NEW YORK (AdAge.com) -- Counting on mobile to be the M&A spark that kicks off a new wave of deals? Don't hold your breath.
While the mobile-ad-network industry is ripe for major consolidation -- and bankers and execs say it needs to happen within two years -- it's unlikely to happen this year. Simply put, its scale and revenue aren't quite big enough to interest the likely buyers in the current economic climate.
There are more than 15 mobile ad networks in the U.S. brokering ads for mobile websites, and while ad spending is growing, there aren't yet enough mobile-media properties to warrant the number of networks in business to serve them. Some blue-chip mobile publishers even employ their own direct-sales force -- a factor that's not helping the space.
"You go into the oppressive world of margin compression where ... the ad networks keep beating each other up on price, and margins get driven smaller and smaller," said a mobile ad network executive who declined to be named.
More than a year ago, Google flirted with mobile ad network AdMob and Yahoo with Quattro Wireless and Millennial Media, but now "the recession has made everyone focus on their core businesses," said Jay MacDonald, partner at media investment banking firm Desilva & Phillips. "There's no game-changer out there; no one network has been able to achieve superior scale."
Google is now believed to be interested in building out a mobile ad network organically and Yahoo "isn't looking to write the big checks now," said a person close to the company's mobile ad executives. AOL is shutting down its mobile ad network as the company streamlines its focus areas and sets its sight on an IPO.
It's unclear any of these giants would pony up the bucks sought by investors who back these startups. Mobile ad networks can fetch up to six times sales, according to some industry bankers and execs. On that basis, sector leader AdMob should be worth $240 million, based on its $40 million annual sales projection floated by industry watchers, yet its purported valuation is $300 to 400 million, based on its latest funding round in January. Nonetheless, the company hit $5 million in sales last month, according to a person close to the startup.
Either way, industry insiders give the networks two years to consolidate before they're dwarfed by the big online properties developing their own mobile offerings.
"Ultimately, they'll all be acquired in the next six to 24 months -- there's too much pent-up demand," said Mike Petsky of investment bank Petsky Prunier. And if they don't consolidate soon, some might not be standing about a year from now, especially those without a strong cash position. At the current rate, the industry can only support at most six ad networks across all mobile media, according to John Hadl, managing partner of mobile-ad agency BrandinHand.
Added a former mobile-ad agency executive who declined to be named: "No one will take the time to do a mobile-only buy. They can't compete with the efficiency of the portals or the ESPNs who can offer them the whole package."
For Greystripe CEO Michael Chang, this means it's all the more critical to "join forces with the online networks to be able to offer the digital media buyer one purchase across both platforms."He struck a deal to deliver mobile advertising for Tribal Fusion. As they try each other on for size, and like how it feels, the next logical step would be a marriage, which, if it were going to happen would more likely occur next year instead of this year.
Four Mobile Ad Networks to Watch
More than 15 mobile ad networks operate in the U.S., spanning the gamut from video to SMS, but most crowded is the display advertising space, which is expected to be the most profitable. Here are what are believed to be the four largest mobile display ad networks and their near-term M&A prospects.
Estimated 2009 sales: $40 million (global)
Total funding: $47 million; last round in Jan.
M&A prospects: Company declined to comment, but word is if anyone can hold out for the right price it's AdMob, because they're purportedly the biggest by revenue.
Estimated 2009 sales: NA
Total funding: $72 million; last round in Aug. 08
M&A prospects: Company said it's not shopping for acquirer. Some posit investors could face tough exit; has most funding among its competitors but not the category leader.
Estimated 2009 sales: NA, though CEO Paul Palmieri said $10 million was a "great quarterly goal."
Total funding: $21 million; last round in 2007
M&A prospects: Mr. Palmieri said company is currently not for sale, which one banker corroborated.
Estimated 2009 sales: $20-25 million in revenue
Total funding: $28 million; last round in March
M&A prospects: Quattro is looking around, bankers say. "If an acquisition provides the best opportunity for our investors, employees and clients we would look seriously at that option," a spokeswoman said.