There's a surge of M&A activity in the ad technology markets including firms that provide more effective advertising analytics and customer targeting. Mary M. Collins looks at the trend and the pros and cons broadcasters face in considering whether they should get on board.
Should You Own The Ad Tech You Use?
“Make or buy?” is a classic business question. In general, the answer hinges on factors including cost and whether the item under consideration is part of the business’s core competency.
TV stations and other media companies are already grappling with the decision for everything from transmission towers and master control facilities to newsgathering apparatus and even ad sales. It may be time to add ad technology solutions to that list.
As I mentioned in my last column, experts agree that customer data is one of the most important assets for today’s businesses. In the digital world, it’s just as important to know customers’ preferences as it is advertisers’.
TV viewers don’t despise all advertising, just the irrelevant messages. In contrast, consumers will go out of their way to access product information concerning the goods and services on their shopping lists.
These realities are driving a surge of M&A activity in the ad technology markets. “The stampede to capitalize on the digital ad trend also includes technology and marketing firms, which provide more effective advertising analytics and customer targeting for advertisers,” explains Jeffrey P. Anderson, a principal with Bond & Pecaro, Inc., a consulting firm specializing in the appraisal of media, communications and technology properties.
“However,” Anderson adds, “There are significant risks that are undermining their values and performance today – although there are also opportunities that could improve their financial results in the future.”
Anderson outlined those risks and opportunities in an article that served as the first installment of a six-part series on media valuation trends appearing in MFM’s The Financial Manager (TFM) magazine. While the magazine is one of the association’s membership benefits, each issue is available to interested parties on the MFM website for a limited time. Past issues are archived in a “members only” section.
The Push for Programmatic Solutions
NAB’s Radio Show, which was held earlier this month, provided the latest validation of Anderson’s message concerning the importance of technology that allows programmatic media buying. The event in Austin included a session moderated by RAB’s Tammy Greenberg, with panelists from the Carat agency and the Publicis-owned Spark Foundry, who shared their views on why programmatic/automated buying is fast becoming a core component for future financial performance. As the title for another session put it, “Get Your Digital Marketing in Shape or Die!”
These conversations provided an anecdotal dimension to data illustrating the growing market demand for automated ad solutions. A new report from WideOrbit issued in conjunction with the show found that “nearly two-thirds of radio industry respondents and almost 90% of ad buyers plan to transact with programmatic platforms within the next 12 months.”
Consistent with forecasts from eMarketer, which expects a 27.8% increase in programmatic buying and selling in 2017, WideOrbit found that both broadcasters and media buyers also expect programmatic spending to increase in the coming year.
The programmatic/automated buying space continues to have its challenges. As Anderson points out in his TFM article, “While programmatic advertising is one of the fastest growing types of advertising, measurement difficulties, fraud potential, non-transparent fees and rebates are obstacles.” Initiatives such as ANA’s recent partnership with the Digital Content Next publisher association should help to address these types of issues.
The Need for Better Analytics
Anderson says programmatic agencies will be challenged to improve data analytics to deliver more customized individual advertisements to viewers. Digital marketers are replacing traditional metrics like page views, unique viewers and click-through rates with attribution models that can provide better insights into “how buyers are influenced as they move across different forms of content and alternative buying options.”
In addition, techniques such as dynamic creative optimization automate the process of website page comparison. These provide publishers with performance metrics, which make clear what pages are most productive when it comes to distributing advertising messages.
These tools can detect the large-scale algorithm changes that help digital publishers and advertisers restructure their content presentations on desktop and mobile devices for better results. As Anderson notes, “Decisions on whether to focus on desktop or mobile content can necessitate significant changes in technology investment.”
Accordingly, Anderson believes that media companies “can build proprietary technology and differentiate their skills around large-scale algorithm changes, programmatic advertising exchange platforms, attribution marketing analytics and native advertising.” He concludes, “These high-growth areas clearly present areas of opportunity for B2B digital advertising technology companies.”
A Competitive Marketplace
On the risk side of the coin, Anderson says the greatest challenges for newcomers in the ad tech market include the competitive threat presented by the two digital advertising behemoths, Google and Facebook. They hold a combined market share exceeding 65%, and often drive the market’s fast-changing technology. Given this, supporting technology platforms and applications “need to be flexible, scalable and able to seamlessly integrate with technology partners, third party data providers and content partners.”
Although new technologies such as voice-activated commands create innovative solutions for advertisers every day, there has been a steady decline in valuation multiples paid for publicly held digital advertising technology companies. Anderson explains this saying, “The declines reflect the increase in competition in this space, rapid technology changes, the dominance of a few large companies and the inevitable maturing economic life cycle.”
Bond and Pecaro’s analysis concludes that overall revenue growth has slowed in the ad tech sector, largely due to these factors. As a result, operating profit margins for these digital advertising companies have been in the mid-teens.
These strains have also contributed to market consolidation, as evidenced by Sizmek’s acquisition of Rocket Fuel in July, and MediaLink’s purchase by Ascential. In addition to expected active buyers such as Google and ad agencies, Anderson reports that recent active purchasers have included many other large companies outside the advertising sector.
In analyzing the M&A revenue multiples being paid overall, Bond and Pecaro’s breakdown shows they can often reflect “higher growth potential for smaller companies and strategic acquisitions where buyers look for technologies to fill in gaps in their established offerings or customer base.”
A number of media companies have been at the forefront of investments in the ad tech sector. They include Cox Media Group’s Videa, a “supply-side” programmatic marketplace for inventory on more than 161 stations in 89 TV markets. Videa recently integrated with Comcast-owned Strata, a software and systems provider enabling ad agencies to plan and buy a variety of media as part of offering an end-to-end solution.
Automating Back Office Systems
Complete, end-to-end automation of the media buying process also requires integrating numerous back-office functions from traffic management to talent fees and other rights payments to billing. It is also essential for these solutions to address a media publisher’s financial analysis and credit and collections departments.
We are dealing with these very issues at MFM. When our BCCA subsidiary, the media industry’s credit association, launched its Media Whys credit report, one of our biggest challenges was in finding an efficient way to import the industry credit data that is (anonymously) included in each credit report. Media companies’ corporate and market teams are already weighed down with tasks and responsibilities. As one MFM member told me, “We will be happy to provide the data if you can find a solution that doesn’t add more work for our employees.”
The result was our first industry collaboration with Marketron. Once they have received authorization from a client, Marketron activates a program that sends a monthly aging report to the Media Whys data warehouse where it is scrubbed, removing the name of the provider and any anomalous information, before being integrated into the credit reports. There is no cost or additional work for the company providing the data. This partnership with Marketron allows Media Whys report subscribers to assess the credit worthiness of advertisers using up-to-date information from other media companies.
Integrating credit and collections technology with programmatic advertising solutions will also be among the discussion topics slated for the upcoming BCCA Media Credit Seminar, which will be held in New York on November 7. The annual event provides media industry credit and collections representatives from around the country with a forum in which they share thoughts about practices that advance the goal of providing greater efficiency when it comes to extending credit while at the same time ensuring prompt and full payment for all media purchases.
Whether the decision is to make or buy some or all of the ad technology solutions advertisers demand, the one thing to be certain about is that future financial success depends upon how well media companies can take advantage of them.