2015 is shaping up to be the most significant year for ad tech yet. Significant as in very eventful for all, lucrative for some and dismal (if not terminal) for others.
The presence of not-so-obviously-strategic providers of these services and technologies will become increasingly prominent, especially as acquisitions and partnerships abound. As if to illustrate the trend, reports originating last week indicated that Verizon "has approached" AOL about a potential acquisition or joint venture "to expand its mobile video offerings." While it seems unlikely that anything beyond a transactional relationship or partnership might emerge (if anything we'd expect AOL to do some buying rather than selling), the reports at minimum reflected recent moves by other large companies not obviously focused on the space who are looking to ad tech in order to better capitalize on the marketing-related assets they possess. Acquisitions will often be deemed an appropriate solution to this problem. For example, during 2014 ADS was not a name that many would have thought of as a potential buyer of ad tech properties when Conversant sold to them. Neither was SingTel an obvious acquirer of AdConion and Kontera, Telstra of Ooyala or Tesco of Sociomantic. Each obviously saw potential to monetize existing businesses (while hopefully capturing incremental revenue, too) and presumably realized that their existing assets were insufficient to realize desired levels of scale. Of course, as evidenced by Tesco's news yesterday that they will be exploring "strategic options" for the marketing data business Dunnhumby in which Sociomantic is housed, it won't work out for everyone. Still, advertising and marketing technologies are merely the tools that are required to realize much of this potential, and as many more companies in industries ranging from technology, telecommunications and retail look to monetize their non-traditional properties this year and beyond, more secure access to those tools will be required.
Second, we should have increasing amounts of M&A involving what might be considered as more conventional buyers in the sector. Last year saw Facebook-LiveRail, Yahoo-BrightRoll and Oracle-DataLogix, for example. Much more of this activity is likely to occur in 2015 as some of the larger companies attempt to play buyers – especially those not named Facebook or Google – against each other given the hegemony that the two largest companies in digital advertising are establishing. The recently released IAB data for 3Q14 online advertising growth showed, once again, that if we exclude Google and Facebook ad revenues from the industry's totals, we can see the rest of the sector growing at a mid-single digit pace. Google and Facebook will do a lot of building around ad tech internally, but they will also be active buyers in this sector, too.
However, while some companies will be fortunate in terms of realizing highly favorable exits, others will simply hang on and others will fade away. Technologies and associated business models have become increasingly mature, and many of the companies driving them have become relatively large. We can identify around 40 pure-play ad tech companies with greater than 300 employees in the sector, each of which should have $50mm to $400mm or more in net revenue this year. Those companies alone have nearly 22,000 employees according to our analysis of LinkedIn data (less than half as many as Google, but more than Facebook, AOL and Twitter combined) and around $4.5bn in total net revenues (excluding media costs) by our estimates. Many of these companies likely operate with costs and cash outflows in excess of revenues and will require ongoing capital infusions to sustain, let alone expand, their current scale.
Further financings will be available to many of those companies which are meeting operational and financial goals, and others will simply maintain a modest scale befitting modest business opportunities. But others dependent upon traditional venture investors may be running out of time to prove themselves as stand-alone businesses. Most venture-funded companies have limited shelf-lives, in part timed to the investment horizon of the venture capital firms who fund them. For a fund with a ten year life which only began deploying capital after two or three years, companies founded before the 2008 downturn – which includes most of the most dominant independent players in ad tech today – exits for and capital returns from portfolio companies will be increasingly top-of-mind. IPOs are plausible for some of the companies in this space, but inadvisable for most given the degree to which the competitive landscape remains fluid and unpredictable (as such conditions make it harder for earlier stage companies to adapt their business models if they are publicly traded)
For the ad tech industry as a whole, 2015 should be a great year – undoubtedly the best year yet. But to simply call 2015 great is missing an important nuance: it will be spectacular for some, mediocre for others and downright painful for others among the sector's participants.
REPORT INCLUDING DISCLOSURES CAN BE FOUND HERE: Madison and Wall 1-9-15.pdf
Brian Wieser is a Senior Analyst at Pivotal Research Group, where he covers securities which are
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