eROI Days Email Agency

Publicis just got a little bigger as it outbid the other agency conglomerates to take Razorfish off Microsoft’s hands for a mere $530 million.  I haven’t had a chance to ask any longtime Razorfish employees how they feel about being traded as frequently as a baseball card, but I can’t imagine that it fosters a lot of loyalty to the company. Microsoft bought Razorfish’s parent company, aQuantive, for $6 billion or 10x revenue just 2 years ago, and is now shedding the business units it doesn’t want (Razorfish) for 1.4x revenue, which says a lot about software company valuations vs. agency valuations.

On reflection, I couldn’t be happier with the type of independent culture Portland agencies have.  Portland’s largest agency, Wieden + Kennedy, is the world’s largest completely independent agency and was named Global Agency of the Year last year – any coincidence that they best creative work comes from an independent agency?

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Last Friday, Microsoft agreed to purchase online ad firm aQuantive for $6 billion which is an 85% premium over its stock price. As an entrepreneur and founder of a company (eROI) that has a similar business model to aQuantive, I’m floored (and highly encouraged) that Microsoft paid so much money for this interactive agency that has some of its own software tools as well.

[Huge Disclaimer: I'm not looking to get investment or sell my company for decades - this blog post is simply out of observation].

OK, let’s look at the metrics of aQuantive and see what kind of multiples Microsoft paid for them. Based on annualizing Q1′07 revenue, aQuantive will do roughly $600 million in revenue this year, so Microsoft paid a 10x multiplier of revenue. Additionally, Microsoft paid a nearly 50x multiplier on EBITDA.

The fascinating thing from my entrepreneurial training is that one of the powerful companies in the world, Microsoft, finds value in an online creative agency – far more value than 1x revenue multiplier that most agencies are used to getting.

OR, the other scenario would say that Microsoft discounted the agency revenue / EBITDA (roughly 60% for aQuantive) and paid an astronomical price for the Atlas and DrivePM software pieces of the aQuantive business.

Despite the high price, Microsoft needs desperate help to compete with Google in the online ad software (and agency) world. This deal will only be successful if Microsoft lets aQuantive retain most of its entrepreneurial culture instead of assimilating it into the Microsoft machine.

In my last blog posting, I mentioned Microsoft’s deliveribility guy Brian Holdsworth but ran out of time before jotting down my notes about his talk, so here they are:

MS Outlook and Windows LiveMail (formerly Hotmail) represent 600 million people / users in the world. Microsoft expects this to climb to 1 billion in the next few years.

Big change in Outlook 2007: it automatically postmarks emails to email addresses NOT in your address book. It delays the send several minutes per email address not in your address book. This will significantly reduce the amount of spam generated by botnets and zombies that send email through unprotected PCs (which is responsible for 80% of the increase in spam in the past year).

Spammer Trends and Tactics:
Microsoft has brought 376 successful lawsuits against spammers in the past 3 years. Part of the lawsuit process requires the spammer to come into Microsoft’s office and explain why they spammed. Recently, a 17 year-old came into to talk to the Microsoft deliverability team – he started when he was 9 years old and was now sending 25 million emails per day and made $300 per day on affiliate revenue (which breaks down to roughly $1 per 100,000 emails – not great ROI, but pretty good when considering there are no costs other than his eventual fine and jail time).

Of the 4 billion emails per day that Hotmail processes, 90% is spam. Much of this is image spam, and spam generated from botnets and zombies.

Next version of Hotmail is Windows LiveMail which is very similar to Outlook.

An Unsubscribe link is built into every email in Windows LiveMail in the Return Header.

Microsoft Goals:
1. Reduce Spam in Inbox
2. Improve deliverability for legit senders:
a. volume based reputation
b. Sender ID + past reputation (Outlook postmark)
c. Unsubscribe built into Windows LiveMail

Last note is the phenomenon of communication barriers within Microsoft. The Outlook team makes major changes/shifts every 3 years, and for Outlook 2007, they are moving to a content rendering engine built in MS Word instead of the natural choice of Internet Explorer. Microsoft’s deliverability found out about this at the same time the general public saw the press release a couple weeks ago – doesn’t know why this decision was made by the Outlook team. Maybe the next ReturnPath event can address this topic in more detail…

5. Most successful companies will become media companies. Microsoft became a media company when it began its blogging program a couple years ago. The lawyers lost and marketers won – revealing the inside scoop at Microsoft was virtually the only thing that has healed the company’s battered reputation. More and more companies are starting their own blogs, helping them to become more relevant and newsworthy to a greater audience within their niche. Blogging has essentially forced companies to step into their customers’ shoes and provide them with more industry knowledge and news, rather than simply ramming products down their throats.

In watching the past few weeks since Microsoft rolled out SenderID, it was sooo funny to me that in about 20 minutes, every piece of spam in my inbox was SenderID okay. And every legitimate email marketer, like CNET, MLB.com, J Crew, etc is still showing up as an envelope with a “?”. Scary huh. No not the fact that spammers had it down in minutes, but the fact that there is a scary “?”. Makes it so forboding.

So does this whole SenderID make a change in the email I get, nope. But let’s give it some time.

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