How would you value AdMob at the end of 2009:

(i) as a stand-alone firm, and

(ii) as an acquisition target.

ijcsm INTERNATIONAL Volume 11 JOURNAL OF CASE STUDIES Issue 1 IN MANAGEMENT April 2013 Google Inc.'s Acquisition of AdMob Case prepared by Professor Nikhil VARAIYA' Introduction On Monday, November 9, 2009, Google Inc. announced that it would purchase mobile advertising start-up AdMob in a stock-and-cash financed acquisition valued at $750 million. AdMob, founded in 2006, sells ads across thousands of websites that are tailored for mobile phones. It was one of the first companies to offer ads that run inside software for the Apple Phone and devices that run Google's Android operating system. Mobile (phone) advertising spending is expected to constitute an increasing share of total online advertising spending. Along with other start-ups, AdMob competes with established players such as Google, Yahoo!, Bing and major cell phone carriers such as Sprint, AT&T and Verizon Wireless to offer and profit from mobile advertising. JP Morgan estimated AdMob's 2009 revenues at between $45 and $60 million. This suggests that Google's offer price for AdMob is a generous multiple of 12 to 17 times AdMob's estimated 2009 revenue. In a sign of increased acquisition activity, on Monday, January 5, 2010, Apple Inc. announced that it had acquired Quattro Wireless, a competitor of AdMob, for $275 million. It was reported that Apple too had earlier tried to acquire AdMob. The Wall Street Journal reported on April 7, 2010, that the Federal Trade Commission (FTC) was reviewing an anti-trust challenge to Google's proposed acquisition. Broadpoint Amtech analyst Brian Marshall stated, "Clearly Apple and Google continue to run down parallel paths ... it's all about mobile advertising on smartphones, they are trying to maximize the dollars they create online" (Reuters, January 5, 2010). After conducting an intensive review, the FTC announced on Friday, May 21, 2010, that it had closed its investigation of Google's proposed acquisition of AdMob, thereby clearing the way for Google's acquisition offer. Google has grown through both organic expansion and acquisition. Per data from Thomson- Reuters SDC database, Google completed well over 100 acquisitions between 2000 and 2010, worth an estimated total of $8.6 billion. More than 50% of the acquisition dollars were spent on target firms in the online advertising market. Google CFO Patrick Pichette recently described acquisitions as an "accelerator for growth." He reiterated, "So for M&A the mindset is to comb Nikhil Varaiya is a Professor in the Department of Finance at San Diego State University, USA @ HEC Montreal 2013 All rights reserved for all countries. Any translation or alteration in any form whatsoever is prohibited. The International Journal of Case Studies in Management is published on-line (www.hec.ca/revuedecas en), ISSN 1911-2599. This case is intended to be used as the framework for an educational discussion and does not imply any judgement on the administrative situation presented. Deposited under number 9 20 2013 001 with the HEC Montreal Case Centre, 3000, chemin de la Cote-Sainte-Catherine, Montreal (Quebec) Canada H3T 247. 49Gmie Inc. '5 Agutst'tion a! AdMob 36'. In very simple terms, 30' refers to the third generation of mobile wireless standards that enables a phone to use the most advanced and mature voice and dataprotocols. Accordmg to Morgan Stanley, penetration of 3G mobile technologies is forecasted to increase from 21 percent in 2010 to 43 percent in 2014. Social networking. Web 2.0 applications enable consumers to easily and rapidly create onlme content and stay connected with their friends and family. Through social networking portalssuch as Facebook, Twitter and others, peeple can send messages, chat, post comments on their Virtual "walls," update their status, share videos, music, photos and stories, play games and makevorce calls over the Internet. Consumers increasingly want to connect to these sites via the Wireless mobile Internet. Video. Just like with "desktop Internet," consumers will probably want to nd, select, watch and share videos using the mobile Internet; Morgan Stanley estimates that global mobile data trafc will grow at a CAGR of 131% over 2008-2013. Voice over IP. Voice over Internet Protocol enables consumers to chat via voice, messaging and video; most VOIP communication currently occms over the xed Internet. With the mobile Internet, consumers will probably want to do the same while they're on the go. Impressive mobiie devices. The iPhone, iPod Touch and Apple's App Store have created the momentum for the mobile Internet, just as Windows 3.0 did for the PC in 1990 and Netscape did for the desktop Internet in 1995. The smartphone share of total handset shipments in 2009 is estimated at 25% in North America, 23% in