Ciaran O’Kane over at ExchangeWire has made two interesting points recently when it comes to the programmatic landscape. The first is around potential consolidation in the ad tech supply chain, particularly around CTV, as major players such as The Trade Desk, PubMatic and Magnite battle it out for share. In particular, the argument was made that phrases such as demand-side platform and supply-side platform are becoming increasingly redundant. The second point was a comment that the retail media space represented a major opportunity for the ad tech players and, arguably, one that was better suited to their core competencies.
These two points are separate in nature, but they are connected and they get to the heart of ad tech’s future. I am going to concentrate on the first part for now and come back to the second point in my next piece.
First, it is important to step back and look at the fundamental nature of the ad tech industry. Ad tech is effectively media buying (and planning) for the digital sphere. In that regard, it is no different from the major media buyers who buy and trade traditional platforms such as television, radio etc.
What is different though is its structure. The traditional media buyers act as ‘gatekeepers’, limiting access to valuable inventory (which has enabled them to keep margins relatively high and provide a significant chunk of the agencies’ profits). Crucial in their success are two factors. First is scale – the bigger the media buyer, the bigger the negotiating power they have with platforms, and therefore the more attractive they become to advertisers. The second is the fact that inventory on traditional platforms is limited by its nature.
The ad tech industry is different. It developed in a ‘Wild West’ fashion with very few boundaries and a multitude of intermediaries. In part, that reflected the inability of the agencies to control the digital media buying space as they had traditional media. However, it also reflected a world where inventory was (theoretically) unlimited, where major tech players such as Google embedded themselves in the infrastructure, and where both advertisers and publishers were very keen to gain traction in a short amount of time.
One feature of industries that grow in such an uninhibited fashion and where every player is looking for growth is that you tend to have an explosion of players, followed by consolidation as weaker players are snatched up by stronger ones and scale becomes an increasingly important factor. That is what has happened in the ad tech space over the past two years, and there will be more consolidation to come. However, that phase may now be coming to an end (with the rapid changes in stock market sentiment playing a key part) and we may be moving onto the next phase.
This new phase relates to the point above about the supply chain itself being consolidated. The amount of ad spend lost in the ether has been contested for years and, while the ISBA/PwC survey suggests that the amount of unattributed ad spend (at least in the UK market) has fallen from 15 percent to low single-digits, the only generally accepted truths are that (1) such leakage exists and (2) nobody really knows the scale of the problem. A core cause of that leakage is likely to be the multiple stages between the buyer (the advertiser) and the seller (the publisher). Reduce the number of the steps in the process and you are very likely to reduce the leakage.
However, there is also another major issue here, namely who reaps the rewards. If consolidation of the supply chain saves money, then who are the end beneficiaries – will it be the advertisers who save money, the intermediaries who benefit from scale and cost efficiencies or the publishers who see more direct revenues. Or will it be a mixture of all three?
My educated guess is it will be the last. However, just as in George Orwell’s “Animal Farm”, some animals were more equal than others, in the case of consolidation, some will be greater beneficiaries than others, with my money being on the ad tech players. And this leads onto my final point.
With consolidation of both the existing ad tech players and the programmatic supply chain, the digital media buying space will increasingly resemble that of the ‘traditional’ media world with a few key players controlling access to the supply and, subsequently, benefiting from improved returns over time.
The parallel does not hold entirely, if only for the obvious reason that the largest online advertising players aka Google and Facebook (or Alphabet and Meta) control the access to their inventory. However, for the rest of the digital publishing space, that may be the reality. It may also come at an opportune time, given how the collapse of Vice and the Buzzfeed News’s struggles are highlighting the problems of business models predicated mainly on digital ad revenues. The major question here may be whether the benefits of the consolidation can outweigh the potential risks of digital supply eroding. And this is why – next time – I will outline why retail media may play a key part for Ad Tech.
As usual, this is not investment advice.