Winter is Coming (to Ad Tech)

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This past couple of weeks have been full of great news in ad tech. The Trade Desk went public and immediately saw their stock price pop 60%. AppNexus raised a small round, presumably setting themselves up for an IPO. Krux was acquired for $650-750M by Salesforce. HookLogic was acquired by Criteo for $250M.

Is the future of ad tech rosy, or is this the sunshine before a long winter?

Well, as a proud owner of RocketFuel stock (bought at $25, now hovering around $2.5, do the math) I am looking at this as glass-is-half-empty. Don’t get me wrong, I love ad tech. Tech IPO is a good thing and these companies have built real, tangible businesses that can withstand the scrutiny of the SEC and the public market (I’m looking at you Uber and Airbnb). The problem is, beyond the wall(ed garden), a massive disruptive force is rising up, looking to swallow up the whole industry. Facebook.

We all know Game of Thrones is a thinly veiled metaphor for the ad tech industry. We are all fighting over market share, going after each other’s advertisers and their budgets. New houses emerge, alliances are made, innovative weapons are developed, all to claim the throne, which Google is sitting on. House Salesforce has acquired Krux as they go to war against House Oracle and House Adobe. House Criteo has acquired HookLogic to strengthen their arsenal. House Amazon has fucking dragons.

When Bezos had long hair

Meanwhile beyond the wall, Facebook has evolved into a completely different creature. They were initially happy staying on the other side of the wall, but the Audience Network (where FB allows advertisers to buy non-FB mobile ad inventory using FB data) is the breach of the wall. They are coming and no one standing between them and the advertiser is safe.

Zuck delivering his sales pitch

Zuck delivering his sales pitch to advertisers

How formidable is Facebook?

Let’s look at the numbers. Let’s see… in Q2 2016 FB had:

  • 1.7B MAU
  • $6.2B in revenue
  • $2B in Net Income

First of all, MAU and quarterly financials in Billions is ridiculous. They also have $5B in cash, so if they wanted to, they could just buy Criteo ($2.1B) and The Trade Desk ($1B) and AppNexus (prob $1B) and MediaMath (prob $1B) without borrowing money. Not that they would, but they could. Facebook’s market cap ($370B) is bigger than Salesforce ($48B), Oracle ($159B), and Adobe ($54B) combined, plus you can throw in IBM ($110B) for good measure.

Let’s look at FB from a capability standpoint. At a high level, points of differentiation in ad tech are:

  • inventory (eyeballs = scale)
  • data (what you know about the eyeballs)
  • algorithm (to optimize ROI)
  • access to ad budget

The four capabilities reside in different parts of the ad tech ecosystem today. Publishers own the inventory and SSPs consolidate them. Data sits in DMPs and the DSPs provide the algorithm + connects the dots with the SSPs & DMPs. Agencies have access to the budget. Most players in the Lumascape does one of the four. Some players can check off multiple boxes, for an example Appnexus could be considered a SSP + DSP and they also have direct advertiser relationships.

What is scary about FB is that they do all four and they do it 10x better.

  • Inventory: 1.7B MAU is a good start + nothing stopping FB from expanding the Audience Network to more inventory
  • Data: This one is obvious. FB knows more about their users than anyone. (although Amazon does have purchase data = the aforementioned dragons).
  • Algorithm: Army of top data scientists working with massive, proprietary data is a winning formula
  • Access to budget: FB has improved the Ad Account and Business Manager to make it easier for advertisers to manage campaigns themselves. The number of advertisers taking FB ads in-house is only going to increase, chipping away the agency’s business.

To top it all off, because FB can directly connect the advertiser budget to an impression without the slew of vendors taking a margin, FB can do all this at a lower price. Traditionally, a dollar an advertiser had spent would become 50 cents by the time it reached the publisher as the money change hands throughout the Lumascape, whereas in the FB ecosystem, the dollar is essentially pure margin.

What’s Next

Digital ads will continue to grow and eat away TV and other marketing budget, so ad tech will not go away overnight. But while ad tech players are busy fighting each other (like the houses in Westoros), a formidable force has started it’s march south. FB will continue to invest in new inventories through partnerships and acquisitions like Instagram, and will further their self service agenda. There will be further consolidation in the Lumascape to connect the ad dollars to eyeballs more efficiently (as in lower margins for everyone). A lot of small players will get crushed. The time to join forces with rivals to beat the common, great threat has passed. Every house must now answer – why do they deserve to survive when winter is here? What value are they adding that Facebook does not / will not?

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