Western Europe and 52% in Japan. According to a New York Times article by Claire Miller (April 24, 2011), "The stakes were high. Mobile phones could be a huge new market for Google. Or they could provide an opening for a competitor to pounce, or obviate the need for a search engine altogether. If people on phones could go straight to apps for information, why Google anything? What are the implications of the signicant growth of the mobile Internet for Google? Does this growth imply a signicant growth opportunity in mobile Internet advertising?" The mobile advertising market Mobile advertising spending The mobile advertising market enables brands, agencies and marketers to reach consumers directly on their mobile phones. Mobile phones are personal devices, which make them a very precise targeting communication tool. Mobile advertising can be used as a stand-alone medium or in cross-media (i.e., TV, print, radio, outdoor, cinema, online and direct mail) campaign plans. When compared with other types of advertising, the mobile advertising market is quite small, with $416 million in 2009 spending. In 2009, online advertising spending was $24 billion, newspaper advertising spending was $38 billion and TV advertising spending was $51 billion (Exhibit 6). Nevertheless, the mobile advertising market is expected to grow at an annual compounded rate of 28% from 2009 to 2013 (Exhibit 7); online advertising grew at an annual rate of 24% over the period 2005-2009. O HEC Warren! Google Inc. 's Acquisition of AdMob Exhibit 6. Advertising Spending in 2005 vs. 2009 (millions) TV Newspaper Online Mobile 2005 $55 400 $51 000 = $50 200 2009 $38 000 $24 000 $416 $10 000 Source: http://www.emarketer.com/Reports/All/Emarketer_2000591.aspx Exhibit 7. U.S. Mobile Advertising Spending, 2008-2013 (millions) 2008 2009 2010 2011 2012 2013 $1 560 $1 140 $830 $593 $416 5320 Source: http://www.emarketer.com/Reports/All/Emarketer_2000591.aspx @ HEC Montreal 59Google inc. '5 Acgui'sirion of AdMoo Mobile advertising channels Multiple channels exist within mobile advertising: mobile websites, mobile applications, mobile messaging, and mobile videos (Exhibit 8). In terms of availability, on one end of the spectrum, there is the mobile messaging channel, which can be used to reach all mobile phone users regardless of whether they have a data service plan or mobile web access capabilities. At the other end there is the mobile video and T V channel. which requires that users have sophisticated video and mobile TV-enabled phones as well as premium-priced service plans. In between sit the mobile web channel and the mobile applications channel. Mobile Applications Exhibit 8. Mobile Advertisin The mobile web is a channel for delivery of web content, which offers and formats content to users in awareness of the mobile context. The mobile context is characterized by the nature of personal user information needs (e.g., updating your blog, accessing travel information. receiving news updates], constraints of mobile phones [i.e., screen size. keypad input] and special capabilities [i.e.. location, connection type such as 36 or WLAN]. Software or content that consumers download to or nd pre-installed on their mobile phone and then resides on the phone. Examples include applications such as games, newsreaders and lifestyle tools. Downloads are accessible only to consumers with the appropriate mobile phones and data lans. This category includes SMS and Multimedia. Messaging Service [MMS]. SMS is available to virtually all mobile phone users and does not typically require a data plan or mobile web access. making it ideal for reaching most mobile "SETS. While SMS is limited to containing text. MMS can contain images, audio and even video content. Video and TV delivered over a mobile network to the mobile phone's media player. Videos may be downloaded or streamed and are usually accessed from a mobile web site or contained in an MMS message. Mobile video is accessible to consumers with mobile web- and mobile video- enabled mobile phones and data plans. Mobile TV is accessible through mobile Til-enabled phones. Channels Banner ads on mobile websites Text ads on mobile Websites Branded mobile web sites Good for: Driving users to a mobile website Lead generation Direct sales Brandin ; Ad placement Within applications (e.g., banners, 'splash' pages] Branded applications Good for: BrandinngRM Drivin- users to a mobile web site Text ads [SMS, MMS] BrandinngRM [SMS. MMS] Banner ads. splash pages [HMS] Animated images [MMS] Good for: Driving users to a mobile website Click to all Branding/CRM Interactive dialogu Vi post roll Static images. animation or video Clickable overlays Branded videos Good for: Branding/GEM Driving users to a mobile web site Click to call Click to bu Source: Mobile Marketing Association. Mobile Advertising Overview, January 2009. Google Inc. 