When Will the Ad-Tech Market Finally Shake Out?

The Key Is Not Venture Capital, but What Agencies Do

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When will the ad-tech market consolidate? People have been asking this question publicly and privately for at least the past five years. A market with fewer players surely would lead to less confusion.

But the market doesn't seem to be listening. Terry Kawaja's Display LUMAScape -- the chart of record for those keeping score of ad tech moves -- has more net new logos today than it did in 2011.

Still, the conversation continues. Several articles have appeared over the past week alone stating that 2013 will be the year that we finally see a market "shakeout," as one described it. What's holding things back? Generally analysts say it's an inability to raise more venture capital to fund operations.

Here is an insider's view: inability to raise dollars is a symptom, not the cause. Deeper dynamics are happening at large ad agencies that are far more critical to the future of many players in the market. Which is ironic, because agencies partly fueled the ad-tech boom to begin with.

Rewind to 2005. It was not uncommon to see up to 10 ad networks on a given agency media plan. Ad tech was suddenly very interesting to the investment community as a result, sparking a venture capital boom that birthed hundreds of players over the next half of the decade. This created an entire ecosystem.

It's important to note that this ecosystem is largely driven by agency budgets, whether directly as a media or tech provider, or indirectly as an infrastructure player that supports the sale. For every media dollar spent by the agencies, that revenue is shared among the different companies that make the campaign come to life: ad serving, measurement, analytics, rich media, etc.

Fast forward to today. A growing trend across agency holding companies is vendor consolidation -- reducing the number of technology and media vendors. This was mentioned by several panelists at the recent trading desk panel in Cannes. Streamlining technology platforms and concentrating buys with fewer properties should increase efficiency and free up resources for the agencies.

When this happens, the effect on the market will be significant: dollars being concentrated into fewer, top-tier media and technology partners that already likely are entrenched with the holding company agencies. Point solutions, smaller properties and the broader ecosystem that supports them will start to be choked.

Add to this the recent rumblings of brands pushing for extended payment terms to agencies. As last in line for payment, receivables that go out for months can spell disaster for ad-tech firms with a tight burn rate. When this starts playing out on a broad level, across multiple holding companies, look out below.

So for those looking for clues on a market shakeout, stop following venture capital moves and start paying attention to the agencies. That's where it will begin.

Eric Franchi is co-founder, Undertone.
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