AQuantive, Inc.

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AQuantive, Inc.

821 2nd Avenue, Suite 1800
Seattle, Washington 98104
U.S.A.
Telephone: (206) 816-8700
Fax: (206) 816-8808
Web site: http://www.aquantive.com

Public Company
Incorporated: 1998 as Avenue A, Inc.
Employees: 1,463
Sales: $308.4 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: AQNT
NAIC: 541990 All Other Professional, Scientific and Technical Services

aQuantive, Inc. is a digital marketing company focused on helping online advertisers reap the greatest rewards from their marketing efforts. The company divides its business along three business lines: Digital Marketing Services, Digital Marketing Technologies, and Digital Performance Media. Digital Marketing Services comprises Avenue A/Razorfish, an interactive advertising agency involved in web site development, interactive marketing, creative development, and branding, and a London, England-based company, DNA, that also operates as an interactive advertising agency. Through its Digital Marketing Technologies division, aQuantive licenses its proprietary technology, the Atlas Digital Marketing Suite, to enable clients to manage and to track online marketing campaigns. DRIVEpm and MediaBrokers compose the company's Digital Performance Media division, which is involved in "behavioral targeting," providing advertisers with information about an online user's behavior, geographic location, and demographic profile.

ORIGINS

When the Internet began to experience its first widespread use in the 1990s, there was no shortage of predictions about how the dawn of the digital age would forever change the way the world operated. The birth of electronic commerce, or e-commerce, in particular, promised to transform the business landscape, fundamentally altering the way nearly every industry conducted its activities. For advertising agencies, the emergence of a digital marketplace offered enormous potential for growth, buttressed by tantalizing claims about advertising's reach and effectiveness in a virtual marketplace, but there remained a gulf between the sanguine prognostications and reality. The founders of aQuantive, Scott Lipsky and Michael Galgon, hoped to bridge the gulf, endeavoring to create a company that would enable online advertising to live up to its billing.

Lipsky and Galgon founded aQuantive in 1997, formally incorporating the following year as Avenue A, Inc. While they were setting up operations in Seattle, Washington, they approached several large advertising agencies to determine why certain clients were reluctant to spend money on online advertising. The response revealed two negative perceptions of online advertising as it was just gaining legitimacy in the marketplace. There were concerns about determining the value, or pricing structure, of online advertising, and the effectiveness of the advertisements. Online advertisers followed the model set by the television and print-media industries, which set rates according to how many people saw the advertisement. Accordingly, digital advertisers set their rates by the number of people who clicked on an advertisement, or the number of "click-throughs," but the method struck many as an illusory way of assigning value because advertisers had no way of determining what a user did after clicking the advertisement. A similar uncertainty existed in all other major forms of advertising—television, radio, billboards, and print—but a central component of the lure of online advertising was its superior potential to be precise in targeting consumers. Advertising agencies and their clients wanted evidence of online advertising's effectiveness, proof that the industry's highly touted potential could be measured in an accurate way. Lipsky and Galgon, after receiving feedback from the advertising agencies they consulted, made it their goal to develop a quantitative method of assessing online advertising's effectiveness.

Lipsky, in his early 30s when he helped start Avenue A, was credited for developing the innovation that greatly legitimized online advertising. Before starting Avenue A, Lipsky worked for Amazon.com, where he developed software capable of gathering data that enabled the online retailer to determine the tastes and behavior of its customers. His work for Amazon.com relied on the same sort of expertise he would need to give Avenue A its start, but there were complexities he did not have to confront in developing Amazon.com's data-mining system. "We needed to figure out a system that could serve up ads and also track sales by following what people were doing once they clicked on the ad and landed on an advertiser's site," Lipsky explained in a March 2001 interview with Fast Company.com. He developed software that used the conventional way advertisements were transmitted to a computer screen, mimicking the "cookies" that served as unique, anonymous identifiers on every computer browser. Lipsky realized that if he placed what he called "action tags" on pertinent areas of a web site—the home page, registration page, and thank-you page—he could track the online movements and behavior of someone who was online. The technology enabled companies, for the first time, to gauge the effectiveness of their advertising, giving them the ability to calculate the precise return on their marketing investments in the digital world.

