Acquiring SEM Firms Still Risky

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Acquiring SEM Firms Still Risky

By: Andrew Goodman
2007-01-25

Gord Hotchkiss argues that SEM firms aren't getting acquired for large sums mainly because they're too tactical.

Link: Gord Hotchkiss argues

Gord also argues that SEM firms don't have skills that help them work on segmenting and customer profiling. I tend to think that the picture is more complex. Or maybe, it's actually simpler. Either way, Gord's assessment of current reality is correct, but his analysis is wrong.

Certainly, the number of firms of any stripe who understand customer profiling is painfully small. There aren't enough of them to go around, and they're not necessarily directly into search (Future Now is a great example).

Let's start by assuming that acquisition binges of service provider firms are anomalies in the first place, and they tend to be just that - anomalies. Much of the timing depends on the sentiment (and stories) emanating from Wall Street in an effort to underwrite certain "rollup" strategies. Industries dominated by small service provider firms, be they in accounting, law, funeral homes, medical services, or web hosting, have from time to time undergone waves of acquisition.

You can't predict financial fads. First, web firms were supposedly struggling. Then, we heard that many online firms would be blocked from exit strategies due to the cooling off of the IPO market. The next thing you know, several providers got acquired by private equity outfits.

True, a big law firm that serves big corporate clients almost never acquires a small firm that has some specialty they'd like to add. And that's the closest analogy with the notion of, say, the world's largest ad agency acquiring my very small SEM agency. The law firm just hires new associates or recruits partners with different skill sets. Is that because the small firm is "too tactical"? Or just too narrow/small to have the marketplace leverage to *force* a buyout? If the little guy starts actually taking the big guy's customers, that's when the big guy takes notice.

So that leaves us a little closer to the answer: if ad agencies are the likely acquirers in the scenario where the target client is mostly larger enterprises, the only leverage a boutique agency has is either in their client list and growing cachet in their own right, or some expertise that the agency will take too long to develop in-house.

One assumes some combination of both was responsible for iProspect getting acquired for something like $50 million. iProspect is known in the industry for its success in attracting large clients.

I happen to think search marketing is a fine training ground for the strategic mind. Of course, no small consulting firm is given the keys to the entire marketing strategy for a large client, but discounting for size, the influence of the search marketer is impressive. Look at all the data clients already let search marketers work with! While expensive, ponderous segmentation and market research exercises are not the typical MO of the searchie, that's often because these don't translate very well to the particular campaigns they're asked to work on.

(It's also the case that testing user response to offers, through for example multivariate landing-page testing, is something the big firms generally haven't allowed their search firms to work on, yet. But it's certainly something search marketers are uniquely skilled to do. In paid search, we learned "direct marketing analysis on steroids," not from any book, but from the ground up. Now we're busy writing the book.)

One large financial institution we worked with kept reminding us that the supposed profile of the target customer was something ridiculously narrow, like a male between 30 and 40 who (we needed reminding several times) had an affinity for golf. Tactical points can't be ignored in strategic navel-gazing: you'll do a terrible job of getting people searching for golf words to sign up for a financial services application using an online form. Golf words won't do it. Financial words will. Customer profiling? I think it's useful, but let's not get too cute.

Can we be honest? The golf obsession in a division that should have been all about figuring out how to expand customer acquisition in a particular niche at an efficient cost per, was a handy way of justifying expensive golf tournament sponsorships, executive junkets and perks, and lavish TV spots that made much of the affinity between a ball circling a plastic cup and the decision to invest with this bank. As if a 42-year-old female who prefers skiing and bocce is not also a target customer. What search forces us to do is to understand the long tail better: to go farther down the path in thinking about micro-profiling and the many differences among many sorts of customers. If it isn't practical anymore to indulge in the institutionalized prejudice that traditional profiling so typically degenerates into, how to we open up the business to be inclusive of more customers, without drowning in data? Traditional shops are no more strategic in answering this question than "searchies". I would argue, they are less so.

What online does is facilitate diversity and heighten forms of communication between corporations and customers of all sorts, in a way that interruption marketing failed to do. Traditional customer profiling has an important role to play in traditional retail, but only if done very well. Meanwhile the old schoolers are missing the boat on the opportunities for customer engagement and even participation in product design, as explained in Tapscott and Williams's new book, Wikinomics.

So traditional ad agencies are still indulging alongside some top execs in traditional, difficult-to-measure, glitzy multichannel campaigns that allow at least a few of the top agency people and execs to spend more time on, say, the golf course, or meeting with the celebrity who got tagged to be the spokesperson based on extensive customer profiling. This "strategy" and relatively costly-per-impression exposure have come at a massive cost, as any observer of advertising knows. The edifice is steadily crumbling.

A few totally awesome data analysts in these firms - and a handful of independent analysts - are doing exactly the right things, while most everyone else in the agency infrastructure is not empowered to act on the power of the data (or put less politely, they're just pretending). Agency culture is still dominated by the power of "creative," and subjective judgments of "spots."

From the ashes of all of this rises search. Which, though highly tactical, is a great training ground for strategic minds like Joe Morin, who is now CEO of StoryBids, a startup that offers an auction system for product placement.

I have a little gig on the side myself. And some skin in the game - similar to Joe, but on a part-time basis. Everything I know, pretty much, I learned from search, which puts you in touch with customers in an unprecedented ways.

Search marketers not strategic? No, I think it's just a bit like web hosting (but earlier days). The many small firms are doing fairly OK by themselves, but the costs of consolidation are large, so waves of finance-driven consolidation will change the landscape over time. Rather than a thousand small dots, you'll see 75 bigger blobs on the map. When those 75 blobs combine into 30 even bigger ones, no doubt the half-dozen large-scale acquisitions will come; or some of the leading firms will go public and diversify their services. As it did Q9 Networks in the web hosting business.

It's very early days yet.

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View All Articles by Andrew Goodman

About the Author:
Andrew Goodman is Principal of Page Zero Media, a marketing consultancy which focuses on maximizing clients' paid search marketing campaigns.

In 1999 Andrew co-founded Traffick.com, an acclaimed "guide to portals" which foresaw the rise of trends such as paid search and semantic analysis.


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