Big expectations for aQuantive: In this 2007 file photo, then-Microsoft executive Kevin Johnson, left, talks with aQuantive co-founder Nick Hanauer, center, and former aQuantive CEO Brian McAndrews. Photo by Scott Eklund, courtesy SeattlePI.com.

It was supposed to change everything for Microsoft, creating a viable rival to Google and establishing the Redmond company as a force in online advertising.

But five years after Microsoft purchased Seattle-based aQuantive for $6.3 billion in cash — at the time the largest acquisition in the software giant’s history — little is left to show for it. Microsoft CEO Steve Ballmer’s initial promises to use aQuantive to “help maximize the digital advertising opportunity for all” haven’t panned out.

Last week Microsoft took a whopping $6.2 billion writedown, largely tied to aQuantive. Microsoft bluntly said that “the acquisition did not accelerate growth to the degree anticipated.”

But what really went wrong? Why was one of Seattle’s rising stars, a 2,600-person company with rapidly growing profits and revenue, unable to keep thriving under the umbrella of the world’s largest software company? And has Microsoft learned enough to avoid making similar mistakes with its $8.5 billion Skype acquisition or $1.2 billion Yammer acquisition?

In a series of interviews with GeekWire, former aQuantive executives and employees discussed why Microsoft’s bet didn’t work. They blame the degradation of aQuantive inside Microsoft on several factors:

  • Microsoft’s insistence on doubling down on search rather than display advertising.
  • An inability to let aQuantive operate as a fast-moving standalone unit.
  • A long, drawn-out brain drain of aQuantive’s top minds.
  • Too many disparate aQuantive businesses to integrate.

But most of all, the former aQuantive staffers say it was simply a culture clash. It became increasingly difficult to combine the engineering-centric culture of Microsoft with the advertising-centric mindset of aQuantive.

“The task of evangelizing the business of advertising — not software — was akin to asking Willie Wonka to grow vegetables,” says one former aQuantive manager who has since left Microsoft. “No amount of explanation about ad revenue versus software revenue or Google’s plan to make software free could refocus a Windows-obsessed culture.  As far as online advertising was concerned, the more important and familiar task was building a better search algorithm.  Period.”

Many of the ex-aQuantive staffers we spoke to cited similar problems. At Microsoft, Windows dominated. And the attempts to dive into online advertising centered around search, largely around the revamped Bing search engine which launched in 2009.

That begs the obvious question: Why did Microsoft pay $6.3 billion for a leader in display advertising if it simply planned to turn the ship toward search?

That still baffles many ex-aQuantive staffers.

“Absolutely, it could have played out very differently. Now, again, if you are Microsoft you could say: ‘Well, we decided to focus on search, we are glad we did that.’ But maybe they shouldn’t have made the acquisition. Maybe they should have made the strategic decision about search earlier, and not acquired a $6 billion display company,” says another former aQuantive executive. “Clearly it could have played out differently if they had chosen to invest in display, invest in Atlas, invest in Drive and try to build those businesses, and then acknowledge that it is a different type of business, run it differently.”

Some of those technologies, namely Atlas and Drive PM, still can be found under the hood at Microsoft’s advertising unit.

But make no mistake, they are shells of what they were. aQuantive’s Atlas unit, which at the time of the sale was a $160 million business growing 40 percent annually, now reportedly has a fraction of that amount of revenue.

For the most part, former executives say that Microsoft let aQuantive’s core technologies languish, pumping resources into search in an effort to catch up to Google, which was making its own inroads in display through the integration of DoubleClick.

It was a strategic bet, one whose outcome has not yet been determined. According to a report out this week by comScore, Bing’s search share now stands at 15.6 percent, up slightly but not a serious dent in Google’s well-established lead.

That critical strategic bet still angers some former aQuantive employees. Says one:

“It became apparent to aQuantive insiders very quickly that the combination was going to be an unmitigated disaster and waste of money for Microsoft. From the initial decision to put aQuantive and its management team under the helm of the absolute wrong Microsoft leadership — who had no knowledge or interest or skills in it — to the near-immediate sign that Microsoft did not know what to do with a strong and successful organization like aQuantive, to the very well-known history of Microsoft’s inability, for years, to integrate its own online ad services and technology initiatives internally, this acquisition had snafu written on its face from day one.”

