Microsoft gets $530m in sale of ad agency Razorfish to Publicis

Ad giant Publicis Groupe this morning confirmed an agreement to buy Microsoft's Razorfish online advertising agency for $530 million, along with a five-year strategic alliance under which Publicis will buy display and search advertising from the Redmond company at "certain minimum guaranteed aggregate purchase levels."

Razorfish was part of Microsoft's $6 billion deal for Seattle digital marketing company aQuantive in 2007. The agency, formerly known as Avenue A/Razorfish, was seen as an odd fit inside Microsoft in part because it works on campaigns that run across a variety of sites, including Google, Yahoo and other competitors to Microsoft's online properties. The clues that Razorfish wouldn't be with Microsoft for the long haul included the fact that its employees didn't get the standard Microsoft benefits package.

[Update, 8:40 a.m.: There are "no plans to displace any Razorfish workers in the Seattle region or elsewhere as a result of this agreement," said Microsoft spokesman Lou Gellos in an email message this morning, responding to our question on that topic.]

The cash-and-stock agreement with Publicis follows a bidding war that included ad companies WPP PLC and Omnicom Group, according to the Wall Street Journal, citing people with knowledge of the bidding. Dentsu, Japan's largest advertising company, bid more than than Publicis did, the Journal reported.

That suggests that details of the strategic alliance may have tipped the balance in favor of Publicis, bringing the promise of guaranteed ad revenue. Microsoft is hungry for online advertising dollars and traction in the search market, as evidenced by its 18-month pursuit of Yahoo for their recently announced online advertising and search partnership.

"The agreement helps Publicis Groupe media clients by allowing their agencies to purchase display and search advertising from Microsoft over the five-year term of the agreement on favorable terms, in exchange for certain minimum guaranteed aggregate purchase levels," the companies said in a news release. "The agreement also provides that Razorfish will continue to be a preferred provider to Microsoft for digital strategy, creative and experiential marketing services, and contains a commitment by Microsoft to spend a minimum amount for those services each year during the term of the agreement."

The Razorfish management team will remain intact, according to Publicis, and the agency will operate under its own name as part of VivaKi, a Publicis umbrella for Digitas, Starcom MediaVest Group, Denuo, and ZenithOptimedia.

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Amazon's A9: Rumors of its death are greatly exaggerated

It’s been three years since Amazon.com’s effort to match Google with its own internet search engine, called A9, crashed and burned. Since then A9 has largely fallen off the technology industry’s radar. But the unit is still around, and playing an active role in Amazon’s efforts to improve product search on its network of ecommerce websites.

“People say things like, ‘Oh, you used to work there. What happened to that?’” said Barnaby Dorfman, a veteran of A9 whose online recipe startup, Foodista, secured an investment from Amazon in April. “The public-facing experiment did not work out, but the other piece worked out quite well for them. They’re helping to maximize sales across all Amazon’s sites.”

While A9, based in Palo Alto, has been extremely quiet since Amazon pulled back on its web search efforts in 2006, its name has popped up repeatedly in recent months, providing a glimpse of Amazon’s evolving strategy with the search unit.

In June, A9 acquired a mobile startup called SnapTell that lets people take photos of items with their smartphones and match them to corresponding product images — technology that is central to Amazon’s efforts to let shoppers browse and buy items from their iPhones and BlackBerrys.

Amazon is also reaping a harvest of patents that were germinated during A9’s early years as a would-be Google rival. For example, Amazon on July 21 was granted a patent for a “System and method for providing search results based on location.”

That kind of broad patent could potentially have a huge impact on the mobile market, given that so many iPhone and BlackBerry applications today have location-based search features, using built-in Global Positioning System technology to direct users to local sights, restaurants, etc.

While it’s not clear what Amazon plans to do with the patent, it’s a sign that A9’s early work on search technology has resulted in some interesting intellectual property that could benefit Amazon in the future, giving it leverage in negotiations with other tech companies, for example.

Amazon spokesman Drew Herdener declined to make A9 executives available for an interview and declined to go into much detail about the search unit, saying only that it does “product search for Amazon.com sites and mobile applications.” He said Amazon does not comment on patents.

A9, on its website, says its product search efforts include Amazon’s Search Inside the Book feature that lets people search for terms within the text of books. The unit also works on the Clickriver Ads program that lets advertisers put sponsored links on Amazon sites (the A9 website also lists OpenSearch, an Amazon-inspired effort to create a standardized format for sharing search results).

