MEDIA: SPOTLIGHT ON ESPOTTING - Espotting deal proves there's still money to be made online

There's room for manoeuvre in the pay-per-click search market, Alasdair Reid says.

Here's one for nostalgia buffs. It's the story of Sebastian Bishop and James Burrows, a creative pairing at Rainey Kelly Campbell Roalfe, who leave to set up a dotcom company, which, after a couple of years, they sell for £135 million. Both, naturally enough, become multimillionaires in the process. Jammy gits, is the immediate reaction in polite ad industry circles; though language in some quarters is rather less moderate.

But the spooky thing about this big deal is that fact that it didn't happen in those far off, dangerously distended days of the dotcom bubble.

Unless we are very much mistaken, or the press release was delayed three years in the post, the deal actually happened last week.

Which is curious. This sort of thing just doesn't happen any more, does it? Or do we see another boom on the horizon?

The company in question is Espotting Media, which Bishop and Burrows founded along with Daniel Ishag, its chief executive going into the deal. The company they're selling to is a rival pay-per-click search engine company

Actually, the deal was described as a merger, which they can just about get away with, especially as the two companies weren't really direct rivals.

Their geographical territories never overlapped - Espotting is a European outfit, with offices in the UK, France, Germany, Spain, Italy, Sweden, Denmark, Norway and Switzerland. is a US-only operation.

In effect, has paid £135 million for a slice of the European market.

And you can see why it might want to pay such a large sum of money for the privilege because this is fast becoming one of the most important sectors of the online market. According to recent industry figures, it now accounts for more than a third of all digital marketing revenues.

Technically, of course, though it's often bracketed under online advertising, this is a direct marketing technique. It's all about paying to feature prominently in the results produced by search engines. If, for instance, you sell widgets, you might want to guarantee you come top of a search on Yahoo! when someone types in a search request for "widget". To achieve that you would then try to offer the highest bid (in terms of payment per click-through) to the likes of Espotting to ensure you come out top of their list, beating all other rivals that the search engine might turn up when "widget" is keyed.

The Espotting/FindWhat deal is part of what many see as a tidying- up process by which the market is consolidating into three blocs. There's Overture, a global operation whose partners include all of the big portals (including Freeserve, MSN and AOL), and Google.

In short, there has been speculation that this latest deal was very much born of necessity - as the market continues to mature, so the theory runs, then the winners are going to be the ones with real clout and geographical reach. These are not boxes that Google or Overture have difficulties in ticking.

But Bishop denies that the deal was driven by defensive motives. "We did it because it made sense, not because of any notion of what the next chapter should be. It was a US company with European aspirations, we had US aspirations. We were the mirror image of each other," he says.

And indeed, you could argue that this market is still far too young for the usual laws of consolidation to apply. There's still plenty of room for different types and sizes of companies and there will be as long as the market continues to grow. This year, globally, the market will be worth around $2.5 billion but, according to many industry sources, it will have grown to at least $7 billion by 2007.

Martin Child, the managing director, northern Europe, of Overture, agrees that the prospects remain healthy - all the more outstanding given doom and gloom elsewhere in the media market.

"It's growing because it works," he says. "It's simple: if people don't click through then you don't pay. "

On some portals, such as Yahoo!, it contributes around 20 per cent of profits. And consumers obviously like the services they come across because, as Child has pointed out, none of this works unless people keep clicking.

So how's the market going to evolve and how do we place this latest deal in that context? Bishop is keen to emphasise the expanded geographical scope offered by the Espotting/FindWhat merger. "Advertisers want US traffic as well as European traffic and we are able to offer that to them. Take travel, for instance, or hotels - it makes absolute sense to advertise in the US.

It's something we found when we expanded in Europe. Lots of UK advertisers saw the benefits of delivering to France," he says.

Child at Overture isn't so sure about the scope for cross-border business.

But he does believe that geographical spread is essential from the point of view of "the distributors" - the big multinational portals that carry these search engine services. They are the ones looking for global consistency.

Charlie Dobres, the chief executive of i-level, says that the reported sums of money tagged to this deal are (if true) good news for the industry in general but, like Child, he's not at all convinced about every aspect of the rationale.

He concludes: "It is, generally speaking, very encouraging for the market as a whole. This is a favourable valuation for a young company with relatively low profit levels and that is a highly positive sign for the digital marketing space. Pay-per-performance now represents 30 per cent of the total in ad revenues and it (Espotting) is very good at it. But the international angle is a red herring. Few companies have the multinational scope or the operating structures that would make that relevant."