The display-advertising ecosystem is a confusing place. The fragmented nature of the sector owes itself primarily to one factor: the rise of audience-based media buying. In the past 18 months we have witnessed a huge growth of audience-based media buying, much of it through ad exchanges. This has brought about an explosion of supporting solution providers including agency trading desks (ATDs), media bidders (DSPs), data supply, data management (DMPs), publisher yield optimization (SSPs), assorted publisher tools, ad verification, etc., all of which play a role in the ecosystem.
And while the growth has been substantial, there is still a lot of upside. According to Forrester, audience-based media buying still represents less than 10% of display media. Real-time bidding (RTB) is driving part of this growth. The ability to make automated decision-making of ad placement based on an optimized ad choice personal to the viewer has been shown to increase yield. To date, however, these automated media-buying techniques have largely been applied to remnant inventory (defined as whatever the publisher's sales force doesn't sell). The real fun begins when the same real-time targeting and optimization technologies can be applied to guaranteed inventory. What will be interesting to see is if a "science"-based approach can yield higher rates than the "art" of selling in a traditional sense. Based on the product-development initiatives of SSPs, we will soon find out.
The fragmented ecosystem, with its many point solutions and venture-backed players, represents both a challenge and an opportunity. On one hand it is inevitable that many companies will not achieve success given the level of competition. The Wall Street Journal estimates that $4.7 billion has been raised by advertising-technology companies, and, given the size of the market, it is clear that not all of that will see a positive return. On the other hand, the market growth and leverage has attracted a wide variety of strategic interest from the usual internet suspects to large media, data, software and network companies looking to take advantage of the growing market. Besides significant growth in the digital channel, the same targeting and optimization technologies learned in the digital channel can be applied to larger offline channels of TV and print.
Eric Schmidt recently suggested the digital-advertising market could be as high as $200 billion in the next five years. To reach those levels, we will likely need to see some blending of online video and TV as well as a further development of advertising toward ec-ommerce, two trends that are already under way. In a recent presentation titled "The Science-ification of Media," I speculated that data collection at the display layer could in effect cause a collapse of the purchase funnel as consumers made their way from display to e-commerce in a more efficient manner. One of the consequences of this would likely be M&A migration up and down the funnel. Today we saw an example of this with eBay's acquisition of GSI Commerce.
Much of the growth in audience-based media buying is attributable to direct response buys. E-commerce companies are remarketing at huge scale while group-buying companies such as Groupon are spending copious amounts every month on targeted display ads. Some evidence suggests that the group-buying companies alone compose a substantial portion of this audience buying growth (which worryingly reminds me of the round-trip deals we saw in the late 1990s).
I am not saying we are in a bubble. In fact, that most common question needs to be bifurcated. This market is certainly showing lofty valuations on "money in" as venture capitalists compete to finance hot deals, especially among the large IPO candidates such as Facebook, Twitter, Groupon and Zynga. Whereas, in the "money out" category (M&A activity), I would argue we are not experiencing a bubble (disclosure: Luma Partners is an M&A adviser to digital-media companies). Today's strategic buyers are conducting proper diligence and valuing companies on the basis of projected financial contribution.
Where do we go from here? I believe the significant innovation occurring in the landscape is likely to cause an inflection point of growth for display advertising. As the market develops and technologies mature, I predict the more sophisticated marketers will bring several key capabilities in-house (similar to the experience in search). This will likely lead to continued consolidation of the ecosystem as point solutions are combined and new entrants seek out their strategic positioning in a vibrant marketplace. Just in the last year, 28 companies have been acquired across the sector and several buyers are continuing to show interest. So buckle-up -- 2011 and 2012 are likely to be busy.
|ABOUT THE AUTHOR|
Terence Kawaja is president-CEO of Luma Partners, a boutique investment bank providing strategic advice to digital-media companies.