But the portion of the advertising market most of these companies are fighting over represents just 20-25% of the total market.
“There is an overarching belief [among investors] that two companies will control the destiny for all of online advertising: Facebook and Google,” Kulkarni said. “Most of the other companies will look for growing in that remnant market share” or the quarter not controlled by those behemoths.
Kulkarni, who discussed his acquisition forecast for 2016 with AdExchanger, will appear at Industry Preview on Jan. 21 to debate his predictions with Peter Stabler of Wells Fargo Securities, Robert Peck of SunTrust and Farrell Hudzik of Accenture Interactive.
AdExchanger: The Verizon acquisition of AOL added a new category of acquirer to the game. Will we see more telcos acquire companies in this space?
KULKARNI: Definitely. Traditionally, if you look at the online advertising ecosystem, on the buyer side of things you had the following: agencies that needed technology toolkits, online publishers that needed more technologies and the Facebooks and Googles of the world. Now you see the carriers of those pipes, both on mobile and traditional media. Companies like Comcast or other traditional media pipe owners see a growing need to have technology to monetize their traffic.
What about Oracle and Adobe? Are they still in the mix as acquirers?
I think they’re clearly in the mix. You will see mar tech and ad tech are on a collision course over the next 10 years, as companies need to think holistically across the entire funnel. The CRM value chain, the marketing value chain and the advertising value chain have operated in different silos. The new crop of businesses have merged, and we’ll see automation to support a merged business function, which includes not just marketing but advertising and CRM.
How do the recent layoffs in the ad tech world play into the acquisition landscape? Are these companies making themselves more attractive acquisition targets?
As a first step, they’re doing layoffs simply to right-size the company. Clearly they’re facing challenges from a top-line margin perspective, and with layoffs it becomes more of a sustainable business going forward. On the second point, we think there is more consolidation in the cards. If these companies right-size themselves and present themselves as profitable and sustainable enterprises, their chance of getting acquired increases.
Do you think we’ll see bankruptcies or fire sales?
I would highlight companies that ran an old ad network model. There’s a wide range of companies that did that, be they companies like YuMe or Tremor on the video side or Rocket Fuel on the display side, as well as Marin Software. These are companies that have struggled to reposition themselves away from the old ad network side. They’re not bankruptcy candidates, but a company that should be bought at a discount compared to where they’re trading.
Ad tech doesn’t have the best reputation in the broader financial community. Are there any changes in that perception?
The investor sentiment is largely negative, but bifurcated. There are ad tech companies with software-based, technology-driven business models. Then there are companies that are service-based with a greater human element. The latter group was the earlier crop of public companies, and these are companies that could be completely disintermediated. The technology group, which includes TubeMogul and Rubicon, seems to have held its valuation so far, largely because these are more technology-based solutions.
What parts of the industry need the most consolidation?
Video advertising is something of a niche that probably will continue to consolidate. We’ve seen a lot of acquisitions already, with Facebook, Yahoo and AOL acquiring video ad tech companies. If I had to call out one niche, video will be the most attractive subsector for the next couple years, particularly with the shift of TV ad budgets to online channels. There’s a need for traditional media companies to have a say in that shift.
Where else might we see consolidation?
Companies outside of Facebook and Google will need good cross-device targeting and attribution. Five years from now, Google and Facebook will probably have cracked the code much better than anyone, given the engagement, data and usage they have across devices. They will figure out the device graph and the user graph. My guess is more other companies are aware of that, and they know they need to play catch up.
What will happen with the SSPs, which include OpenX, Index Exchange, Pubmatic, Rubicon and AppNexus?
Every SSP is trying to create some level of exclusivity, whether it’s a slice of inventory or a type of inventory, like mobile desktop or video, or header bidding access to that inventory. My guess is publishers that are successful with one SSP will become quasi-exclusive with that one, through things such as more header bidding or programmatic direct agreements.
I’m not completely convinced there is need for consolidation. What I think you will see is clear winners and losers segregate. PubMatic laying off employees is probably the early sign, along with the speculation that OpenX is on the sale block. We probably need two SSPs, and I bet Rubicon and AppNexus are the winners in the next few years.
That’s a tough assessment. Why do you think that?
Scale has become a significant competitive advantage over the past few years. The two companies with the largest scale are Facebook and Google. Even in ad tech, scale has started to matter. It has a double negative effect, first in the ability to sustain unit economics, which is the margin they can derive from every transaction. That leads to a negative vicious cycle in business execution itself. We are seeing the “strong getting stronger” play out.