Explaining the Wave of Ad Tech M&A

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The proverb states that the "enemy of my enemy is my friend," even if, as Mr. Spock once claimed on "Star Trek," the saying was coined by a man who later decapitated his "friend." As the Facebook and Google duopoly presses down on the ad tech world, many will see the wisdom of the sentiment and will choose to compete by aligning with partners and even competitors, despite the inherent dangers of relying on a rival.

Facebook and Google now control a combined 67% of the U.S. mobile ad market and 54% of the overall digital ad market. Increasingly, anyone who isn't part of this duopoly is pitted against the rest of the ecosystem in vying for the rest of that share. Meanwhile, investors are seeing the effect that the Google/Facebook combo is having on ad tech revenues. These two walled gardens are sucking up the lion's share of the profits in digital -- it's not even close.

As a result, investors seem to be losing confidence in the ability of individual ad tech players to compete, and so venture capital interest has slowed to a trickle. Overall, U.S. capital firms invested about $860 million in ad tech firms in 2015. That's the lowest level since 2010. As of August, investment was on pace for its lowest funding since 2005.

Ad tech firms find themselves between a rock and a hard place: on the one hand, the rise of the Facebook/Google duopoly; and on the other, the drought in financing. The predicament has raised calls for individual players in this fractured landscape to join forces. And that's exactly what they are doing -- or at least, trying to do.

M&A frenzy

The most obvious way they are joining forces is by buying one another, and that activity has been both public and well-documented. Without access to additional capital, ad tech companies have to be strongly cash flow positive to remain independent. Few can. So the pressure to survive is prompting lots of M&A activity. Ad tech acquisitions spiked in 2014 and have remained high ever since, mirroring a trend that we are also seeing among publishers and ad networks.

Interoperability and standardization

The second, less-visible way that ad tech firms are learning to cooperate is to make sure their platforms interoperate, which is a far more difficult technological challenge than most folks realize. Unless they have already stuffed their balance sheet with the last investment round, companies have realized that they need to invest in their core competencies to remain viable, sticking with what they are best at, while learning to entrust the rest to other partners. For ad tech companies to really focus on what they do best, they must simultaneously ensure that their offerings complement and seamlessly integrate with others to form a customize-able full stack. In this environment, the different pieces need to fit together. Data needs to be transferable, IDs need to be connectable across platforms, and creative needs to be optimized for dynamic executions across devices. Call it the "Age of Interoperability."

My interoperability or yours?

The Age of Interoperability has been ushered in with eloquent, public calls for standardization of formats, technology and operating processes. The atmosphere is one of brotherhood, as though everyone were joining forces in some noble rebel alliance to defeat the dark forces of empire. But the reality looks less like "Star Wars" and more like the Middle East. Just because companies recognize the need to be "interoperable" doesn't mean that they will lay down their arms and settle old differences.

This sort of maneuvering is nothing new. Standardization in tech is always a messy process that is determined both by market forces and through the cooperation of companies. VHS beat Betamax because it was able to store a two-hour movie on a single tape, which was twice the capacity of Betamax. But blu-Ray beat HD-DVD because it got support from the major Hollywood studios.

In ad tech, the fight is almost always over data: how to connect it, share it and protect ownership of it. For example, the DigiTrust consortium to create a common cookie is a not-for-profit effort designed to help publishers and the ad tech supply chain compete more effectively with Google and Facebook. As a not-for-profit, its interest is to promote the industry, rather than any individual company. Whether or not it is ultimately successful will depend on whether enough companies voluntarily sign up, not by a standards body arbitrarily choosing to support one company's tech over another.

Can't we all get along?

Ad tech companies have to work together to hang onto their respective slivers of the market. Ultimately, interoperability and the cooperative spirit to make it work is what will allow ad tech players to best service their clients, who increasingly demand data transparency and customized technology. THIS needs to happen in the nitty-gritty technological collaborations that make an increasingly data-driven space work more effectively for everyone. (Note: This is hard work; it will never be a simple "plug and play" where different pieces of the stack line up like interchangeable Lego blocks.)

Unfortunately, that's not the current spirit of negotiations between ad tech players. Instead, what we have right now is a me-first approach that's playing itself out in the committees that were created to foster collaboration.

Honest competition should not be subverted into battles over standards, formats and protocols. Once the jockeying moves from overt competition for customers to covert attempts to win over trade bodies with proprietary "standards," everyone loses, except for Facebook and Google. The goal should not be to write standards in such a way as to benefit your company at the expense of near competitors, but rather to level the playing field with the giant walled gardens. At the end of the day, they are the real competition.

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