's Acquisition of AdMob Within the mobile web channel, there are opportunities to provide ad inventory through banner ads on mobile websites, text ads on mobile websites and branded mobile websites. Google currently dominates the market of text ads on mobile websites by following the same strategy as desktop Internet search advertising: listing text ads that are related to searches performed by users on Google's mobile website. The mobile applications (apps) channel provides ad inventory embedded in software or content that users download to or find pre-installed on their mobile phones. These can be games, newsreaders or lifestyle tools. Market share distribution - Mobile advertising spending In 2009, 55% of mobile advertising spending went to mobile messaging, particularly text messaging, 25% went to mobile websites and mobile applications, and the remaining 20% went to mobile search advertising. 4INFO, Cellfire, HipCricket, ILoopMobile and Verisign Messaging are the major players in text messaging. Google, Yahoo! and Bing dominate search engines, while AdMob, Jumptap, Mojiva, Quattro Wireless and AOL are considered leading mobile advertising networks (Exhibit 9) that serve both mobile websites and mobile applications websites. Exhibit 9. Mobile Advertising Spending for 2009 (estimated) Mobile Advertising Spending, 2009 (est.) Select Players; Google Yahoo! Bing Search 20% Select Players: Text 4INFO Messaging Cellfire Apps & 55% HipCricket Websites iLoopMobile 25% Verisign Messaging Select Players; AdMob Jumptap Mojiva Quattro Wireless AOL/Third Screen Media Source: eMarketer, 9/2009 Source: http://www.emarketer.com/Reports/All/Emarketer_2000591.aspx Although the mobile applications segment currently accounts for less than 25% of all mobile advertising spending, it is the segment with the greatest growth potential. There are two important factors driving the growth of this channel: first, there is an increased preference for unlimited data plans by customers. Subscribers with unlimited data plans increased from 16% to HEC Montreal 61Google Inc. 's Acquisition of AdMob 21% from December 2008 to December 2009.' Second, and most important, there is an increasing popularity of smartphones, phones equipped with powerful processors and large displays (e.g., Apple's iPhone, RIM's BlackBerry, and Google's NexusOne). Gartner forecasts that smartphone sales will surpass those of personal computers by 2012. So how large is the growth potential of the mobile applications advertising channel? Chetan Sharma Consulting estimates that mobile application downloads should jump from 7 billion in 2009 to almost 50 billion in 2012. During VentureBeat's MobileBeat 2009 conference, experts predicted that, "With 10 million apps, the mobile applications market will be as big as the Internet in 2020." The panel also suggested that by the end of 2009, the market would grow to 100,000 apps. Exhibit 10. 2009 Market Share for Mobile Ad Networks. Total: 279MM. Serie1; Google; $28.00 ; 10% Serie1; Others;. $65.93 ; 24% Serie1; Millenia Media; $51.00 ; 18% Serie1; AOL; _ $7.00 ; 3% Serie1; JumpTap; $11.00 ; 4% Serie1; Quattro_ Serie1; Admob; Wireless; $40.00 ; 14% $21.00 ; 8% Serie1; Microsoft; Serie1; Yahoo; $23.00 ; 8% $32.00 ; 11% Source: http://www.mediapost.com/publications/?art aid=117926&fa=Articles.show Article Signs of this potential growth are beginning to show. According to Apple, its App Store hit 1.5 billion downloads. AdMob estimated Apple's monthly revenue from app downloads at $200 million or $2.4 billion per year. But AdMob's most important finding is the usage behaviour of users: "They are happy spending money on apps for their smartphones, especially after they've had a chance to try them for free." So who pays for all these free trials? Advertisers. And who links advertisers with app developers? Mobile advertising networks. http:/www.mediabuyerplanner.com/entry/49025/mobile-users-increasingly-choose-unlimited-data-plans/. 2http:/mashable.com/2010/03/17/mobile-app-market-17-5-billion/. http://www.businessinsider.com/apps-market-to-be-as-big-as-the-internet-in-2020-with-10-million-apps-2009-7. http://gigaom.com/2009/08/27/how-big-is-apple-iphone-app-economy-the-answer-might-surprise-you/. HEC Montreal 62Google Inc.'s Acquisition of AdMob Mobile advertising networks Operators and publishers that own mobile websites can sell ads directly or through a third party as premium inventory or as part of a mobile advertising (ad) network (Exhibit 10). Traditionally, an ad network connected websites that wanted to host advertisements with advertisers who wanted to run advertisements. Recently, ad networks have also been paying software developers for allowing their ads to be shown when people use their software applications.' Mobile ad networks can be grouped into three classes: blind networks, premium blind