That same employee said that Microsoft’s motivation for buying aQuantive was more defensive than offensive. In other words, Microsoft bought the company, and paid a big premium, in order to fend off other suitors. The bidding for aQuantive was competitive, one of the reasons that the value increased to $6.3 billion, more than double what Google paid for DoubleClick about a month earlier.

In other words, the defensive nature of the acquisition doomed it from the beginning. Microsoft wasn’t sure what to do with the assets once they got them, and then a strategic decision to invest heavily in search shortly thereafter sealed aQuantive’s fate.

“Whoever you are, if that is your key motivation then you’re setting yourself up for a huge challenge when you realize that you suddenly have all these great people who are the best in their field, and a business that you really have no interest in building or knowledge how to integrate. The result, sure enough, was that the aQuantive organization, and value, began getting dismantled: The best of the best of the team were sent off to different business units who were looking for smart people. The core aQuantive business of making money and contribution margin dwindled quickly.”

He added that it was a shame to see much of aQuantive’s hard work over 10 years basically flushed down the drain.

Microsoft’s Steve Ballmer and Skype’s Tony Bates. Have lessons been learned from the failed integration of aQuantive?

“If it were any other company, Steve Ballmer might have been fired for the loss which he knew, or should have known, it would be,” he said.

In a statement sent to GeekWire, Microsoft said that aQuantive’s tools remain an important part of the company.

“While the business did not perform relative to our projections, we have retained a number of highly talented employees from the acquisition and the deal continues to provide tools for our online advertising efforts,” the statement said. “It is likely that our standing in the online advertising industry would not be as strong today were it not for the people and technology we acquired from aQuantive.”

Are there lessons to be learned from the failed aQuantive acquisition?

Many of the ex-aQuantive employees we interviewed said that Microsoft’s culture makes it hard to integrate online services, which require more frequent product releases and constant contact with customers. The long product cycles of Windows and near monopoly of the product create a much different creature.

But at least one former executive noted that the company appears to be taking more of a hands-off approach when it comes to Skype, the communications giant that Microsoft bought for $8.5 billion last year. Skype employees even received badges with the Skype logo, which Nick Wingfield of The New York Times earlier this year said was part of a symbolic move to give the unit a “longer leash.” (It’s too early to say whether that will occur with Yammer, the online collaboration service that Microsoft agreed to purchase for $1.2 billion last month).

By contrast, Amazon.com has had some success buying companies with very different corporate cultures, successfully integrating them by allowing them to do their own thing. The best example of that is Zappos, the online shoe retailer whose open culture runs counter to Amazon.com’s stiff and sealed-off approach.

The differences between Microsoft and Amazon in this regard are not lost on one former aQuantive executive who suggested that Microsoft’s meddling and need for control actually gets in the way.

“I think they end up damaging themselves,” he said. “If you look at Amazon’s model, they have a model that says: ‘We are going to be cannibalized, but let’s do it ourselves.’ Microsoft has a model that seems to say: ‘Let’s hope we don’t get cannibalized, and if someone else does it, then we will copy them, and we will try to crush them.'”

Granting that level of autonomy, let alone resources, did not happen with aQuantive. That’s one of the reasons why some think the only way for Microsoft to succeed in online advertising would be to split off the Online Services Division from the rest of the company, a suggestion that GeekWire’s Todd Bishop pondered in a post this week titled: “How to break up Microsoft: Maybe it’s not such a crazy idea.”

Nonetheless, the integration of Skype could very well be a sign that Microsoft learned a very expensive lesson on aQuantive. Whether that’s the case or not, ex-aQuantive staffers still can’t believe that a business they helped shape and build into an online advertising powerhouse is essentially no more.

“aQuantive was not a smoke-and-mirrors business that oversold its abilities.  While I can’t say whether it was worth $6 billion at the time, it could’ve breathed new life into Microsoft had they allowed it to,” one former manager said.  “It would’ve easily paid for itself and demonstrated that Microsoft was a serious contender in the ad biz.  Egos and culture clashes aside, Microsoft was generally disinterested in the advertising business, despite lots of industry lip service.  Many of us spent over a decade building a company with a youthful, smart, relatively ego-free culture that could not be stopped.  We were all sad to see it end the way it did.”

