With the first generation of public ad tech outfits facing growing pressure to provide ever-increasing ROI, investors are becoming savvy to the issues that were formerly the sole concern of the elite in the ad tech sector. The Drum speaks with one of the leading personalities in the ad tech M&A space Terry Kawaja, chief executive of Luma Partners, to gauge his opinion on what parties are likely to sink or swim in an era when data is king.
Investors are really starting to probe into the black box of programmatic
The recent spate of Q2 quarterly calls from ad tech companies demonstrated just how much scrutiny investors are paying to the evolution of the programmatic sector, and in particular how they can make themselves stand out from the crowd.
For instance, Rubicon Project’s stock price was heavily hit after its leadership conceded to being late into the header bidding space, while Criteo’s senior team were also scrutinised heavily on the same matter, as well its abilities to harness first party data as a differentiator.
Meanwhile, fellow publicly listed ad tech outfit TubeMogul was equally grilled by investors over the industry's shift to mobile and the likelihood of this negatively impacting advertisers' ROI given the consequences for viewability.
Speaking with The Drum, Terry Kawaja, founder of investment broker Luma Partners, says the fact that public investors are going to that level of granularity shows just how seriously they are taking the sector.
“The fact that public investors are clued-in on issues such as first party data, and header bidding is amazing… it shows just how important these issues are for the returning value of these companies,” he adds.
Power to the people
One of the key mantras in the marketing industry at present is ‘people (or person) centred marketing’, with it being adopted in various different guises by many in the industry from Facebook and Google, to less high profile names.
The fact that the early phase of the digital advertising industry was built on proxies, i.e. cookie-based targeting and measurement, that were not tied to specific users (rather they were paired with different devices, and browsers, etc), representing a fundamental flaw in audience targeting.
For instance, what if an ad is served to a device that is shared by a number of users? Plus, given the rise of mobile’s primacy when it comes to internet consumption in Western markets, this method of targeting ads online is becoming increasingly redundant (see slide below, an insert from Luma Partners’ most recent report on the rise of first party data).
The rise of the walled gardens, and how to compete with them
This has led to the rise of the valuation put on first party data (most of which can be accessed at scale), which is kept behind the industry’s walled gardens, where advertisers have little ability to track using third party measurement tools, hence the term walled garden.
Facebook and Google command 85 per cent of the incremental online ad spend at present, according to Luma Partners, and currently control the growth of the market. “That’s because they were first to market with these kinds of solutions [whereby they can help advertisers target users across screens based on their log-in data],” explains Kawaja.
“In the long run, this should in effect create a re-democratization of marketing, because once you prove the viability of people-based marketing and the effectiveness of first party data, then everybody that has it will start utilizing it and developing it,” he adds.
To date, those that have made the most of this outside the duopoly of Facebook and Google companies, such as cloud-based outfits, such as CRM tool providers Oracle Marketing Cloud, SalesForce and SAP. But others are now starting to get into the act.
Kawaja raises the fact that many of the new strategic buyers looking to enter this landscape will likely be Western telecoms operators as well as those from farther afield, bearing in mind the near $900m a Chinese investment consortium spent recently on ad tech outfit Media.net.
Kawaja says: “We’ve also seen telcos get in on the act [such as Verizon Wireless’ purchase of both Yahoo and AOL in the last 12 months], and why do they want to do that? It’s because they have vast amounts of first party data on consumers.”
He goes on to say: “Yes, we will definitely see more telecoms operators get involved in this space. Large telcos, both foreign and domestic, will be interested in capabilities in the marketing technology space.”
This shift is largely driven by many telecoms providers having near monopoly status in their domestic markets, according to Kawaja, highlighting Australian telco Telstra, which itself forked out millions for video ad tech outfit Videoplaza through its Ooyala subsidiary, among many other examples.
“You can almost think of it as a growth initiative diversification programme,” he points out. “That’s a major driver of why companies like that are moving sooner.”
Credit card companies
He further forecasts that players from other industry verticals are also likely to get into the space, with Kawaja envisioning credit card companies to get involved, either through acquisition or investment.
“Companies like MasterCard and Visa know more about you than even Facebook. For instance, Facebook is impressive with 1.5 billion users but MasterCard has even more with 2.2 billion, and they know where you are and have a far bigger intent signal than Facebook, because they know what you purchase,” says Kawaja.
Luma Partners’ report also goes on to highlight the opportunity for companies that can provide link between the marketing cloud providers such as Oracle and the rest of the ecosystem, highlighting Merkle as a potential way for different tiers of the industry to fuse first, second and third party data sources in a manner that could “level the playing field” when it comes to competing with those titans that are the industry’s walled garden.
“We’ve also noted companies like Neustar and Acxiom are also doing things to enhance that and I think that’s a trend you’re likely to see going forward,” he adds.
How to survive the ad tech cull
Commenting on the recent strong economic performance of Criteo, which saw its share price rise in the immediate aftermath of its recent quarterly call with analysts , Kawaja attributes its success to its market share when it comes to the retargeting sector (which may not be in vogue but is still a lucrative part of the industry).
“Criteo is in a business that has significant network effects and they’ve gone and got the lion’s share of retargeting even though they may be in a place where they’re either suing or being sued [by SteellHouse]. However, the point is they have the largest publisher footprint and the best data pool that has proven effective, and they’ve been running the table there when it comes to marketing search dollars.”
Although, he does warn Criteo to diversify its interests, in case it runs the risk of being a “one trick pony” as they are often ridiculed for the blunt retargetting capabilities of its tools.
The business of ad blocking
Complacency over providing consumers the right experience with online advertising, has led (in part) to the emergence of ad blockers (which themselves are starting to bring their own business models to market).
Commenting on some of the recently touted solutions towards ad blocking in the past 12 months, he points out that getting people to pay for content is especially difficult, particularly whenever they’ve been used to getting it for free online.
“Getting people to change behaviours sounds like really tough work to me. Inertia is a very powerful thing. I really want there to be a solution as I don’t want people to suffer but what I say is that we should treat the problems, not the symptoms,” he concludes.
Download a full copy of the most recent Luma Partners report here