networks and premium networks. This classification takes into account five characteristics: size (in terms of publishers, advertisers or impressions), publishers used to serve ads (independent publishers, independent and premium publishers and prestige publishers only), targeting options (from limited options to plenty of options), capability of advertisers to choose websites (no capability, capability at a premium, and capability), performance advertising options (cost-per-click, cost- per-action, and none), and brand advertising capabilities (limited cost-per-mille," some proportion of cost-per-mille, and predominantly cost-per-mille). Exhibit 11 provides details on the different types of ad networks and identifies the key players in each type of ad network. Exhibit 11. Business Model-Based Classification of Mobile Ad Networks Blind networks Premium blind networks Premium networks Size in terms of publishers, advertisers and impressions Largest Medium-sized Smallest Higher proportion of premium publishers Prestiege publishers Primarily sereves ads Independent mobile (i.e. big-traffic mobile through publishers (sites sites of well known (mobile operators and applications) brands: newspapers. and big-name broadcasters of destinations) operator portals) By Country & by Targeting Options content channel Lots Lots (news, sports, etc.) Allows advertisers to choose websites Not usually At a premium price Yes Performance Advertising Cost-Per-Click Some CPC, and (CPC) is the norm some CPA (Cost-per- Rarely Action/Acquisition) Brand advertising Some, Cost-per- Mille (CPM) Higher proportion Predominant (may be 61 202 20 only) Microsoft Mobile Advertising; YOC Admoda/Adultmoda; Millenial Media; Group; Key Players Admob; BuzzCity: Jumptap; Madhouse; Advertising.com/AOL: InMob Quattro Wireless Nokia Interactive Advertising: Pudding Media Source: http://mobithinking.cor le-ad-network-guide http:/en. wikipedia.org/wiki/Advertising_network 2 Every time a consumer clicks on an advertisement, the network charges the advertiser a certain amount; 35 cents, for example. Goes beyond a click and into a specific action once the consumer lands on the advertiser's page. An action could be to fill out a form or purchase a product. 4 A cost-per-mille payment is made for every 1,000 impressions. An impression is registered every time a web page from a content provider pulls the ad from the ad servers and is displayed on the content provider's web page. HEC Montreal 63Google Inc. 's Acquisition of AdMob AdMob Omar Hamoui, a visionary entrepreneur, founded AdMob in 2006 in order to "remove roadblocks and enable mobile web businesses." AdMob's mission was: "To provide the business models, services, tools, and data fundamental to the development and growth of the mobile Internet." AdMob delivered successful advertising results to businesses, regardless of their size or budget, by providing measurable, high return on investing solutions. AdMob's advertising client base (Ford, Coca-cola, EA, P&G, Land Rover, MTV Europe, Adidas, and Paramount Pictures), mobile web publishers (Accu Weather, BluePulse, CBS Mobile, EA, Flirtomatic, Holliwood.com, Peperonity, and TinyTube) and winning accolades list (Mobile Marketing Association, Ad Age, Business Week, Wired Magazine and the World Economic Forum) reflect its successful business execution capabilities. AdMob developed three top initiatives to help businesses leverage the mobile Internet: Business Models: Through its mobile advertising network (Exhibit 12), AdMob served billions of targeted and personalized ads on the mobile web. This had two main beneficiaries: publishers that monetized their mobile web traffic, and advertisers that targeted and reached customers directly on their mobile devices. Services and Tools: Using AdMob Mobile Analytics (Exhibit 13), mobile website owners could get insight into their traffic and site usage, which in turn enabled them to make data-driven decisions about their mobile businesses. Data: Through its Mobile Metrics Report (Exhibit 14), AdMob shared information about the traffic in their network on an aggregate basis. This report was a snapshot of trends on the mobile Internet. As with most private companies, no public information on AdMob's financial performance was available. According to news reports, by February 2009, AdMob had served 60 billion impressions worldwide since its launch in February 2006. Its display inventory generated 20% of its revenue and the rest came from text ads. Jason Spero, Vice President of Marketing for AdMob, stated in September 2008 that AdMob was charging advertisers 30 to 35 cents per click, or $25 to $30 cost per thousand impressions. " iPhone and Android were creating more mobile apps and more mobile web browsing, which in turn were creating more mobile ad inventory for AdMob to fill. Its gross revenue in November 2009 was approaching $100 million; AdMob's share of this revenue was estimated to be $60 million. Alex Farber, "Answering the call," nma.co.uk, February, 2009. 