Wall St. Speaks Out on Google & Facebook Ad Tech Dominance

All In All, Ad Tech Is Just Another Brick In The Wall - Brian Wieser, Pivotal Research Group

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Google's display-related businesses are large enough that by themselves they would be one of the largest sellers of advertising globally. Much of this strength has emerged as Google has assembled the world's most important collection of advertising technology assets. Seeing similar opportunity, we think, Facebook has begun to do much the same. Because of these efforts and the dominance that each has in legacy businesses, both remain well positioned to put in place walled gardens of ad tech which should help to further entrench each company beyond current levels of domination

This past week, Facebook's Brian Boland, the company's VP for Ads Product Marketing, was reported to have hosted a press briefing to discuss how several of the company's advertising products fit together. In particular, reports of the briefing highlighted how acquired companies and related products Atlas and LiveRail paired with internal initiatives such as Custom Audiences and the Audience Network should help advertisers better target consumers both on and off of Facebook. While there is evidently some connective tissue between these products, it seems to us more of an emerging outline, especially when compared with the efforts Google has made in recent years, and with new strategic moves that have come to light in recent months.

In particular, a recent article in AdExchanger provided detailed commentary about this year's appointment of Sridhar Ramaswamy, whose formal title is SVP, Ads & Commerce, as the sole executive in charge of advertising related activities including display and search across Google. He and Susan Wojcicki, now CEO of YouTube, previously held joint responsibility for this field. The thrust of the article is that changes on the display side of the business are only now beginning to be felt following the management change and related personnel moves which followed in subsequent months. For example, some products with overlapping characteristics are being merged, including DFP (the company's publisher-side ad server) and AdX (its ad exchange). While these products have always been complementary, the elimination of separate leadership teams and development cycles could help Google to accelerate growth for both of these products if a strong position can be made stronger by making them work better together, effectively encouraging publishers to rely on both products.

Another follow-on consequence of the management change may be policy changes which have strategic implications. To point, we learned in October that Google would prohibit independent data management platforms (DMPs) from firing tracking pixels onto Google Display Network (GDN) inventory unless the inventory was bought using a common demand side platform (DSP). In other words, Google's policy would effectively require DMPs and DSPs to be one and the same if an advertiser wanted access to GDN inventory. If a marketer preferred to use a DMP separate from a DSP and still wanted access to Google's inventory, the marketer would experience many challenges in managing campaigns across owners of digital media inventory.

In a separate article published last week on Digiday, Google may be tying its own DSP (DoubleClick Bid Manager or DBM) and AdX together in a commercial sense, providing significant incentives for buyers to use both together. As those incentives relate to how Google credits buyers with meeting upfront commitments (generally impacting the net pricing of media purchased) a failure to use both would potentially place even a large agency at a pricing disadvantage vs. a competing agency. This is no minor issue considering that Google is the single largest supplier of media inventory, even to the largest agency holding companies as indicated above, made more critical given the importance of price benchmarking in agency reviews.

According to the Digiday article, Google's practices have caught the attention of the FTC, which is reportedly speaking with agency executives to assess whether or not Google is effectively limiting competition through its actions. As with the integration of an ad server and an exchange, there are tangible operational advantages for a buyer to use Bid Manager and AdX together, especially in relation to reporting of data associated with a campaign bought by the DSP and run on the exchange. However, pricing of media aside, buyers may find a more substantial advantage in using the same DSP to buy programmatic inventory across multiple sources of inventory over the course of a campaign. The consequence of incenting buyers to use both DBM in this manner is that they may either manage more of their campaigns solely using AdX (and use other DSPs for campaigns with other media owners, which may cause challenges in comparing results across campaigns) or shift reliance to DBM for all programmatic buying across multiple media owners.

Facebook is in a slightly different position than most other sellers of digital media inventory. A Google with a stronger display advertising platform may hurt Facebook marginally, but the scale of its own O&O inventory is so substantial that its competitive position remains relatively unchanged regardless of Google's strength. Further, its own efforts – as described above – reinforce expectations that Facebook would like to build a walled garden of its own, helping Facebook sustain growth from outside of its O&O platform. Whether it extends on those efforts so by way of further internal investments or by acquisition is a question to be answered, and one which much of the ad tech community and their mostly-venture capitalist investors will keenly await.

The actions described above can be wide-reaching if successfully executed. It is no dark sarcasm to suggest that a day may emerge soon when buyers will need separate tools to work with both Google and other media owners who fall outside of its spheres of financial influence. Google would likely take market share for its exchange and DSP, and independent DMPs will be weakened. Publishers would be more likely to work with Google than would otherwise be the case. Perhaps some buyers will choose to prioritize only the inventory associated with Google rather than anyone else. Others will only go so far as to prioritize rather than limit their spending with them. However, as one of an advertiser's first ports of call (alongside Facebook), Google would improve its ability to capture a growing "share of wallet", producing real benefits from scale. These actions should help sustain rapid growth for GDN, and help capture share of spending that would otherwise go to other large publishers.

Of course, other publishers and ad tech companies already compete vigorously with Google every day, and the smaller ones have long had to operate in Google's shadow, focus on niches that Google ignores or compete differently (by offering better product features, for example), so it's not as if Google's successes necessarily mean demise for others. Still, the opportunities may become starker for many participants in ad tech, as the choice to partner or sell out (including to Facebook or Google) may become increasingly appealing, as the alternative may be to fade away. Ad tech businesses and related products are critical elements which support the growth of digital media in general. As they are put in place or reinforced for each of Facebook and Google, walled gardens will help to further entrench each company beyond current levels of dominance.

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Brian Wieser is a Senior Analyst at Pivotal Research Group, where he covers securities which areimpacted by the advertising economy, including Facebook, Google, Yahoo, Interpublic, Omnicom, WPP, Publicis, Nielsen, CBS, Viacom and Discovery Communications. Brian can be reached at brian@pvtl.com.

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