issue, but creating this kind of creative vanguard would be very helpful to Microsoft as it attempts to sell the IPTV solution to brand advertisers in the next few years.

Mergers, especially of this magnitude, always represent a big roll of the dice. According to financial consultant KPMG, 83 percent of mergers fail to enhance shareholder value. While such combinations might make sense from a strategic corporate perspective, the real acid test is whether the new entity can pass value back to its customer base. Microsoft and aQuantive may be able to deliver such value, but there are many hurdles to realizing synergies, and this goes also for Google, WPP, Yahoo and other cash-rich companies seeking to broaden their offerings.

What will not change, however, are the fundamental requirements of a healthy relationship between an advertiser and an agency, which ultimately comes down to a trustful relationship wherein the advertiser can always be confident that the agency acts with the client's best interest at heart. Such relationships depend on the independence of agencies from media owners and will fail should it become apparent that the agency has anything but the client's interest in mind when it makes its decisions. This basic fact - call it the Iron Law of Advertising - dictates that Microsoft, Google and others must never allow competitive industry factors to endanger this essential relationship, which predates them and will succeed them.

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