2Sarah Reedy, "Advertisers Tap iPhone," Telephony, September 2008. HEC Montreal 64Google Inc.'s Acquisition of AdMob Exhibit 12. AdMob's Mobile Advertising Network Ad Network Advanced Targeting Meets Qualified Traffic AdMob provides innovative solutions for brand and performance advertisers, effective distribution for app developers and revenue opportunities for mobile site owners. Moshe Advertisers Agencies AdMob provides innovative solutions for AdMob offers turnkey solutions to help brand and performance advertisers to engage your mobile target audience. you get your brand in the hands of your target audience no matter where they Learn More are: at home, at work, at play, or in transit. Learn More Innovative ad formats admob to meet your unique needs Connecting the Mobile Ecosystem Reach your target audience on the mobile web Tap App Publishers Tap Developers Publishing ads on your site AdMob provides app developers with a with AdMob allows you to solution to distribute and monetize your monetize your mobile traffic with one of the fastest growing and highest apps. performing networks of advertisers. Learn More Learn More Drive downloads Maximize and grow your business your revenue opportunities Source: http://www.AdMob.com/marketplace HEC Montreal 65Google Inc.'s Acquisition of AdMob Exhibit 13. AdMob Mobile Analytics ad Real-time Dashboard - Adv x + - C ( http://analytics.admob.com/reports/ D Apple ! Yahoo! Google Maps Los YouTube W Wikipedia News Other Bookmarks AddMob Home dmob.com | Log Out admob Home TapTap - Real-time Dashboard Select Sits JARTAP Source: Last 30 Days Update Range: 2010-03-20 - 2010-04-18 . Visitors Pageviews Visits Pageviews per Visit Average Time Spent Sources 174,545 56,363 3.11 00:02:31 Site Usage -1.43% . -0.53% 1.39% -14,00% Events How often are the reports updated? Pageviews Zoomer: 7d | Im Most reports for AdMob 12,000 Mobile Anayties are odated caly. Ho throughout the day. usage for each particular chart. cates and times are GMT 6,000 . Updated penodically throughout the day. Top 5 Content URLs URL Pageviews % of Total Sources by Pageviews 5,542 6.47% Search Engines. 53 15% 7 /siterdetails/mbuzzy 5.340 6.23%% site/details/crush_or_flush 2,792 3.26%% deo/details/bfa806fceoBa958. 2.761 3.22% site/details/wapkung 2.360 2.75%% More. Top 5 Events Top 5 Keywords Event Occurrences % of Total Keywords Pageviews % of Total External Redirect 31.18 83.65% tap tap 9.159 10.969 Tap 6.43 14.58% mocospace 5.626 6.73% Customize 240 0.64% 3pforfree.com 3.622 4.34%% Feed Search 0.51% mouzzy.com 2.692 3.22% Register Success 0.48% www.3gforfree.com 2.342 2.80% More More. About AdMoo . Help . Contact . Terms of Service . Privacy Policy 2005-2009 AdMob, Inc http://analytics.admob.com/ HEC Montreal 66Google Inc.'s Acquisition of AdMob Exhibit 14. AdMob's Monthly Mobile Metrics Report AdMob Mobile Metrics Our Insights on the Mobile Ecosystem Back to Main * Nower Post Previous Post . February 2010 Mobile Metrics Report March 25th, 2010 In this month's report, we separate the traffic in our network into three categories - smartphones, feature phones and mobile Infomat devices - to examine the relative growth rates of each over the past Download Report (PDF) year. Some of the highlights from the report include: . Smartphones accounted for 48%% of AdMob's worldwide traffic, up from 35% in February 2009, fueled by heavy application usage on iPhone and Android devices. Although the share of feature phone traffic in AdMob's network declined from 58% to 35%, the absolute traffic from feature phones still grew 31%. This means that while the overall traffic from feature phones is growing, traffic from smartphones and mobile Internet devices is growing faster. The mobile Internet device category experienced the strongest growth of the three, increasing to account for 17% of traffic in AdMob's network in February 2010. Although the vast majority of traffic in this category comes from the iPod touch, the category also includes devices like the Sony PSP and Nintendo DSI Traffic Share by Handset Category, Worldwide 60% AdMob Network 50%% Percentage of Traffic 40% 30% 20% 10% 0% Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 -Mobile Internet Devices -Smartphones -Feature Phones admob Based on a survey we ran last month, 11% of smartphone users are interested in purchasing an iPad. As more mobile Internet devices are introduced into the market, it will be interesting to see how traffic from the category grows relative to smartphones and feature phones. We added trended data and a list of top smartphones to the country data sheets we cover each month. We also removed operator data from the monthly report, but will continue to share d