In early 2008, a media conglomerate with holdings in newspapers, specialized online marketplaces and consumer cable spent $300 MM for a 2 year old online advertising company with a mere $7 MM in sales in 2007. The conglomerate purchased the start-up for its growing presence in vertical advertising, which is projected to be a major growth area for online ad sales. Commentators indicated that the conglomerate purchased the start-up company to acquire technology that would permit it to push niche advertising to its cable and website subscribers.
Several months after the deal closed, Google and Yahoo announced their respective plans to enter the market for delivering niche advertising through alliances with major cable providers. Moreover, AT&T announced that it was continuing with its plans to roll-out internet television throughout the US, with a major aspect of this product to be generation of advertising revenue. These “heavy hitter” competitors will undoubtedly make it more difficult for the conglomerate to achieve quick payback on its $300 MM purchase of the start-up.
If the conglomerate’s management had reviewed the relevant patent filings to acquiring the start-up, they would have seen that Google owns the basic patent in the vertical advertising space, and that it also owns several other apparently significant patents in this area. Yahoo and AT&T also own a number of relevant patents. The large patent investment by major corporations effectively provided a sneak peek into their future plans as announced several months after the close of the deal. While the conglomerate may still have purchased the start-up, one must wonder whether it would have paid a premium of almost 35 times previous year earnings that had been in business only 2 years.
Fast forwarding to 2009, we have yet to see any significant competitive movement in the vertical advertising space, most likely due to the current recession. When the economy improves, it will be interesting to see how Google, Yahoo, Microsoft and AT&T leverage their patent rights in the relevant technology space. Only time will tell whether the media conglomerate’s growth projections for its acquisition will be adversely affected by patents.