Economics of the Web and network effect

Does it take years for the success of Search Sovereign Google’s business model to sink in…? That too for savvy gorillas like Microsoft…well the late blooming came with a price.

Microsoft Corp, close on the heels of Google's acquisition of DoubleClick has purchased online advertising company aQuantive, for about $6 billion in cash, and is paying a significant premium to to do so.

The move comes amid a torrent of acquisitions in the advertising industry, now in the midst of profound change. Players are engaged in frantic land-grab, as traditional advertising dwindles and advertisers move online.

Microsoft, like Google, Yahoo and others, has realized economics on the Web are subject to “the network effect”: You have to be the biggest player on the block — the bigger the network of advertisers you have, the better you can serve publishers, the more business you will get.

Reflecting the high stakes at play, Microsoft will pay $66.50 per share for aQuantive, an 85 whopping percent premium to aQuantive’s Thursday price of $35.87. It comes after advertising giant WPP moved yesterday to buy 24/7 Real Media, and Google’s recent purchase of online advertising company DoubleClick, and Yahoo’s announced acquisition of Right Media Inc. for $680 million.

The purchase of AQuantive increases the likelihood that the software maker will also buy Yahoo because AQuantive doesn't give Microsoft additional advertisers it needs to compete against Google, Goldman Sachs Group Inc.

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What’s left now…?

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