Why adtech market consolidation isn’t anti-competitive

Ahead of the annual Automated Trading Debate, Results Internationals’ Mark Williams provides analysis on the merger and acquisition activity in the adtech market.

A view on the advertising technology market that is heard time and time again is that consolidation is inevitable.

I’m not going to challenge the orthodoxy; in real terms the level of M&A deal activity in both adtech and marketing technology has remained high over the past six quarters. However, I would contend that consolidation will not slow the rate of new start-ups coming onto the market, and also that it will in no way diminish creativity across the sector.

What we are seeing is a greater variety of strategic buyers looking to invest in advertising technology. Businesses across all sectors are looking to monetise their assets across the adtech value chain including telcos, offline data companies, publishers, CRM and enterprise software, and e-commerce software vendors. They are up against the rising adtech independents which are also looking to take a slice of the $60bn annual digital media market.

Each of these businesses needs to purchase the best adtech solutions in order to meet the needs and preferences of their brand clients. Certain advertisers are content to use a series of point solutions to service different channels, media-buying strategies and/or territories, and will choose the proven best for each.

However, those working on an international scale are increasingly looking for an integrated, multi-channel platform to handle all of their global media spend.

Typically these are the biggest brands and those which all adtech providers are fighting to win and keep. This encourages the suppliers to widen their solutions to capture as much optimisation and execution capability as possible, thus driving acquisition.

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The largest global players, such as Google and Facebook, have been making aggressive headway with their own adtech stacks. They have a long history of being acquisitive in the space and clearly have very deep pockets.

Their main competitors are the specialist adtech/martech companies, for example MediaMath and Ignition One, which are now also looking to acquire capability (faster than they could build it). All of these vendors are also arguably spurred on by the increasingly ominous entrance of traditionally less advertising (and more marketing) focused competitors.

A good example here would be Oracle, which is looking to adtech as a way to broaden out its ‘marketing cloud’ offerings. Businesses like Oracle are relentlessly acquisitive and have huge global clients bases, as such they hugely competitive, but would make interesting acquirers for many of the scaled independents in adtech.

Another (relatively) new, but equally significant, investor in adtech are the telco operators, which are looking to leverage the masses of hugely valuable and location-specific proprietary data they own about customers. While they could licence this, the data is more valuable if they continue to own it alongside the technology used to exploit it – thereby generating true proprietary value in the face of Google and Facebook etc.

It’s worth noting one vertical market that has yet to invest heavily in adtech: publishing. Theoretically publishers occupy an enviable position, they have both the data and pre-segmented audiences but typically lack the ability in-house to optimally monetise these assets to their fullest potential.

However, it would be hugely expensive for a media company that owns hundreds of websites to buy and bring an adtech stack in-house and then to hire the specialist staff and keep investing in it to make it a successful ongoing concern.

That said, we are starting to see disruptive media companies redefine the sector, BuzzFeed, The Guardian, and Vice, for example. Most recently NewsCorp acquired Unruly, so it may just be a matter of time.

Regardless of the platform, all inventory is monetisable but the complexity of the multi-channel world means there will always be fragmentation. This suggests that regardless of the rate of consolidation, there will always be an element of unpredictability.

The sector doesn’t stand still and if someone creates a new infrastructure or a new platform, a way to monetise it in the quickest and most targeted way possible will swiftly follow. In the most simple terms, those that adopt quickest will succeed. And in a world where speed is everything, acquiring will bring capability quicker than developing in-house.

For every adtech company that gets acquired there’s another start-up working out new ways of doing things better. This is a fast-moving and highly competitive sector and to a great extent this is down to the ways that brands engage with vendors, with contracts often awarded on a quarterly or even campaign basis. Ad spend can move from one provider to another with relative ease.

Indeed the media agencies, which currently control the largest proportion of a brands’ ad spend, move it from platform to platform to get the best possible ROI and to protect both their client relationship and their own margin. This means that all vendors are incentivised to continue to innovate and work hard to develop their own platforms, or to continue making acquisitions in order to keep brands’ custom.

Those trying to pose the greatest potential threat to Google and Facebook are the pre-IPO, US-headquartered adtech stacks, such as MediaMath, Turn, DataXu etc. They have been growing revenue at phenomenal rates and are trying to formulate the best possible strategy they can before realising value on the public markets. Therefore, they are looking to expand their capability, integrate new channels and expand their geographic reach.

They have to do so on the external funding they have raised to date – a daunting prospect in the face of cash rich competition which are also looking at acquiring the same players. Their modus operandi thus far has been to bolt-on relatively small players, which are both affordable and provide the innovation they need.

Indeed, demand for start-ups is universal, but in the face of being swallowed up by Google or Facebook, many entrepreneurs find aligning themselves with the fast growth contenders an exciting alternative.

Consolidation is good for the near-term M&A markets and it’s exciting for a number of independents that are considering a strategic exit at some point. It’s fair to say consolidation hasn’t happened in Europe to the same extent it has in the US, but there’s a clear context for this.

The European advertising market as a whole is probably a similar size to that of the US, however, it’s made up of 28 independent national markets and media buying is done on an individual country basis. This makes for a much more complicated growth strategy into Europe for the major US advertisers. Therefore UK or European-based businesses that are able to provide those large advertisers with a multi-geography European footprint and are also able to bridge language and cultural gaps will be the most attractive strategic targets.

While there’s little doubt some large players will prosper through consolidation, this does not necessarily mean the number of players in the sector as a whole will contract dramatically, as some commentators have suggested. The sheer number of channels and the rate of technological change means there will always be emerging players looking to dominate a particular segment.

For the current market leaders the over-arching strategic imperative is to keep up with the pace of the industry. Regardless of specific circumstances, the quickest and most cost-effective way to achieve leadership will continue to be through strategic acquisition.

Mark Williams is director of Results International

On Monday 4 October, Mediatel will host the annual Automated Trading Debate. Full details here.