on a regular basis. HEC Montreal 67 Google Inc.'s Acquisition of AdMob AdMob received $4 million in a Series A financing from angel investor Michael Dearing in September 2006. Subsequently, several venture capital firms invested in AdMob. It received $15 million in Series B funding from Accel Partners and Sequoia Capital in March 2007. It received $15.7 million in Series C funding from Sequoia Capital and Accel Partners in October 2008, and $12.5 million in Series C funding from Draper Fisher Jurvetson and Northgate Capital in January 2009. AdMob's total funding over the three-year period was $47.2 million. In recent years (according to Dow Jones VentureSource), the median percentage of a company sold in a first round was 40%, 33% in a second round, and 26% in a third or later round. These data can be assumed to apply for the AdMob financing rounds, since ownership stakes actually acquired by investors in AdMob in each funding round were not publicly available. Google's acquisition decision In 2005, DoubleClick was taken private by two private equity firms, Hellman and Friedman and JMI Equity, for $1.1 billion. At the time of the DoubleClick transaction, the mobile advertising market was in its infancy and expected to grow very rapidly. During 2007, several firms in the online advertising market were purchased at multiples between 10 and 15 times annual revenues. Google purchased DoubleClick for $3.1 billion, which was more than 10 times DoubleClick's revenue according to a New York Times article; Microsoft purchased aQuantive at a multiple of 13 times revenue, or about $6.3 billion, resulting in a 85% takeover premium over aQuantive's pre-acquisition stock price; and Yahoo! paid some $680 million for an 80% share of Right Media, which generated about $35 million in revenues in 2006. The acquisitions during this time reflect the intense rivalry between Google, Yahoo!, and Microsoft in seeking strong competitive positions in the online advertising market. Google has historically been an active acquirer, having completed over 100 acquisitions since 2000. While search-related Internet advertising via the personal computer continues to be a major driver of Google's growth, the emergence of the mobile Internet could provide significant opportunities for continuing growth. On May 21, 2010, the Federal Trade Commission (FTC) closed its investigation of Google's acquisition of AdMob, signalling that anti-trust concerns due to this acquisition were not warranted. The FTC stated, Google and AdMob today are the leading competitors among mobile ad networks, which drive the availability of free or low-cost applications and content for smartphones and other mobile devices. Mobile ad networks "monetize" mobile publishers' content by selling publishers' advertising space; advertising revenues, in turn, fuel the development of mobile applications and Internet content. Mobile application developers and other publishers rely on mobile ad networks to sell advertising space that they cannot effectively sell on their own. During the investigation, Apple acquired the third largest mobile ad network, Quattro Wireless, in December 2009 and then introduced its own mobile advertising network, iAd, as part of its iPhone applications package. The Commission has reason to believe that Apple quickly will become a strong mobile advertising network competitor. Apple not only has extensive relationships with application developers and users, but also is able to offer targeted ads (heretofore a strength of AdMob) by leveraging proprietary user data gleaned from users of Apple mobile devices. Furthermore, Apple's ownership of the iPhone software development tools, and its control over the developers' license HEC Montreal 68Google Inc. It Acgutsm'on of AdMob The online advertising industry is engaged in buying and selling advertising space on web pages that are accessed by viewers on the Internet: the Intemet itself is accessed via desktop .or laptop computers, smartphones and other mobile devices. The industry is often divided into: (a) 'search advertising' that appears on search-results pages: (ii) 'display advertising' that appears on non- search web pages; (iii) classied listings that appear on websites; and (iv) email-based advertisements. As of 2009, the distribution of ad spending across these categories indicates that search advertising dominates with a 47% share, followed by display advertising at 22%. The Internet search segment is highly concentrated, with Google. Yahoo! and Microsoft capturing over 90% of search queries. Total advertising spending on TV and newspapers declined from $105.6 billion in 2005 to $88.2 billion in 2009, but online advertising spending increased from $10 billion in 2005 to $24 billion in 2009. As of 2009, mobile advertising spending totalled $416 million, which is less than 2% of total online