All Things Digital

Please see this disclosure related to me and Google.

They say that only the grass gets trampled when elephants fight. And that grass might actually turn out to be Yahoo in the epic battle between Microsoft and Google.

While the New York Times spilled a lot of ink earlier this week in a very long piece about that massive mano-a-mano, the true fallout in the online ad space, at least, could be more painful for the No. 2 player–Yahoo–which sits smack in between No. 1 Google and No. 3 Microsoft.

Yesterday, that was clearly in evidence in a kind of round-tripping ad deal Microsoft struck with Viacom, a five-year strategic partnership that was valued at $500 million by the two parties.

It’s pretty simple, really. Microsoft dips into its massive cash coffers and buys ads on Viacom’s many online and offline media outlets and it also licenses Viacom content–from places like MTV and Comedy Central–for its online MSN and Xbox 360 services.

Viacom scores!

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Which is just what I–the Amazing Kreskin–predicted would happen in a post on Yahoo on Monday.

“At least Yahoo shares, which have remained lackluster, are not likely to be impacted, as the disappointment is already baked in, ” I wrote. “In Google’s case, most are waiting to see if it blows away estimates–which would not necessarily give a bump to its high-flying stock–or just meets them, which could clip the wings of its shares.”

Snip, snip then–after the search giant fell short of expectations due to burgeoning costs of making all that money. Even though revenue was up 58% (which was actually a lower rate of revenue growth from previous quarters), Google’s unexpected and aggressive spending sent its shares down in after-hours trading, dropping almost $35 to close at $514.

And more good news for the do-no-wrong company, which can allegedly do wrong: a subcommittee of Congress has opened a preliminary antitrust investigation linked to its $3.1 billion offer to purchase of the online advertising company DoubleClick. Given the dominance in the online ad market gained by Google with the deal, this move comes as little surprise.

Here’s another obvious prediction: CEO Eric Schmidt has his hands full in the coming year. And if you want to know a lot more about how he is looking at that responsibility, here’s Walt’s interview with him in its entirety at D5 in late May:

Please see this disclosure related to me and Google.

Here is the entire interview Eric Schmidt did with Walt Mossberg on May 31 at D5 in Carlsbad, Calif. The Google CEO’s appearance is also posted here on YouTube (big surprise!) by Google.

The talk focused a lot on copyright, since Schmidt went on right after my interview with Philippe Dauman (that post has both text and video highlights). The CEO of Viacom, which is now suing Google for $1 billion for copyright violations, was very articulate about his problems with the search giant.

Still, Schmidt conceded no ground on the controversial issue, as you will see. But a lot of other things were discussed, including the future of search and online advertising, Google’s recent acquisition of DoubleClick and the fears over the growing power (and potentially evil behavior) of the Internet giant.

Here’s the video, which is a little over 50 minutes long:

Please see this disclosure related to me and Google.

For a meeting where very little happened, Yahoo CEO Terry Semel did yeoman’s work yesterday at the portal giant’s annual stockholders gathering at the Santa Clara, Calif., Convention Center.

Despite the cheesy ballroom setting, festooned with Yahoo-themed purple balloons, scratchy audio and very unflattering lighting, he dug in before a small audience of perhaps a few hundred.

There, Semel tried to make his case for the impending resurgence of Yahoo, while listening patiently to a few shareholder gripes and reciting all that annual-meeting corporate mumbo-jumbo required at these meetings.

(You can see my video of the event at the bottom of this post.)

Along with Semel, Yahoo’s board of directors sat well-behaved in the front row, too, and there were a lot of top executives, probably all nervously waiting for some giant shareholder shoe to drop, given the company’s recent record of lackluster everything.

That runs the gamut from its languishing stock price to low morale and management turnover to slower growth and its losing the ad race with rival Google to, perhaps most flashily, the giant $71.7 million pay package for Semel that got a lot of attention last week.

“We’re all waiting for some big protest or something,” one of the many Yahoo PR people in attendance whispered to me, warily looking over the place.

Not to be, as it turned out.

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For those who think Microsoft did not have the guts to make big purchases on the Web, the $6 billion all-cash price they ponied up for advertising network aQuantive should quash that sentiment.

That’s more than 10 times its revenue last year, and, yipes, close to 50 times its cash flow. And that is double what the Seattle-based parent company to Avenue A | Razorfish was worth on the public market just before the acquisition, a figure that has already been bid up by all the recent activity in the market.

That includes Google’s $3.1 billion bid for DoubleClick, Yahoo’s $680 million to buy the rest of Right Media and WPP Group’s acquisition this week of 24/7 Real Media for $649 million. And, by the way, AOL bought a German-based online ad company called Adtech this week, too.

If you don’t know what to make of all this, consider yourself in the majority, as these prices seem–let’s just come out and say it, as we are not investment bankers–insane. In fact, the general Internet acquisition market feels to me a lot like the wacky IPO market back in the height of the bubble, where you were often slack-jawed by the rising stock prices for companies with no visible means of comparable growth.

But before I get going on that rant, at least the big players are overpaying in a market that I think we can all agree is one that is just at its most early stages. Here’s why:

1. Spending by big advertisers online lags well behind what many call “audience engagement.” In other words, time spent on the Web has obviously been growing and taking share away from traditional media. But spending online, though fast growing at about $20 billion this year, has not kept the same pace.

2. The time to act, then, is now, to lock up any and all available assets in this space, especially ones that give the buyer a big market share and critical mass. The three biggest online ad players, Google, Microsoft and Yahoo, have snapped up the three biggest independent online ad agencies.

3. As more ad spending shifts online, the ability to have expertise and to innovate quickly will become critical. What all these companies are buying–besides stronger relationships with advertising clients–are people and experience.

4. Most of all, there was no way Microsoft was not going to answer Google after it bought DoubleClick, especially if it wants (and it does) to stay competitive with the search giant in the online ad market. Given that its talks with Yahoo about some sort of partnership (as I have said before–please don’t) have not borne fruit (as eager as, I am sure, Microsoft ’s Steve Ballmer would like to make that announcement), such a move by the company seemed inevitable.

Could they resist? I think not.

Please see this disclosure related to me and Google.