GeekWire’s Todd Bishop contributed to this report. Follow us on Twitter @GeekWire

Comments

  • guest

    “If it were any other company, Steve Ballmer might have been fired for the loss which he knew, or should have known, it would be,” he said.

    Might? There’s little doubt that any other CEO would have been fired for a disaster of this magnitude. A SIX BILLION dollar write off. Wiping out an ENTIRE quarter of earnings and putting the company in a negative earnings position year over year. And that’s net of the $530 million they got for selling Razorfish. Otherwise it would have been even more. But this plus numerous other expensive disasters and misjudgments still hasn’t led to his removal. It’s clear the MS’s board is unprepared to fire Ballmer regardless of how many mistakes he makes, how much MS’s growth, relevance, and competitiveness suffers, or how far its market cap falls. Unless shareholders intervene, MS is on a one-way track to becoming a footnote in computing history.

  • Thomas R.

    Great write-up. Too bad other tech blogs and certain news organizations don’t do more pieces like this. Journalism is becoming a lost art. Kudos for actually interviewing more than one person!

    • Paul_Owen

      Ditto. Thanks, John.

    • http://www.christopherbudd.com Christopher Budd

      Add me to the list of people saying thank you for this.

      Like I said about Todd’s story yesterday (http://www.geekwire.com/2012/breaking-microsoft-not-crazy-idea/#comment-584559904) it’s a well-researched and thought-out piece.

      Most importantly it raises questions and provokes thought about something that really needs thought and discussion.

  • c

    Good article, too bad it went down the way it did. Big egos at MSFT never gave it a chance.

  • guest

    The photo tells the story. Hanauer and McAndrews are laughing and can’t believe MSFT just bought them for $6B CASH. Kevin Johnson is looking at them, kinda wondering why they are laughing so hard.

  • Guest

    Great and fascinating story.

    What’s described here mirrors something I’ve said about another type of acquisition: talent.
    Microsoft is very good at going out and getting some great talent. But once it has them, they often just don’t know what to do with them. They languish, get frustrated, and eventually disappear.
    Sounds like much the same here.
    Microsoft is good at acquiring top notch things. But poor at actually using them once they have them.

  • Aaron Linkowski

    Geekwire disappoints in its intention to be a gossip column
    more than reporting tech business.

    This article is another example of hearsay from “Ex”
    employees and malcontents.

    A good business article on why the aQuantive acquisition was
    written off would cover the following:

    In 2007, advertising revenue was considered a strategic
    threat to traditional software license sales. Give the software application
    away and generate the revenue instead through advertising.

    By 2012, the business of ad serving has collapsed:

    Ad serving has become completely commoditized, the marginal
    cost of serving a banner ad has gone to zero.

    In 1998, a banner ad earned $25 per thousand impressions,
    today the revenue is less than $10 per thousand.

    Microsoft is not alone:

    ValueClick has lost
    half its value since 2007.

    Google spent $3+B for DoubleClick but has seen its revenue
    per click continue to fall and is faced with the possibility of a market where
    banner ads are free. Google will be the next to take a write down.

    Giving away, high volume display ads is a viable strategy
    for Microsoft going forward. Writing
    down aQuantive may be a first step in this new strategy to compete with Google.

    In summary, the real business story today is that the tables are completely turned.

    In 2007, Google was going to remove Microsoft’s ability to
    earn software license revenue by giving away software and generating revenue
    with ads instead.

    Today, Microsoft can remove one of Google’s main revenue
    generators in providing banner ads for free and push the market to zero.

    And Microsoft continues to generate record revenue by
    directly charging users of their software applications.

    • Guest

      I’d sure be curious what data is driving this point:

      Giving away, high volume display ads is a viable strategy
      for Microsoft going forward. Writing down aQuantive may be a first step in this new strategy to compete with Google. [end]

      I’m not a numbers person so I can’t speak to the numbers you put up. But I can say that Microsoft using Windows and Office money to try and extinguish another company’s business model bears SO many similarities to what they did to Netscape with IE that I think even the barest hint of that would bring down the full wrath of anti-trust on the US and European sides of the pond faster than you can say “repeat offender”.

      The other problem with this theory is by all accounts, there IS no Microsoft Advertising unit left. Between brain-drain and today’s layoffs (they let go their chief evangelist…doesn’t bode well for drumming up business) the sense I have is that the company formerly known as aQuantive is now a dried husk of itself.