advertising spending. However, mobile advertising spending is projected to grow at an annual rate of 28% over the period of 2009 to 2013. The key segments of mobile ad spending are: (i) text messaging; (ii) search advertising; and (iii) display advertising. It is expected that mobile search advertising will comprise signicantly more than 50% of all mobile advertising spending in the next three to ve years. Search is at the heart of what Google does. It devotes more engineering time to its search service than to any other product. By providing an unmatched search service, Google is the top Internet site in terms of trafc, reaching 40% of global Internet users every day,l for an estimated 1.8 billion people in 2009.2 This means that on any given day, Google has an audience of approximately 720 million people. Google generates revenue primarily through advertising. Advertisers see Google as a channel to reach customers in a measurable, cost-effective and highly relevant way. They bid in an open and competitive auction to have their ads appear alongside the search results for particular keywords. Ads are useful to the peOple who see them as well as to the advertisers who run them. Advertisers utilize two key programs, Google AdWords, and Google AdSense, to promote their products and services on the web. In the AdWords program, advertisers bid in an open and competitive auction to have their ads appear alongside the search results for particular keywords. Google distinguishes ads 'om search results or other content on a page by labelling them as "sponsored links" or "Ads by Google." The AdSense program delivers ads to Google partnerlailiate websites from its AdWords advertisers that are relevant to the content or search results on partner sites; these partners include bloggers as well as major online publishers. The AdSense program enables advertisers to extend the reach of their ad campaigns, improves partners' ability to generate revenue from their content and delivers relevant ads for their users. For several years, this effective monetization of search has enabled Google to become one of the fastest-growing and most protable companies in the world. Advertising revenues grew at 121%, 95% and 73% in 2004, 2005 and 2006, respectively (Exhibit I). Operating margins were 20%, 33% and 33% for the same years, while its market capitalization over the same period was ' httpn'fuww.aleata.corw'sitgiglga'googlgrom. 2 ng'fr'wwu,inlgjlgm'orldslats.Eotnfsta'lshln'l. G HEC Montreal 51 Google inc. '5 Acguisirt'on oz AdMob Advertising revenues constituted 97% of Google's 2009 total revenues. Whereas the average growth of advertising revenues at Google was 243% over the period of 2002 to 2005, it averaged 41% over the period of 2006 to 2009 "Exhibit 3 and Exhibit 4}. In 2009, Google's revenue growth from selling text advertisements linked to search queries slowed dramatically. In 2009, during one of the most severe economic recessions since the Great Depression, Google's year- over-year revenue growth diminished signicantly to a mere 9% {Exhibit 1]. Although the majority of the reduction in revenue growth could be attributed to the economic downturn, this reduction made Google realize that it was too dependent on revenue from on-line search advertising, which in turn now had a greater dependence on xed Internet subscriber growth. By contrast, the rapid growth of mobile lntemet advertising could make mobile advertising an important segment of the online advertising market. In order to bring in new growth and maintain its leadership in the online advertising market, the company needed to respond to the rapidly changing environment of the web. It had focused its efforts in two areas in particular: online display advertising (i.e., placing banner ads on the websites of content providers), a business where it lagged behind rivals like Yahool, and mobile advertising. In the mobile advertising business, Google was already ahead of its rivals, Microsoft and Yahoo!, in search advertising, a type of text advertising. Nevertheless, given the increasing penetration of smartphones with large screen displays and increasing availability of smartphone software applications, Google set its sights on another segment of the mobile advertising arena: mobile display advertising (i.e., mini-banners embedded in mobile websites and in mobile applications or "apps"). Google Inc. 's Acquisition of AdMob Exhibit 4. Google Inc.'s Historical Balance Sheets 12/31/2009 12/31/2008 12/31/2007 12/31/2006 12/31/2005 12/31/2004 12/31/2003 12/31/2002 Currency USD (in thousands) USD (in thousands) USD (in thousands) USD (in thousands USD (in thousands USD (in thousands USD (in thousands) USD (in thousands) Consolidated Yes Yes Yes Yes Yes Yes Yes Yes Cash & Equivalents 10. 