Avenue A, boasting an industry first, became a going enterprise with its innovative action tags. Lipsky assumed the role of chief technology officer, while Galgon, who spent the years before Avenue A's formation as an officer in the U.S. Navy and as a full-time volunteer for Volunteers In Service To America, served as general manager and president. The company achieved its greatest growth, both financially and in the breadth of its product offerings, during the early 2000s, a period in which a third executive exerted considerable influence over the company. Brian McAndrews was hired as president and chief executive officer in 1999, giving the young company a seasoned executive to guide it through its early stages of development. A graduate of Harvard University and Stanford University, McAndrews spent five years at General Mills before joining broadcaster ABC, Inc. in 1990. McAndrews spent a decade at ABC, holding various executive positions at ABC Sports, ABC Entertainment, and the ABC Television Network. Under McAndrews' guidance, Avenue A completed its initial public offering (IPO) of stock in 2000, gaining access to capital that would help it embark on its first serious acquisition campaign.

COMPANY PERSPECTIVES

These days, customers are difficult to identify, hard to reach and challenging to keep. In addition to drawing on the quantitative consumer data we've accumulated over the years, our multi-disciplinary teams immerse themselves in your audience's world to understand their motivations, interests, likes and dislikes. This research helps us develop insights that form the basis of our solution design. We combine attitudinal and behavioral research to generate actionable insights into your most valuable customer segments. This initial feedback is validated further when we bring real customers into the earliest phases of a project to help us analyze, refine and enhance our work. Then we subject our final solution to rigorous usability testing and campaign optimization. The result is an online experience that accurately reflects user behavior, provides relevant content, high ease of use and minimizes abandonment.

EXPANSION IN THE NEW MILLENNIUM

Acquisitions helped the company broaden its capabilities, giving it a spectrum of services that later would be grouped under the aQuantive banner. At first, however, expansion centered on the same type of services marketed under the Avenue A name. In 1999, the company acquired iballs LLC, a firm that offered Internet media planning and buying services akin to those offered by Avenue A. The acquisition was notable because it marked the first geographic expansion undertaken by the company, giving it an office in New York City (iballs was renamed Avenue A/NYC in 2001). In 2002, the company added an office in Philadelphia by acquiring an interactive advertising agency named Frontier that also offered services similar to Avenue A. By the time the company acquired Frontier, it had already begun to venture into other areas of the online advertising market. In 2001, a new division was formed to license the company's proprietary technology platform, the Atlas Digital Marketing Suite, to traditional and online advertising agencies. The division, named Digital Marketing Technologies (DMT), became one of three pillars supporting aQuantive in the years ahead.

The company's acquisition campaign kicked off in 2003, the same year aQuantive was adopted as the corporate title under which Avenue A and Atlas operated. In December 2003, the company acquired GO TOAST, a search-management technology provider. By using GO TOAST's technology, advertisers received assistance in the bidding process that was part of having a link show up on search engines such as Google. The $12.6 million acquisition, which was grouped with aQuantive's DMT division and officially purchased by Atlas, occurred the same month the company launched ChannelScope, a product that helped retailers assess online advertising's influence on conventional, off-line sales. The product was launched after two Avenue A clients tested it, producing data, in one instance, that demonstrated online advertising was responsible for a more than 20 percent increase in the client's in-store sales. "We've always believed," McAndrews said in a January 23, 2004, interview with Investor's Business Daily, "that online ads [benefit] offline sales, and for the first time we're able to prove there's a benefit." On the heels of purchasing GO TOAST and launching ChannelScope, aQuantive completed another acquisition, paying $4.5 million for NetConversions in February 2004 and incorporating the company into its growing DMT division. NetConversions, founded five years before being purchased by aQuantive, was a Seattle-based company that identified how web sites could be improved to increase customer-conversion rates, a so-called "Web site usability technology provider." The acquisition coincided with the opening of an office in Chicago, Illinois, by Avenue A to serve JCPenney.com.