      • guest

        Actually it bears little similarity to that situation. But nice troll attempt. Well, not really.

    • T

      This is also “hearsay,” as a former aQuantive employee, but I’ve heard from the team that worked on Atlas ad serving (a system that served 250,000 ads/second and was down to a couple of developers after the acquisition) that the Atlas system serves ads for 1/10th the unit cost to the company of the Microsoft-developed equivalent solution. Especially if they’re planning on giving it away, why hasn’t Microsoft invested in developing and expanding the use of the most efficient technology?

      Hint: “not invented here” and politics.

  • BrentR

    Great post, John.

  • Pete Rock

    Brian McAndrews doomed the venture with his ill-advised email consisting of a compilation of complaints about Vista and Office from 15 of his friends that he sent to MSFT-All. Regardless of the validity of the complaints its not the way you start a new gig.

  • guest

    Nadella: “You know, we definitely had an organic build strategy both
    on the search and ad side, and that’s something that we are going to definitely
    keep at. But if you really think about the aQuantive deal, of all the deals we
    could have done, this is perhaps one of those things which is most complementary
    in terms of the assets. If you look at the aQuantive footprint, they have
    world-class tools when it comes to advertisers and publishers. That’s an area
    that we need to expand into, and so therefore, bringing those tools and their
    capabilities along with what we have, we just felt was the best way for us to be
    able to serve our advertisers in a good way and in a rapid fashion. … “

    June 2007, as captured by some reporter named Todd Bishop ;-).

    Good thing Nadella didn’t go to even larger areas of responsibility at MS. Oh wait…

  • insider

    1. aQuantive was a successful small cap stock company. The tactics and strategies used by a small cap company simply didn’t translate to Microsoft, where businesses have to be in the $1B revenue range to really matter. Small cap strategy and thinking took the whole Microsoft Advertising group over when Brian McAndrews (who’s super smart and talented) was put in charge rather than a seasoned MSFT executive. Not because Brian’s not smart or capable, rather because it took him too long to acclimatize himself to MSFT imperatives. The simple fact is that none of aQuantive’s strategic imperatives translated to Microsoft. The value of the deal to MSFT was the customers, and applying those customer relationships to broader strategies that existed within Microsoft at the time. But the acquisition was effectively turned into a ‘reverse’ acquisition with the AQNT folks getting put in charge of online advertising, and then…

    2. aQuantive’s culture was business driven, where business people told engineers what to build, and engineers figured out how to build it. Microsoft’s culture is engineering led, where business people influence engineers and the engineers get final say. This was a bitter pill for aQuantive execs, and led to years of infighting rather than running toward success together.

    3. Microsoft’s ‘fast follower’ culture screwed up, thinking they could fast follow Google, who operates much faster, and thinking they could leverage Yahoo to grow search and ad revenue faster. Meanwhile squandering their massive display business and the ability leverage the aQuantive customer base. This blame lays squarely at Ballmer’s feet. The decision to focus on search and not display was a mistake.

    • Ex-aQuanti-Softie

      On point 1, I heard the $1B argument a lot during my time at Microsoft, granted Microsoft does have the history to back that up. However, that was often used as an excuse to justify huge waste in product development and operations. So many BS projects with no clear customer value, and so little care factor for taking care of our existing customers. In online services some of these decisions mean huge capital expenditures, if small-company strategy means caring about profitability then I guess I’d make that mistake myself.

      On point 2, much of the bitter infighting was there before aQuantive arrived.
      I think the bitter pill had more to do with feeling like the decisions we were making as a company didn’t make sense. I was on the engineering side and our leadership was making some clearly bone-headed decisions, but again I had a tough time hurting customers of profitable services for the sake of some future $1 billion business. Prior to the acquisition, aQuantive tended to go after good ideas regardless of whether they originated in the business group or the engineering group I don’t recall a lot of ego getting in the way.

      • MSAD

        Insider is right.