Product search is a critical element of the online shopping experience. When someone searches for a product on Amazon.com, the speed and relevance of the results can prompt people to buy more and generate more sales. Amazon is also keen to adapt its product search to the iPhone and other smartphones, where more consumers are doing their shopping these days.

A9 has "moved from this very ambitious vision to something that’s a better fit for Amazon’s needs, which is searching for products,” said Oren Etzioni, a University of Washington computer scientist who founded Farecast, an airfare prediction tool. Farecast was acquired by Microsoft last year and its technology was incorporated into Microsoft’s new search engine, Bing.

A9 never made a big dent in the internet search market, which continues to be dominated by Google. For June 2009, Google had a 65 percent share of the U.S. search market, followed by 19.6 percent for Yahoo sites and 8.4 percent for Microsoft sites, according to internet measurement firm comScore (the data came out before the recently announced Microsoft Bing-Yahoo search partnership).

Amazon, which launched A9 in 2004, essentially dismantled the public-facing part of the search engine in Oct. 2006, removing its maps and block view function, its instant reward program, and search history feature.

The A9 unit is headed by Bill Stasior, a veteran of the AltaVista search engine. The A9 site says the unit is hiring for 10 positions, mostly in software engineering.

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Target dumps Amazon.com to run its own ecommerce operations

A few weeks ago we reported on speculation about a split between Amazon.com and Target. Well, it turns out the two are headed for a divorce. Target this morning announced it will take the reins of its own ecommerce operation starting in 2011. That would be a big loss for Amazon's ecommerce platform business, which runs web operations for third-party retailers.

Here's more from Target's press release:

“Amazon has been an important strategic partner since we re-launched Target.com in 2001, and the strength of Amazon’s technology and fulfillment services has been a contributing factor in Target.com’s success,” saidSteve Eastman, president, Target.com. “However, to deliver a customized multi-channel experience for Target’s guests, we believe it is in Target’s best interest going forward to assume full control over the design and management of Target’s e-commerce technology platform, fulfillment and guest services operations.”

Previously, Target and Amazon extended their contract to 2011. Amazon and Target will continue to work together during the next two years to optimize performance of the existing platform and fulfillment services.

“We are grateful to have been able to work with Target for the last eight years, and we wish Target the very best as they go forward,” saidSebastian Gunningham, Senior Vice President of Seller Services for Amazon.com, Inc.

Target said it plans to launch its own platform ahead of the 2011 holiday season. With Target out, Amazon's biggest known customer for the ecommerce platform business will be U.K.-based Marks & Spencer.

In recent years, Amazon has lost other big enterprise customers, Toys "R" Us and the Borders book chain. Amazon may be shifting to a more middle-market strategy with the ecommerce platform business. The company has been working on a secret project code-named Vitamin C to build ecommerce tools for mid-sized retailers.

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Kindle users flock to freebies

Amazon.com has raised the ire of some in the book publishing industry for pricing Kindle versions of best-sellers and new releases at $9.99. But what about Kindle books that cost, well, nothing? The Associated Press reports that free books have become top "sellers" in the Kindle store, a development that could hold promise -- or peril -- for publishers.

AP writes:

Publishers and authors have been nervous that the standard cost for electronic editions of new releases, just under $10, will take away sales from the more expensive hardcovers and set an unrealistically low price for the future. They are concerned, but open-minded, about free books, which present a chance and a challenge: Readers may buy other books, or, they may simply seek more free titles.

Scott Shannon, publisher of the Del Rey/Spectra imprint at Random House, tells AP that free Kindle books are "a huge hot-button topic we've been discussing within our division and at the corporate level." He said free books can prompt people to buy other titles, but "in the long term, we have to guard the market. We have to make sure people understand that time and energy goes into writing a book."

Right now the top three bestsellers in the Kindle store -- "The Angel Experiment" by James Patterson, "The Briar King" by Greg Keyes, and "Paranoia" by Joseph Finder -- are all free. In fact, half of the top 20 Kindle bestsellers are listed at $0.00.

Amazon isn't the only company offering free e-books. Sony and Barnes & Noble have tapped Google's huge book-scanning project to add free public domain books to their collections. But Amazon appears to be the only one including free titles in its bestselling e-book list -- giving them broad exposure.

