Over the past few years, marketers and publishers have become increasingly concerned that they can’t see through the forest of ad tech. Predictions of carnage in the “ad tech complex” are not new. Terry Kawaja, founder of LUMA Partners, has long foretold hard times. While Terry is in a privileged position as a mergers and acquisitions expert, his February statement that a whopping 90% of the current ad tech companies will disappear (without successful exits) took many by surprise.
As you likely know, I’m a firm believer in the open and competitive internet. One of its great advantages is an environment in which innovation and disruption can spawn seedlings of new ideas and opportunities without great barriers. In addition, I’ve long been on record that programmatic ad technologies will unlock new efficiencies in the market. Automation is the future and we should embrace it.
But there is no doubt that the trees have started to fall and the forest has begun to thin. I’ve personally been eager to take an axe to a few of them that are rotten to their core. But how they fall will be important. There are five strong forces about to hit the ad tech landscape that are likely to cause damage to those who are unprepared. Publishers should use this as notice to their operations teams to ensure their businesses are ready.
The Forces at Work
The press had a field day lately covering Google and YouTube’s “brand safety” crisis as more than 300 advertisers publicly boycotted Google. It was the number one topic on both sides of the Atlantic as I witnessed at ExchangeWire NYC last Wednesday in NYC and the next day at European Advertising Week in London. All eyes are currently on Google. But the reality is this issue has affected our industry for many years.
Brands are damaged when advertisers and their “agents” (quotes used intentionally) rely too much on technology to guide the flow and placement of their advertising. This is a familiar issue to the other half of the Duopoly, Facebook, too. Audience targeting without consideration for environment works fine for direct marketers who are simply trying to fulfill demand through clicks and moving product off shelves. But when brand stewards look to digital to create desire and demand—and shape minds—the context and environment for their advertising is vital. Clearly, the pendulum swung too far. As with many other road bumps for Facebook and Google, they’ll use their scale and dominance to lure advertisers back into the fold. However, many small and mid-sized ad tech companies won’t be able to adapt as advertisers seek assurances on their ad placements.
Advertisers have taken note of the amount of value leakage with these same intermediaries in the ad tech ecosystem. It’s clear that almost no one sitting in the supply chain has been truly accountable to the two principals, the marketer and the publisher. Remember, these are the only two stakeholders that are recognized brands and rely on the trust of the consumer. Marketers have now set a goal of 70% of their investments going to working media while the first lawsuit is being filed by a premium publisher.
The investment community’s interest in ad tech has been built on outsized margins and models. If you’re in the middle of a supply chain, this can only be achieved by maximizing self-interests as principals. This has led to unsustainable growth through black boxes, volume rebates and incentives, inventory arbitrage and reselling of data and services. Advertisers have clearly put the industry on notice to end it. (See Rubicon’s most recent 10K disclosure.)
VC Funds Dwindle
Over the past year, the Sand Hill interest in ad tech has been drying up. There is a brutal combination of a maturing landscape and an absence of predictable exit strategies. While the public market has been unfriendly to ad tech for the past couple of years (see FUEL, RUBI, PUB, TRMR, MM), Google, Facebook, Oracle and Aol have also stopped buying. Yes, Chinese dollars are still out there but no one should be excited about this option. If trust and transparency need to be built in the ad tech ecosystem, it’s not wise to invite investment from China.
Google and Facebook are under a lot of pressure here in the U.S. Very quietly last week, ad tech was hoodwinked into supporting the Senate’s vote to abolish the FCC’s rules which will open the doors for all ISPs to now resell consumers’ browsing history and location data. This will relieve any concerns at Google and Facebook that rules may creep into their businesses as the bar has now been lowered even further.
The regulatory concerns that forced Google to allow header bidding are gone in the new Washington. More importantly to ad tech, every ISP now has the ability to compete and replace the ad tech services business. Verizon is in the pole position to own this space having cobbled together and transformed an array of ad tech assets into an ability to deliver the full supply chain with unique access to the sensitive data of nearly every American coupled with the inventory of MSN, Yahoo, Aol and the wider web.
These are four letters that most small to mid-sized ad tech companies have wrongly delegated to their legal counsel. However, they need to know the European Commission’s General Data Protection Regulation (GDPR) is coming at them like a freight train that will impact their entire business. In a little over 12 months, the already finalized GDPR will be the law of the land across Europe.
Importantly, it will create risk and obligations globally as it will serve as the de facto gold standard on data protection for much of the world. Well, except for the United States. Although the jury is still out, it likely will serve as an opportunity for any publishers who have a strong and trusted relationship with their consumers. However, it’s universally understood GDPR will take a chainsaw to much of ad tech as none of these companies have relationships with consumers to solicit or justify consent in order to continue their data collection.
What is the broader impact on the ecosystem if Terry is right and much of the ad tech forest truly falls? It’s hard to tell. With careful planning, the companies who deliver consumer products will avoid impact. There is a fairly good argument it will benefit most DCN members—premium publishers.
Interestingly, the advertising relying on the ad tech ecosystem is a very small fraction of the internet economy. An expert at Harvard Business School, working with the IAB, put out their third version of a research study attempting to size the US internet advertising market. I took issue with this research, along with others, as it counted every bit of internet-based commerce–from Uber to Citibank to Amazon purchases–under the category of “advertising.”
That said, the study does allow us to better analyze the contributions of the ad tech ecosystem. The IAB/HBS study approximates the US internet advertising market at $1.21 Trillion (6% of GDP). Using the IAB’s own estimates of the revenue in ad tech, not counting the Google and Facebook duopoly, only a measly 1.5% ($28 billion) of the internet advertising market is at risk.
I guess the question is, will the felling of the ad tech forest even make a sound? And an important question for the industry: What happens if there are only two trees left standing?