In the highly tumultuous world of ad tech, is a wave of acquisitions leading to a shakeout of the market? Katie McQuater explores the trends driving consolidation.
The ad tech industry is on an upward trajectory, with a swell of acquisitions indicating the market is far from slowing down. And with an AOL survey showing almost 90 per cent of businesses plan to grow their use of programmatic buying of display, video and mobile ads by more than fifty per cent in the next six months, it isn’t difficult to understand why more companies than ever are making savvy acquisitions in the space.
In the first three-quarters of 2014, there were 322 ad tech transactions globally, according to Results International, in comparison to the 223 in 2013. If this rate continues at pace in Q4, the number of deals will almost double in 2014.
These numbers reflect activity across all ad tech segments, but programmatic has been one of the biggest drivers of deal activity this year. Recent deals have included the $640m acquisition of BrightRoll by Yahoo, a deal that signifies both the inquisitiveness of the large internet companies in ad tech, and, crucially, highlights the importance of programmatic video.
In addition to the Yahoos, Googles and Facebooks of the world, telecoms companies, broadcasters and traditional offline data players are also buying up companies and expertise alongside the pure-play programmatic players. It’s a varied picture, with each having their own reasons to move into the space.
The uptake of programmatic with advertisers is a key driver for the flurry of acquisitions activity. Advertisers are starting to better understand the opportunities programmatic can offer – and are viewing it not simply in terms of its efficiency as a direct-response channel.
“Advertisers are waking up to the huge potential of programmatic and combining programmatic with their own customer data,” says Julie Langley, partner at Results International. “It’s not just about the channel. You can use programmatic to fundamentally change the way you market. I think marketers are starting to think about how you bring creative, data and planning together to reflect this new world and the opportunities created by programmatic.”
Langley says companies are starting to realise the potential of creative being combined with programmatic’s “incredibly clever plumbing” and data from online and offline channels. In that sense, the perception of programmatic has changed.
“There’s been a temptation to say it’s just plumbing, but actually if you marry the creative with this incredibly clever plumbing, with your customer data across all the different channels, then that’s a really exciting challenge.
“In the early days it was all about ad tech’s efficiency, but I think people are now realising it’s actually a strategic tool.”
One acquisition trend is the buying of technical solutions and products in order to scale them as part of a media offering. The technology companies in the Lumascape have either tended towards buying other tech companies or formed advertising networks. This is an unsurprising trend driven by distribution of technology, according to Caspar Schlickum, chief executive of Xaxis EMEA.
“There’s an interesting and unsurprising trend around technology companies buying businesses to help them distribute their technology by tying it into media. Technology from a business model point of view is very difficult to make work, so often if you bundle it together with media you have much more opportunity to build scale.”
While there has been a huge amount of consolidation – almost half of the Lumascape has been acquired, points out Schlickum, in attempt to “reinvent business models and create more compelling solutions and products and services” – he’s surprised there haven’t been more acquisitions on the buy side. “It surprises me there hasn’t been more acquisition across the whole portfolio by the demand side because of course we represent the clients; we’re best placed to understand what the clients want.”
Of course, deals aren’t just about scaling technology; the concept of the ‘acqui-hire’ is also driving activity in the space. According to Nigel Gilbert, European vice-president of AppNexus, this is just one means of obtaining people with the right skillsets to grow your business.
“Developers are very hard to recruit. It’s one way of acquiring a team of people that already have the skills, processes and understanding required to build technology at scale.”
So while some services in the industry will start to become commoditised as the market consolidates, skillsets remain highly sought after. According to Langley, the data science skills required to get the most out of programmatic cannot be commoditised. “On the contrary, I think they’re a really scarce skillset and they’re going to become more scarce as more companies vie for them – not just the ad tech players but also the trading desks, in-house media teams and agencies. There are huge amounts of value to be gained from savvy teams, savvy data scientists and savvy uses of data,” she adds.
There are three ways to categorise M&A activity, argues Gilbert – fear, greed or confusion. While some are making investments driven by fear because their business is being challenged by programmatic, and some acquisitions are driven by greed, others reflect confusion and a lack of understanding of the market. These deals are “symptomatic of a degree of confusion about what their business is going to be in the new world,” according to Gilbert.
Will this wave of consolidation in the industry help simplify the industry and de-fragment the cluttered Lumascape? It’s worth noting the effects of corporate consolidation have not yet filtered down to operational level, with 73 per cent of advertisers working with up to 20 vendors to execute campaigns according to a survey AOL carried out with its clients.
According to David McMurtrie, head of publishers at Google, there is a need for companies on the demand and supply sides of the industry to offer an integrated solution.
“The digital ecosystem, by its nature, is always going to have complexity – this comes from innovation in our industry and is healthy. But there is a need for the biggest companies to offer a fully integrated solution across the ecosystem on both the demand and supply side. This has the benefit of bringing greater transactional and operational efficiency across all parts of the business as well as strengthening strategic relationships and increasing transparency.”
Paul Oronoz, UK country manager at Specific Media, argues the complexity of the space is driving the land grab in acquisitions activity as the space consolidates.
“Let’s not forget many acquirers are looking to eliminate future competition and gain a larger market share. It’s a race that will drive acquisitions and therefore consolidation. Although complex today, it’s a very exciting time for the industry.”
While the industry will definitely see greater consolidation and simplification, Langley notes that it is not now, nor will it be for many years to come, a mature industry, and as such this will shape the disruption of the sector for many years, with a raft of new entrants “every week”.
With all of these high-value deals, is the industry headed for a shakeout that will eliminate weaker players? Langley believes there will be a shakeout in the market, but stresses that “it’s the companies that execute best on their strategy, do something differentiated and provide really good customer service” that will survive.
Going forward, there is an opportunity for smaller, nimble players to make the most of the evolution in programmatic by working directly with brands – an opportunity that didn’t exist five years ago, according to Langley. “As a rule, buyers looking at the sector are placing a premium on that direct to advertiser relationship.”
Graham Moysey, head of international, AOL says: “We operate in a very dynamic and fragmented market and consolidation is inevitable. There is a drive to connect all players in the ecosystem so we can simplify at scale. Companies that can do this well will either lead or be part of a larger entity to drive simplicity and clarity in the digital ad ecosystem.”
No matter how the industry consolidates, and companies buy up vast amounts of the space, delivering against brands’ core objectives will remain key. According to Schlickum, this will generate the most value in the crowded space.
“Our industry talks so much about what we do, but ultimately the challenge of marketing has never changed since the industry was first invented – ultimately it’s about selling more stuff to grow a business. The models of how we engage with clients are starting to become renumerated on the basis of what we actually deliver. And that’s a good thing.
“Many of the acquisitions are geared towards that. It’s the ability to really deliver against marketing objectives rather than being, say, a technology vendor or an ad network or a publisher.”
This feature was first published in The Drum's 26 November issue.