"Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is written by Nico Neumann, senior research analyst for programmatic marketing strategy and analytics, at the Institute for Choice, UniSA Business School.
Many experts have warned since 2014 that the programmatic ecosystem will face industry consolidation. The signals are difficult to deny: There were more than 120 major mergers and acquisitions in 2015, along with layoffs at Rocket Fuel, Turn and PubMatic, among others. At the same time, the stocks of some public ad tech companies are down by as much as 90% since their IPOs.
Will it stop here?
Certainly not. If we consider the enduring high degree of market fragmentation and the available “cake to share,” it seems impossible that all of the roughly 1,900 ad and marketing tech companies can survive.
Consider the numbers. Assume a 2016 global programmatic ad market of approximately $20 billion, with about 60% of money flowing to publishers due to the current shift to programmatic direct deals. With another 15% flowing to agencies or traders for their media-buying execution, the multitude of ad tech middlemen are left with about $5 billion. If we divide that by the 1,900 companies competing for their share, we get about $2.6 million in revenue per company – globally. Not a very lucrative situation.
So what will the future ad tech landscape look like? History has shown that industry consolidation is a natural process and systematic market forces make it often possible to predict its evolution. For example, there were approximately 2,000 car manufacturers in the US during the early 1900s, before most brands disappeared and Chrysler, GM and Ford emerged as the dominant players, along with several smaller car producers.
This is a typical pattern that has been observed across numerous industries by business professors Jagdish Sheth and Rajendra Sisodia, as well as Bruce Henderson from the Boston Consulting Group. When fragmented markets mature, most end up with three major competitors – usually full-line generalists with market shares greater than 10% – as well as several specialists that only succeed if they can better cater to specific segments. This phenomenon is called the Rule of Three.
Three Dominant Players
Building on this rationale, which companies will become the three full-line generalists in ad tech?
Presently, one may name Google, Facebook and Yahoo as the biggest all-around forces. However, Yahoo has struggled in recent years. Many top-level executives left in 2015, and there has been speculation about a sale of its core Internet business.
Unmistakably, there are three other companies that are able to fill the third generalist position: Amazon, AOL/Verizon and Apple.
Amazon, which owns Zappos, IMDb and Quidsi Retail, has quietly expanded its ad business and is even said to have built its own DSP. The retail giant possesses excellent first-party data of 272 million active customer accounts; Amazon knows not only what people searched for, but also what they bought. Moreover, let’s not forget that Amazon has its own Android app store (which got kicked from Google Play when Amazon secretly added its store to the app) and a foothold in the video market through Prime Instant Video. Nevertheless, despite the huge potential, Amazon is moving cautiously into digital advertising. The company prefers not to share the most coveted of its data with advertisers to shield its customers and successful ecommerce business.
Verizon, currently No. 15 on the Fortune 500 list, completed its $4.4 billion acquisition of AOL last summer. Leveraging Verizon's network, which includes a device graph for cross-device targeting, and AOL's advertising and content strengths in the growing areas of video and mobile will certainly position AOL/Verizon well against Google and Facebook. However, while Verizon is a strong contender in the US, its limited presence in other countries could represent an obstacle in taking on a global ad tech leadership role. Also, it’s questionable whether the use of a telco’s network data (collected via zombie cookies) for advertising would fly in Europe, where consumer data privacy is a bigger issue and laws are stricter.
Even though Apple CEO Tim Cook officially took a potshot at Google and Facebook for monetizing personal information of customers, Apple should be mentioned as a crucial player in the programmatic advertising game. The technology juggernaut is likely to benefit from the rise in ad blocking, which it fueled through offering the feature in iOS 9, and the ongoing discussions around ad fraud because Apple delivers the ads directly into apps, making iAds 100% viewable.
The introduction of cross-device retargeting, native ads and Apple News, which is supported by dozens of publishers, such as The New York Times, Guardian, Economist and Financial Times, should help boost Apple’s advertising revenues. In addition, the information gathered through iTunes, app activities and news-feed preferences allows rich audience targeting while respecting consumer privacy.
A Look Into The Crystal Ball
Which of the three candidates is most likely to step up? AOL/Verizon appears most vocal about its ambitions to take on Google and Facebook in the ad space. Nevertheless, if the pendulum swings back toward empowering and protecting consumers this year, then this trend would play out in favor of Amazon's and Apple’s business models.
Finally, we are left to wonder: What will happen to all the other smaller companies? Predicting competitive dynamics of specialists is more difficult, particularly in a fast-moving industry like ad tech.
However, Can Uslay, Z. Ayca Altintig and Robert Winsor, who investigated more than 160 industries through the lens of the “Rule of Three,” offer some advice: Specialist companies that typically have 1% to 5% market share and focus on niche products, for which they can demand higher margins, tend to show stronger financial performance than medium-sized organizations with 5% to 10% market share. The reason is that the latter are often “stuck in the middle,” mired in a conundrum of leveraging margins versus scale.
The coming years are going to see some ad tech players disappear and others absorbed by consultancies or IT/mar-tech powerhouses. This consolidation is a necessary step of the industry life cycle. On the positive side, the reduction in vendors should help customers interested in ad-tech solutions to be less overwhelmed by an astoundingly vast and unorganized market offering.