        The problem is that Atlas doesn’t scale revenue-wise as an ad serving business (price decreases over time to almost zero), it only scales if you can leverage it to get those advertisers or agencies to spend money on other services that have higher revenue and margins. There were lots of plans for this, but they constantly were scuttled because aQuantive folks thought that Atlas was valuable on its own merits, which to MSFT it wasn’t. Plenty of blame to go around frankly – but this could have been great.
        aQuantive ran after good ideas very slowly and organically – DrivePM should have been 5-10x bigger than it was at acquisition based on competitor growth during the same time (Blue Lithium, others). That was because they grew it slowly to maintain margins and keep costs in line. That works great at a small cap, but MSFT needed to bust major moves in the wake of the
        aQuantive acquisition – instead we spent years not working well together and blocking each other from doing anything.

        Look at AdECN – the technology was ready to go into pilot or beta for almost a year and nobody on the business team would free up the needed ad inventory to run a pilot because they were so worried about protecting revenue (on remnant ad inventory!) and didn’t believe in that strategy – so they blocked it instead of running hard. Just one of many examples.

        Like I said – plenty of blame to pass around, but there seems to be a point of view that Microsoft didn’t have any ideas and bought aQuantive for no reason. There was a cohesive and clear strategy – but it didn’t make sense to the incoming people who wanted Drive PM to be the focus.

        This was a classic example of big acquisitions with conflicting cultures clashing to the point where they don’t work. It looks like MSFT figured some things out with Skype – seems to be going much better. Either you keep the acquisition at arms length and let it operate somewhat independently, or you are ruthless at driving synergy and integration to the point of making fast decisions and letting people who are in the way go. The problem was that neither path was followed, and the whole APS group just wallowed.

  • Fred Totts

    How do you squander an acquisition when the total market declines significantly? So Microsoft failed to have the foresight to see banner ad revenue falling over the last 5 years ? Do you look at banner ads, let along click on them?
    With apologies to the ex- aQuantive employees, serving banner ads does not require the best computer science or business minds. So calling the acquisition a failure due to brain drain?
    And yes, seeing the revenue for banner ads declining, Microsoft was smart to put more focus on search.
    And the system is still in place, any corporation can place their banner ad on the internet through Microsoft.
    The real news on the write down is that now Microsoft is not constrained to show any return on capital on this acquisition. They now can provide banner ads for free or near free without balance sheet constraints.
    While Geekwire saw this as another opportunity to criticize Microsoft, I am sure Google is not gloating but instead is feeling strained on knowing that now Microsoft may hasten the revenue decline in their banner ad business. That’s where it is going anyway, with or without Microsoft’s aQuantive write-down.
    Geekwire should try to understand and report the business case and go beyond the petty, “Microsoft fails again” story. But perhaps interviewing people that actually understand the banner ad business is not as easy as connecting with a few ex-employees that obviously don’t.

  • Jack Walsh

    Google’s display ad revenue from Youtube, Adsense and Doubleclick was $2.5B in 2007. In 2011 it was $1.1B, a drop of over 50%. The biggest concern on Wall Street in Facebook’s IPO was the decling revenue per impression in display ads and their dependence on display ads as their main revenue source. In short, the display ad business is declining. Why does this article not inform on this as the main reason for the aQuantivje write down? Why can’t the ex aQuantive executives admit their business has no pricing power today. They would be a declining business today without having ever been acquired by Microsoft or anyone else.

    • atmdt

      No one argues that the eCPM for display hasn’t declined overall, but calling a banner ad a commodity is exactly why MSFT doesn’t get the ad business. They focus on that aspect alone. The value add isn’t just the serving of the ad, but it is the reporting, experimenting, sales, and a myriad of other services, etc., etc. that provide differentiation. Fact – Google’s display revenue has steadily increased over the past 5 years while MSFT’s has steadily decreased, even with all of the advantages of the aQuantive assets. Even Yahoo did better in display year over year. I think that makes the point of the article. MSFT has no idea how to make money in display. Further, you assume that aQuantive, in the last 5 years, wouldn’t have been able to adapt to the changing ecosystem. They survived the .com crash and grew year over year. Yeah, some execs and about 2,600 other people might have a bit of a chip on thier shoulders. Can you blame them?

      • Jack Walsh

        You are wrong. Google’s banner ad revenue has decreased over
        last 5 years. I know as I am an analyst
        that covers Google. This is one of the reasons Google’s stock has been stuck in
        the $500 trading range for the same last 5 years. And this is after Google put
        banner ads on YouTube !

        Bottom line – aQuantive’s business model broke. Blaming
        Microsoft is just immature or ignorant by the ex-aQuantive execs.