Activity on the acquisition front picked up pace as 2004 progressed, adding to the breadth and depth of aQuantive's stance in the digital advertising market. A third division was formed in April 2004 that moved the company into what was known as the "behavioral targeting" field. The division, named Digital Performance Media (DPM), consisted of DRIVEpm, which purchased advertising inventory from online publishers and sold it to advertisers looking for specific shopping behavior on the Internet, demographic attributes, and geographic location. "DRIVEpm," a company executive explained in an April 26, 2004, interview with ADWEEK Online, "helps eliminate waste through its targeting capabilities, and, in turn, publishers realize fair value for their inventory, advertisers obtain better results, and consumers benefit from a more relevant, quality surfing experience." The DPM division soon was bolstered by the July 2004 acquisition of U.K.-based MediaBrokers, which became the European arm of the division.

KEY DATES

1997:: aQuantive is founded as Avenue A and incorporated the following year.
1999:: Brian McAndrews is appointed president and chief executive officer of Avenue A.
2000:: The company completes its initial public offering of stock.
2001:: The Digital Marketing Technologies division is established.
2003:: aQuantive is adopted as the corporate title for Avenue and its sister companies.
2004:: SBI.Razorfish is purchased, more than doubling the size of aQuantive.
2005:: A U.K.-based interactive agency, DNA, is acquired.

2004 ACQUISITION OF SBI.RAZORFISH

As aQuantive developed a third facet to its business, it made the boldest move in its seven-year history, brokering a deal that thoroughly restructured its original line of business. In June 2004, the company announced it was acquiring Salt Lake City, Utah-based SBI.Razorfish, the largest independent interactive agency in the country. With $93 million in revenue in 2003, SBI.Razorfish served clients such as Ford Motor Co. and Kraft Foods. The acquisition, completed one month after it was announced, more than doubled the size of aQuantive, a $160 million deal that combined Avenue A's strengths as a media-buying agency with SBI.Razorfish's strengths in web site marketing and design. "A lot of Avenue A's competitors also do Web-site design," McAndrews said in a July 12, 2004, interview with ADWEEK. "It's important for us to have that full range of capabilities offensively but also defensively. I think we have a better shot of retaining clients the more we're doing with them and the more strategic our relationship with them." The acquisition led to a re-branding and restructuring of aQuantive's DMS segment, which became Avenue A/Razorfish, a combination of Avenue A, SBI.Razorfish, and i-Frontier.

In the wake of the transforming acquisition, aQuantive's financial performance confirmed the decision to go ahead with the deal. Analysts praised the complementary nature of the union, which contributed significantly to the company's results for the first quarter of 2005. aQuantive's net income rose 55 percent to $6.4 million and its revenue leaped 187 percent to $65 million, $25.3 million of which was directly attributable to the purchase of SBI.Razorfish. For the year, the company posted $308 million in revenue, nearly twice the total recorded the previous year. More important, aQuantive registered $35.1 million in net income, its third consecutive year of profitability after racking up more than $100 million in losses during its first six years in business.

Looking ahead, the completion of further acquisitions appeared likely as the company sought to strengthen its presence not only in the United States but abroad as well. In December 2005, aQuantive purchased DNA, a U.K.-based interactive advertising and web development agency that was incorporated into its DMS segment. A $9 million-in-sales firm, DNA served clients such as automobile and motorcycle maker BMW, aid agency Oxfam, and wireless carrier O2. The acquisition was completed to improve aQuantive's ability to serve its U.S.-based clients who desired global advertising and marketing campaigns. Fulfilling such a demand presented aQuantive with the opportunity for enormous growth potential in an era in which online advertising was playing an increasingly important role in connecting companies with consumers. "The Web site," McAndrews proclaimed in a May 9, 2005, interview with ADWEEK, "is going to replace the 30-second commercial as the expression of a brand."

PRINCIPAL SUBSIDIARIES

Atlas DMT LLC; Avenue A LLC; aQuantive Paymaster, LLC; Drive Performance Media LLC; Atlas Europe Ltd. (U.K.); MediaBrokers Ltd. (U.K.); DNA Consulting Ltd. (U.K.); NetConversions, Inc.; Avenue A/Razorfish Philadelphia LLC; Avenue A/Razorfish Search, LLC; Atlas OnePoint, LLC; aQuantive Australia Pty Ltd.; Avenue A/Razorfish, Inc.