Interesting side note: Amazon's Kindle store is now heavily promoting its recently announced collaboration with Shmoop. The new Shmoop Classics for Kindle are a mashup offering, combining literary works with an interactive guide of "smart, fun analysis." Kind of sounds like electronic CliffsNotes. More from the Amazon Kindle blog.

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Zappos parties it up after big Amazon acquisition deal

Things have been pretty festive over at online shoe retailer Zappos since the company announced it was getting acquired by Amazon.com. First, Zappos CEO Tony Hsieh said he would hand out bonuses and Kindles to staff. Then the company threw a 10-year anniversary party complete with disco lights, carnival games and an open bar. Here are some video highlights of the over-the-top party. Check out the human hamster ball about 35 seconds in.

Previous coverage:
Amazon and Zappos: a good fit?
A blow-by-blow account of the Amazon-Zappos deal
Zappos CEO: 'Nobody was forced to sell to Amazon'

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Marchex's sales; Richrelevance scores cash; CTI; and more

Seattle online local advertising company Marchex could see its revenue further eroded due to the recently announced advertising partnership between Microsoft and Yahoo, with CFO Michael Arends pointing out potential issues in a conference call this week, reports Domain Name Wire.

Onvia, which provides an online service to connect businesses with government contracts, said that its revenue increased 21 percent during the second quarter to $6.2 million as its clients base grew five percent to 8,500. The Seattle company also trimmed its net loss for the second quarter to $197,000.

In a story from TheStreet.com titled "Honey I Shrunk the Tech Sector," Seattle entrepreneur and venture capitalist Martin Tobias predicts more tech M&A deals in the near future.

Bothell biotech Scolr Pharma saw revenues decline 17 percent to $230,789 during the second quarter as royalty payments from Perrigo fell. The company -- which finished the quarter with $3.1 million in cash and cash equivalents on the books and is looking at ways to reduce the burn rate -- saw its net loss decrease 26 percent to $1.6 million.

Comcast said it plans to begin reselling its WiMax broadband Internet service -- dubbed HighSpeed2Go and currently available in Atlanta and Portland-- in Washington state, Philadelphia andChicago this year.

Rosetta Inpharmatics founder Stephen Friend -- who is in the midst of creating the new Seattle non-profit Sage Bionetworks -- is the subject of a detailed Xconomy profile in which he describes how the life sciences non-profit is taking cues from the open source software movement.

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Startup valuations take a dive as 'down rounds' now rule the day

We've certainly seen our fair share of "down rounds" in recent months, venture capital deals in which the valuation comes in at a lower price point than previous rounds. That recalibration is certainly part of larger economic forces as VCs and entrepreneurs re-think the values they placed on startup companies from a year or two ago.

A survey released today by Fenwick & West points out just how prevalent "down rounds" are becoming -- at least in Silicon Valley where the law firm analyzed recent financings for 89 companies.

According to the report, 46 percent of the deals were down rounds while 22 percent showed "flat" valuations. More interestingly, Fenwick notes that the past two quarters are the only two quarters where down rounds have exceeded up rounds since the fourth quarter of 2003.

And the tide has shifted rapidly. During the second quarter of 2008, just 13 percent of deals were down rounds while 68 percent were up rounds.

Furthermore, Fenwick's Venture Capital Barometer shows an average price decrease of six percent for those companies receiving venture financing during the quarter. That followed a decline in the first quarter -- the only two negative quarters since the firm started tracking price movements in 2004.

What does it all mean?

The New York Times' Brad Stone offers his insights in a story headlined "Falling Valuations: Poison for the VC Industry."

But there are other things at work here too, highlighted by my story yesterday on DevHub which gave up on venture financing earlier this year in order to focus on reaching profitability.

Those stories may become more common as startups try to make their previous venture round last as long as possible or learn to exist on their own cash flows, rather than butt their heads up against tough terms in a new venture deal. (Seattle-based iLike is another example of a company that's living off its venture reserves and own cash flows at the moment).

Prominent Seattle venture capitalists -- speaking in good times -- have told me that you should only take venture capital as a last resort. In tough times like these, that's probably even more important.

The Fenwick report also discusses liquidation preferences, corporate restructurings and other topics.

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