Why Limelights big bet on EyeWonder didnt pay off

Limelight Networks will sell its EyeWonder interactive ad unit to DG (formerly DG FastChannel) in an all-cash transaction valued at $66 million, the content delivery network said on Tuesday. Thats a heavy discount from the $110 million in cash and stock that Limelight agreed to pay for the business back in December 2009. So what went wrong?

In short, the ad business didnt fit in with the rest of Limelights value-added services, and EyeWonder didnt grow as quickly as the CDN provider expected or really, at all. When Limelights big interactive ad acquisition was first announced more than 18 months ago, EyeWonder was expected to add about $40 million in annual revenues to the company. In DGs press release announcing its purchase of the unit, it said it expects EyeWonder to generate revenues of approximately $36 million to $37 million for full year 2011.

The acquisition of EyeWonder followed Limelights strategy of placing bets on companies with solid technology but underperforming sales or operations teams. Following a conversation in May with Limelight CEO Jeff Lunsford about what the company looks for in acquisitions, I wrote:

Limelight looks for quality teams that have built a good product but havent had great luck with sales and marketing. It then fits the technology and team in with its own architecture, and hopes to accelerate revenues by selling across its customer base.

Sometimes that strategy backfires, as it did with EyeWonder a! nd somet imes it pays off. While EyeWonder was a big part of Limelights value-added services business, it wasnt the part that was growing. Limelights software-as-a-service business, which includes the assets of video management firm Delve Networks, which Limelight purchased in August 2010, and CMS player Clickability, which was acquired in May this year, has grown nearly 50 percent, according to Limelight VP of Corporate Communications Paul Alfieri.

Limelights acquisition of EyeWonder might not have panned out, but todays deal makes a lot of sense for DG, which already has an ads business. DG plans to combine EyeWonders behavioral ad technology with MediaMind, which it acquired in June. And people are still bullish on interactive ads in general for instance, New York City-based interactive ad startup Innovid raised $9.5 million in a Series B funding round led by Sequoia this morning.

Photo courtesy of (CC BY 2.0) Flickr user Christopher Chappelear.

Related research and analysis from GigaOM Pro:
Subscriber content. Sign up for a free trial.