Must Ad Tech Margins Fall? One Analyst Says No

By
  • Facebook
  • Google Plus
  • Twitter
  • LinkedIn

pivotal-brianThe conventional wisdom on ad tech margins is that lucrative markups naturally compress over time due to a variety of factors, including competition for media impressions, which drives up the cost of impressions.

But some companies, most notably Rocket Fuel, seem to have defied that logic.

The programmatic ad platform, which went public last fall, has enjoyed steady margin growth for at least the last five quarters. In Q3 2012 its revenue ex-media cost margins were 54%, and rose to 58% by Q4 2013.

By comparison, digital ad platform Criteo's margins were around 40% for the first half of 2013. That's down from around 42% for full-year 2012.

Does this foreshadow the younger Rocket Fuel’s future? In a Friday research note, Pivotal Research analyst Brian Wieser said he doesn’t believe margins inevitably fall.

"Interestingly, lighter competitor margins [e.g. Criteo] amplify concerns among investors that margins must inevitably fall at Rocket Fuel, which is not necessarily the case at all," Wieser wrote. "Any given ad network can find pockets of inventory that are under-appreciated by other networks, including those with more data (such as Google's GDN) for many different reasons."

The trick to sustaining the arbitrage is for the ad platform provider to align with new inventory sources that are cheaply priced relative to the ad network's algorithms and client makeup. "You find a place where the publisher can improve the yield and the marketer can improve performance," he told AdExchanger in a follow-up interview.

A larger question is whether margin expansion should be the goal. "It may well be there's only so much revenue to be had at that margin," he said.

When that happens, growth must come from other directions, such as regional expansion, tapping new advertiser segments, and partnerships such as Rocket Fuel's deal with CCI in Japan.

But managing media costs remains a key method for preserving margins. And increasingly, that's done by hiring people to interface directly with the sell side, to build relationships there and attempt to secure exclusive inventory access.

Google's Bonita Stewart, VP of partner business solutions in the Americas, has recently secured a number of big publisher deals.  She told AdExchanger last week, "You will see more announcements around how we are working with publishers, how we are connecting the demand and the supply, how we are driving incremental value for publishers and how effectiveness of our technology will deliver to the bottom line."

The absorption of WPP Group's 24/7 Media by its corporate sibling Xaxis can also be seen in this light. The deal was pitched to the marketplace as a way to obtain exclusive inventory access for marketers. But locking down supply also brings the helpful, ancillary benefit of preserving margins.

"You will have to bet that over time, in the pursuit of growth, there won't be that much inventory," Wieser said.

The ad platforms know this, and they're acting on it.

  • Facebook
  • Google Plus
  • Twitter
  • LinkedIn

Email This Post Email This Post

4 Responses to “Must Ad Tech Margins Fall? One Analyst Says No”


  1. Aaron Kechley says:

    How do you account for the growing demand among advertisers for transparency? It fundamentally threatens the ad network model altogether, doesn't it? There are software companies who are selling directly to agencies and brands the very same platforms that enable ad networks like RocketFuel to operate, and so eventually economic forces will erode the profit that comes from the arbitrage aspect of the ad network model. Sure, there will always be a market for outsourcing the work of buying and managing media, but the profile of that type of business looks like a services organization, which by the way fits very well within the agency business model.

    • Zach Rodgers says:

      Aaron, absolutely. But I haven't seen much hard information on brands demanding transparency. Performance marketers should theoretically be the first to rebel, and I've talked to a few who are bringing it in-house or going 'direct to DSP' using managed services. It might be that 'services' continues to exist everywhere -- at the agency & at the platform level.

    • Chris Smutny says:

      Rocket Fuel’s margin is a testament to the power of their technology. Advertisers are willing to pay that much to RF because their targeting works against the advertiser’s goals. The threat to RF’s margins is from current and new competitors being able to hit that level of performance. In that case, you will see RF’s margins compress.

      On the topic of transparency, I think more is better than less, but most advertisers I’ve worked with are willing to sacrifice some transparency if it will drive better performance, so long as things like objectionable content and frequency caps can be protected.

  2. Sam says:

    One must separate ad technology from media brokers (networks) who leverage technologies to create an arbitrage advantage. RocketFuel and Criteo are brokers who use tech, they are not ad tech vendors per se.

    If you're only talking about those who buy/sell media, then you should make the distinction as software vendors are true ad tech purveyors while these companies are brokers with some obfuscated tech layer used to create a perception of added value.

Leave a Reply