Mike Walrath in an excellent article over at AdExchanger said “What we’re really talking about here is the race to build the next-generation digital marketing services company.” I would put it more strongly: the DSPs, the ad agencies and the ad networks are on a collision course*.
Once upon a time it was pretty easy to tell who was doing what. Ad agencies worked for marketers and rep firms worked for publishers too small to get the attention of the agencies. But the incredibly quick growth of digital advertising made a hash of all that. Ad networks once were digital rep firms, now they are impossible to categorize, except ad hoc. Digital media buyers once were agencies, now they are impossible to categorize, even ad hoc. There are hundreds of companies that have entered the digital display category in the last five years and almost all of them are difficult to categorize**.
GCA/Savvian put together a Display Advertising Technology Landscape map, showing some 140 companies in 21 categories. Almost every company on that map should be in multiple categories or will be in multiple categories in the next 12 months. Ad networks are becoming DSPs or exchanges, ad exchanges are becoming creative optimizers or DSPs, ad servers and optimizers are becoming exchanges, arbitragers are becoming DSPs or exchanges, rich media companies are becoming optimizers… you name it. It’s chaos. Albeit the normal chaos of a promising market.
In broad strokes, I think the future of all this is inevitable. In a few years there will be three layers between the marketer and the publisher: the publisher’s agent, the marketplace, and the marketer’s agent. The agents will use technology developed by dedicated technology firms to some extent, and they will have proprietary technology to some extent. They will buy data from dedicated data firms to some extent and they will have proprietary data to some extent. The marketplaces will have their own technologies and will come in two flavors: ‘exchanges’ for fine-tuned purchases and OTC-type enablers for block purchases.
There will be various types of technology firms–from trafficking to API access to optimization–and there will be many types of data firms–from analytics to targeting to ROI estimation. But the number of players between marketer and publisher will shrink from six-ish to three***.
Here’s my rough take, in qualitative visual form.
Ad networks will need to choose between becoming a publisher’s agent, becoming a marketer’s agent, becoming a marketplace, becoming a technology provider or becoming an arbitrageur. They can’t be all of these things–or even most of them–anymore, at least not on a large scale (many of them have already chosen a path.) Publishers and marketers aren’t thrilled with the inherent conflicts of interest and built-in obfuscation of many of the larger ad nets. As alternatives become more available, they won’t put up with them.
DSPs will need to choose between being a technology provider to marketer’s agents or being a marketer’s agent. Most of the DSPs I know have always claimed to want to be technology providers. They have been pushed into providing agency services because the agency media buyers have not had the requisite competencies to use the DSP tools. The DSPs responded by providing these skills for hire: some of them have become, by now, de facto media buying agencies. Some of them have begun buying media on behalf of marketers, rather than agencies. DSPs are now confronting the classic tradeoff between easy revenue growth as a professional services company and valuable revenue growth as a technology company****.
The agencies see the danger of being displaced as the primary owner of their customer, the marketer. There are two responses: buy or build. The ad agency holding companies will inevitably buy some of the DSPs that choose to become marketer’s agents (as they bought the interactive agencies and the SEMs.) The ad agencies will also begin to build in-house expertise in using the DSPs. This will be painful for them because they will be competing to hire people who understand numbers, and these people are far more expensive than their traditional hires. If an agency wants to hire someone with the analytical skills that would enable them to work at an investment bank, then they will need to pay them like an investment bank. How this sits with the purchasing departments of the major marketers–who sometimes seem more concerned with cost than efficiency–remains to be seen.
There won’t be one winner, but three years from now there will be fewer than ten companies dominating the marketer’s agent piece of the world. The foundations that lead to this dominance will be laid this year.
* I talk about this incessantly in person but have not written about it because I have every type of conflict of interest here: financial, professional, personal, sentimental, intellectual, moral, etc. Proceed with caution.
** I have a notebook where I have 500+ companies listed under 25+ different categories, all digital display ad tech (no traditional digital agencies or ad networks, that would probably triple the count.) I didn’t put this together on purpose, it was a result of talking to entrepreneurs about their potential competitors, so the count is probably low by quite a bit. I tried making a ‘map’, but found that it was physically impossible in two dimensions. GCA/Savvian did it by simplifying several aspects of their presentation and limiting it to the Web and internet video.
*** In many–most, if you count by dollars rather than impressions–cases, the actual number of players is currently one: the agency. The agency places the buy directly with the publisher. This also will change as publishers realize that if they don’t have an agent representing them they are not maximizing revenue. It’s interesting that almost no large marketers do their own media buying, but almost all large publishers do their own media selling. That may have made sense when there was one newspaper in each town and three TV stations, but not any more.
**** I have heard from one holding company exec, re one of the DSPs: “we would buy them if they valued themselves as an agency, but they keep insisting they’re a technology company.” Agencies sell for 6-10 times forward earnings. Tech companies sell for 40 times hope. If you somehow think the former is better, your VC wants a word with you.