Margins And The First Inning

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mergingSomehwhere there may be a business school class enjoying this.

It's a pretty simple construct - when commoditization occurs, the increased competition leads to eroding margins for an entire swath of companies. And then the games begin.

Business case in point is today's nexus of media and ad tech businesses - whether it's Omnicom-Publicis, Tremor Video or YuMe's IPO's, DG-Extreme Reach or Milliennial Media-Jumptap.

Milliennial Media and Jumptap

Beginning with the latest M&A, for Jumptap's group of venture investors, the sale to Millennial Media may be a day of relief at best.  The "smart money" doesn't invest for 10-50% annual returns even though "an exit" makes for a nice tombstone.  Jumptap's $122 million in investment compared to the roughly $200 million in Millennial stock that Jumptap investors received in return is not a big deal for now.  But...

If Millennial's stock doubles in a year as their opportunity becomes clearer, suddenly the smart money looks smarter.  Of course, the reverse could happen.

Clearly, mobile is a beast that is evolving and perhaps it's time to "call it": the mobile ad network has been commoditized and Millennial and its competitive set are struggling with whatever comes next in a cookie-challenged mobile world. Programmatic audience buying in mobile is happening but it's obviously still early days.  Big properties with addressable first-party data - logins - seem to hold the cards for true, by-the-impression, sometimes real-time biddable, audience buying in mobile.

Can or should a Millennial Media become an exchange?  Given recent earnings conference call discussions, it seems like Millennial thinks it's at least part of the answer.  How they compete with the likes of Google, Facebook and Amazon in the long term will be interesting.  From here, in-app advertising inventory could be one way that syncs with the move to one-to-one addressability.  Given the pace of change, mobile marketing "services" seems to be open too. It's not the high margins Wall Street loves, but services brings in the ad dollars even if it lowers a company's valuation multiple.

Remember when Google bought Admob for $750 million in 2009?  No doubt it helps to be first to market - or close.  And, it would seem those frothy mobile days are over except that former Omniture employees might tell you a different story.

When Google swallowed up Urchin in 2005, which became Google Analytics and remained free to users, the prevailing wisdom was that this was an "Omniture killer."  Several years later, a robust, growing public company concentrating on enterprise analytics sold to Adobe for $1.8 billion in 2009 and became the underpinnings of a key industry "ad stack" strategy that is still taking shape.

DG and Extreme Reach

DG and Extreme Reach's recent transaction is emblematic of similar challenges in the mobile space.  Both were targeting the TV ad distribution business. It was a pricing race to the bottom considering their combined, dominant market share of this type of distribution along with its overall limited scale.  Might as well stop the bleeding and see if margins can be solidified.  Now, Extreme Reach and DG go off in different directions, one more focused on digital, the other on TV -- at least that seems to be the current positioning.

Similarly, when reviewing through the looking glass, the 2011 merger of workflow automation systems Mediabank and Donovan Data Systems into MediaOcean was a story about two companies who dominated in terms of market share and who's margins were dwindling due to their fierce competition.  This merger could also be a story about a creaky traditional agency model.  (See below.)  And on that note, MediaOcean CEO (was MediaBank's CEO) Bill Wise asked in a seminal opinion piece in Adweek in 2010: "Will IBM Crush Madison Avenue?"

The IPOs

Recent IPOs by Tremor and YuMe tell a story about the video ad network.   Their challenge is unique in that video inventory is less plentiful than mobile or display.   Again, the valuations are lower than expected today given their venture investment, but in a year, Wall Street could reward if either company can figure out a way to scale - such as crossing into other channels or, perhaps, using analytics to make a better story (or keep pounding a way at a story) for marketers who are looking to extend their TV ad spend.  Adap.tv appears to have made its tech and revenue case to Aol with a healthy $405 million price tag.   This deal would appear to be more about "pipes" than networks. Aol shareholders should know the effects of this transaction in 12-18 months as CEO Tim Armstrong continues to roll the dice toward a programmatic future. Regardless, the company's Project Devil strategy, which was infused by the 2010 acquisition of Pictela, needs a new boost.

Omnicom-Publicis

July's Omnicom-Publicis merger is another signal about competition and margins as the traditional services model looks for a new secret formula to battle the tech sector and escape Big Data's shadow. For example, trends such as marketers buying direct from Google-Facebook-Twitter-Publishers.  Yes, the agency still needs to enable those buys, but they aren't the gatekeepers that they once were. Black boxes and margins diminish consequently.

Also, in spite of certain efforts such as the agency trading desk or bolting on tech acquisitions as WPP has done, the traditional agency model stlll seems challenged for the innovation needed to serve marketers.  Circling the wagons in the form of a merger, consolidating the still-critical service layer, may be the best bet in the short term.  It's about scale and pricing power in the short term, and solidifying margins. But the holding company behemoths will have to navigate how member agencies compete with one another and serve the marketer while serving the holding company's interests - let alone hold on to those valuable employees.

Overall, it is clear that commoditization is bringing a hammer to margins and is driven by technology and "big data."  It may be the end for some, but it is also a new beginning for many others.  Which "others" remains to be seen.

And that's OK if you like to watch or play this game. It still feels like the first inning to me.

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