        And if left independent- what would aQuantive adapt to? Paid
        search? Oh wait, that’s exactly what Microsoft did with their increased
        investment with Bing.

  • remyngtin

    They laugh , and shareholders suffer .
    Ballmer has to go — his leadership has been a complete failure since day 1

  • Mike Lewis

    Terrific story, John.

  • Radu

    As an engineer who worked at aQuantive through the
    acquisition, I’m not going to talk about the wisdom of the strategic decision
    to make a major push into (the declining business of?) display advertising –
    b.t.w., although the display ads business was the crown jewel, aQuantive had
    several other digital advertising businesses. Acquiring aQuantive might have
    been the right thing to do (price considerations not withstanding), considering
    the consolidation that was going on in digital advertising at the time.
    Microsoft’s inability to extract much value from the acquisition is a different
    story.

    The article and other commenters point to the cultural clash
    between Microsoft’s engineering-driven culture and aQuantive’s
    advertising-centric one. It is true aQuantive wasn’t selling software licenses,
    but it was making a good chunk of money managing online advertising campaigns
    and such. However, aQuantive had a wonderful engineering culture that Microsoft
    failed to understand, appreciate, leverage, and maybe even learn from. Building
    and running online services is totally different from developing shrink-wrapped
    software. At aQuantive, engineers were told by the business owners what needed
    to be done, what the market wanted, but from that point on they had a lot of
    leverage in choosing how to get the work done, what tools to use, or what release
    timeline to adopt, so that it makes sense. That changed completely following
    the acquisition and “integration”. On the other side of the pond, at
    Microsoft do engineers call the shots? Really? Also, with few exceptions, I
    strongly believe it would be a big mistake to let engineers make business
    decisions.

    Working at aQuantive as an engineer was fun, exciting,
    empowering. As a result, employee and team productivity was pretty good. Some
    teams used to release new features and/or improvements every 4-6 weeks, feeling
    proud of their agility and release cadence. Thus, it was hard to understand why
    their software releases were later pegged to some major annual milestones of
    some mega-teams in AdCenter they had little in common with. It stymied the
    desire to iterate fast and get new features in the hands of the customer
    a.s.a.p. and led to slowdown. People who used to be willing to take risks and
    push the envelope quickly learned that the key to a lucrative career at
    Microsoft was not to make mistakes and not to upset their new corporate
    masters. Staying the course and not making waves became the new agile.

    Some good (well, maybe some were not so good) people were
    let go during several rounds of restructurings and reorgs. Some left on their
    own will, as the new state of affairs was not well aligned with their own modus
    operandi. The ones who stayed had to choose between being bold and following their
    engineering instincts on one hand, and doing whatever was necessary for them to
    have a long and prosperous employment. Multiple reorgs and un-reorgs and
    re-reorgs introduced a lot of uncertainty and led to risk aversion. Some of the
    old aQuantive products were shut down. Some still exist today, but they’ve been
    staying afloat like sail-less, oar-less, rudder-less boats on the Pacific. And
    maybe some ended up being put to good use and making money to Microsoft, even
    if not to the extent of the 2007 midsummer night’s dream.

    Don’t
    get me wrong. Microsoft is still and will remain a great software company, one
    of the best there’s ever been. Even in the unlikely case it makes a capital
    mistake and ends up falling into oblivion over the next 10 years. Many of today’s
    Microsoft’s detractors are probably making a decent living working in the
    Microsoft ecosystem and running in its
    wake. Many of today’s local startups are/were built with the cash and
    the engineering and business knowledge accumulated while at Microsoft.
    Microsoft still does lots of things right. It is just that acquiring and
    integrating aQuantive, or building a successful online services business for
    that matter, has not been one of them.

  • Gail

    Thanks, John. Someone finally told the truth.

  • WinDroid7BookProPad4G

    I survived the Microsoft acquisition, and all I got was this lousy t-shirt.

    If it ain’t broke, don’t “fix” it. In this case, Microsoft “fixed” it til it was broke.

  • Oplease

    What a waste. Not the Microsoft purchase, but all these “young, smart people” dedicating their lives to…online advertising. Wow. Way to make a difference. You get people to click on ads and buy crap.

  • Maddy

    Great write up reallly!!!

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