197,588 8,656,672 6,081,593 3,544,671 3,877,174 426,873 148,995 57,752 Short Term Investments 14,287.187 7.189,099 8, 137,020 7,699,243 4,157,073 1,705,424 185,723 88,579 Cash & Equivs & ST Investments 24,484,775 15.845,771 14,218,613 11,243,914 8,034,247 2,132,297 334,718 146.331 Receivables (ST) 3,178,471 2,642,192 2.162,521 1.322,340 687.976 311,836 154,690 61,994 Current Tax Assets 667,650 286.105 213,791 29,713 49,34 89.972 :2, 105 12.646 Other Current Assets 836,062 1,404,114 694.213 443.880 229,507 159,360 48.721 10,825 Total Current Assets 29, 166,958 20,178, 182 17,289,138 13,039,847 9,001,071 2,693,465 560,234 231,796 Gross Property Plant & Equip 8,130,134 7.576,341 5,519,912 3,289,594 1,417,425 583,068 261.837 86.886 Accumulated Depreciation 3,285,524 2,342,498 1.480,651 894,355 455,676 204,152 73,582 33,013 Net Property Plant & Equip 4,844,610 5,233,843 4,039,261 2,395,239 961,749 378,916 188,255 53,873 Long Term Investments 128.977 85.160 1,059,694 1,031,850 Intangible Assets 5,677,503 5,836,544 2,745,964 1,891,960 277,683 193,887 105,556 96 Deferred LT Assets 262,611 33,219 11,590 0 Other Assets 416,119 433,846 168,530 114,455 31.310 35,493 17,413 1.127 Total Assets 40.496,778 31,767,575 25,335,806 18,473,351 10,271,813 3,313,351 871,458 286,892 Accounts Payable & Accrued Exps ,892,307 1,522,194 1,392,497 933,204 530,134 237,847 168,369 37,022 Accounts Payable 215,867 178,004 282, 106 211,169 115,575 32,672 46,175 9,394 Accrued Expenses 1,676,440 1.344,190 1,110,391 722.035 414,559 205,175 122,194 27,628 Current Debt Current Lease Obligations 1,902 4,621 4.350 Other Current Liabilities 855, 160 779,896 643,105 371,383 215,250 100,619 62,462 48,13 Total Current Liabilities 2,747.467 2,302,090 2,035,602 1,304,587 745,384 340,368 235,452 89,508 LT Debt & Leases 1,988 6,512 Deferred LT Liabilities 41.618 12.333 30,249 60,427 45,887 7,443 23,524 2,481 Other Liabilities 1,703,469 1.184,290 580,276 68,497 61,585 36,484 21,724 14.438 Total Liabilities 4,492,554 3,528,713 2,646, 127 1,433,511 852,856 384,295 282,688 1 12,939 Common Share Capital 318 315 313 309 293 267 161 145 Preferred Share Capital 44.346 44.346 Additional Paid-In Capital 15,816,738 14,450,338 13,241,221 11,882,906 7,477,792 2,582,352 725,219 83,410 Retained Earnings 20,082,078 13,561,630 9,334,772 5,133,314 2,055,868 590,471 191,352 85,704 Accum Other Comprehensive Income 105,090 226,579 113,373 23,311 4.019 5,436 1.660 49 -249,470 -39,701 Other Equity 83,348 -6,677 -119,015 -373,968 Total Equity 36,004,224 28,238,862 22,689,679 17,039,840 9,418,957 2,929,056 588,770 173,953 40,496,778 31,767,575 25,335,806 10,271,813 3,313,351 871,458 286,892 Total Liabilities & Equity 18,473,351 8 @ HEC MontrealGoogle Inc. 's Acquisition of AdMob Mobile Internet Mobile phone activations are increasing more rapidly than purchases of any other consumer product. It has been frequently stated that half the world now has a mobile phone. Mobile Internet data connections are following this growth at a slower rate. Nevertheless, mobile Internet adoption has outpaced desktop Internet adoption. The number of iPhone and ipod Touch users nine quarters after they were launched was 57 million (Exhibit 5). The number of AOL subscribers (desktop Internet) nine quarters after it was launched was 7 million. More users will likely connect to the Internet via mobile devices rather than desktop PCs within the next five years. According to the Wall Street Journal (October 5, 2010; p. c12), smartphone sales are expanding at triple the rate of the PC market comprising desktops, laptops and notebooks. Gartner estimates global smartphone sales in 2010 will rise 56% to 268.8 million units, while PC shipments will increase 18% to 363.6 million units. For 2011, Gartner forecasts 431.7 million PCs will be shipped, compared with 413.6 million smartphones. And it projects 497 million PC's in 2012, below its forecast of 563.8 million smartphones. This is due primarily to five converging trends: 3G, social networking, video, voice over IP, and impressive mobile devices. Exhibit 5. Mobile Internet Ramping Mobile Internet Outpaces Desktop Internet Adoption iPhone + iTouch Users = 8x AOL Users 9 Quarters After Launch iPhone + iTouch vs. NTT docomo i-mode vs. AOL vs. Netscape Users First 20 Quarters Since Launch 60 Mobile Internet -57MM Desktop Internet iPhone + iTouch Netscape" 50 Launched 6/07 Launched 12/94 Subscribers (MM) 40 -25MM Mobile Internet 30 NTT docomo i-mode Launched 6/99 20 -11MM 10 Desktop Internet AOL -7MM v 2.0 Launched 9/94 Q1 Q3 Q5 Q7 Q9 Q11 Q13 Q15 Q17 Q19 Quarters Since Launch -iPhone + iTouch -NTT docomo i-mode -AOL -Netscape Morgan Stanley Note .AOL subscribers data not avail before CQ3:94, Netscape users limited to US only. Morga -39MM netbooks have shipped in first eight quarters since launch (10/07). Source. Company Reports , Morgan Stanley 23 http:/communities-dominate.blogs.com/brands/2007/01/putting_27_bill.html