10:34 AM

The Rapid Rise of the West Coast Media Industry...

...and the rapid fall of the East Coast Media

Advertising agencies have become the prime target of the Internet giants in their most recent M&A activities.

It is all part of the roll-up in the industry, as Sramana Mitra describes it well.

It is also a way for GOOG, YHOO, and MSFT to acquire advertising agencies as part of their inevitable move up the value chain.

The goal in these acquisitions is not the technology but the revenues and customers. Why split revenues with advertising agencies? Especially if you know how much advertising content you can publish in the months ahead. And you have the computing platforms to scale the advertising content much more efficiently.

It is much better to acquire those companies because:

  • You recover the share of ad revenues paid to the advertising agencies.
  • You also buy the customers. And those customers are going to be increasing their online advertising spend dramatically as they finish up with advertising contracts elsewhere.

These are easy numbers to crunch for the CFOs and justify the valuations of the deals.

But the Internet giants will face challenges:

  • These are more people based businesses than they are technology based.  They don't scale nearly as well as servers-and-software. Google and the others know how to grow through servers-and-software but not through people.
  • Managing the advertising businesses is going to require skills in managing relations that are nothing like software developer relations. Managing those businesses well and not killing them will be a challenge.
  • Their market valuations might come under pressure if their cost of business rises because of the people-scaling factor and impacts operating margins.

The Rise of the West Coast Media

This is all part of a larger trend as the new media companies of the West Coast grow in value, while the old media companies of the East Coast cutback and shrink.

GOOG, YHOO, EBAY, AMZN, and MSFT are all publishers. They publish pages of content and advertising. Some of it is subscription based, some of it is advertising supported. These are technology-enabled media companies.

Our West Coast media companies are growing by leaps and bounds. The East Coast media companies are shrinking.


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