COVID-19 threatens to accelerate ad tech consolidation in second quarter
'We will see companies close under these conditions,' warns one programmatic exec.
The second quarter is expected to bring a wave of closures and layoffs within the ad tech ecosystem, as brands either cancel or scale back ad spend amid the novel coronavirus pandemic.
The belt-tightening is largely the result of significant declines in travel, retail and entertainment, as well as cancelations for major tentpole events such as the Olympics and NCAA March Madness. The most recent data suggest that nearly a quarter of media buyers and brands have canceled their ad spend for the second quarter while another 48 percent say adjustments are in order for the same time period.
“The second quarter will have massive headwinds,” says Will Doherty, exec VP of global marketplace development at Index Exchange, which provides software for publishers to sell ad space programmatically. “And it will only likely accelerate throughout the year.”
“We will see companies close under these conditions,” he adds.
Not helping matters are the standard patterns of payment across the supply chain. Although it takes merely nanoseconds to purchase an ad, it can take several months before anyone in the ad tech ecosystem gets paid (see chart below).
Brands typically pay agencies 120 to 180 days after their campaign runs; agencies pay demand-side platforms (DSPs), which they use to buy ads programmatically, 90 to 150 days after; DSPs pay supply-side platforms (SSPs), which publishers use to sell their inventory, 60 to 120 days after; and SSPs pay publishers within 30 to 60 days after an ad first appears on their platform.
In many cases, demand-side platforms (DSPs) use revenue from three months earlier to pay earnings that were due for either the previous or current month. This creates a large squeeze on both DSPs and others, especially when coupled with the significant scaling back of ad spend that’s expected for the second quarter.
“This is going to be a major cash crunch for everyone,” says Hanna Kassis, CEO of Oarex, a company that purchases invoices at a discounted rate from media companies such as publishers. “We expect to see a ripple of non-payment throughout the industry.”
DSPs will be most vulnerable in the second quarter as agencies typically don’t pay them for several months after a campaign has run. As a result, DSPs will often spend up front to buy ad placements in an effort to secure business. Under normal circumstances, this usually isn't a problem, “but agencies may now not pay due to unforeseen circumstances like coronavirus and the loss will be put on the DSP,” says Kassis. “If [DSPs] don’t pass the loss to their supply-side partners, it damages them even more.”
If DSPs opt not to pay their supply-side platform (SSP) partners, however, the burden shifts to everyone else in the supply chain. “The uncertainty and risks DSPs now face is very concerning, but chances are the losses will be passed on and it will create a ripple effect throughout the ecosystem,” says Kassis.
Companies such as Teads, GumGum and PulsePoint have all recently extended their payment terms in anticipation of a scenario like the one above playing out.
GumGum was the first company to extend its payment terms, which allows its partners more time to pay them any money owed. “We wanted to be preemptive,” says GumGum CEO Phil Schraeder. “We wanted to start having those difficult conversations early because it is in the best interest of our entire industry.”
Roughly 25 to 50 percent of brands are either canceling or scaling back their ad spend this quarter, according to the IAB report. “This is the new reality,” says Schraeder. “It means we, as an industry, might need to reset a bit. But the industry needs to have a conversation about it.”
What’s happens next
“What we are asking ourselves is whether the aftermath will be like what happened in 2000 or 2008,” says the CEO of a large ad tech company, who asked to remain anonymous. “If it’s 2008, it will be layoffs, cost cuts, some failures, but mostly a painful year.”
The CEO adds: “If it’s like what happened in 2000 with the dot-com bubble, we’re going to see massive failures, fire sales and wholesale landscape change. The jury is still out, but the latter is starting to feel possible.”
The COVID-19 pandemic threatens to accelerate what many believe is a looming consolidation of ad tech.
“I have real trouble believing things bounce back by the second quarter, given that we are now in April,” says Joanna O'Connell, an analyst at Forrester. “It’s plausible that consumers [will] live in a world of no restaurants, bars, travel, entertainment or shopping for, at minimum, some months.”
O'Connell says advertisers will push through the pandemic by changing messaging in creative. “But that doesn’t mean advertising won’t continue to take a hit in the foreseeable future,” she says. “And that has clear implications for ad tech.”
