The Golden Age of Ad Tech or Peak Advertising?
The digital media industry is either a glass half full or on its way to empty. It’s all about perspective.
The bull’s case for the health of the system tellingly comes from the state of the middlemen. This week saw Criteo come roaring out of the gates with an IPO that “popped” 30 percent its first day. The company, which doesn’t create content, is now worth $2.3 billion, more than The New York Times. Rocket Fuel, a new style ad network middleman, is worth $1.6 billion, gaining on the Times each week.
Ubiquitous investment banker and chart maker Terry Kawaja believes the ad tech naysayers are wrong. It’s a “golden age of ad tech,” he wrote in AdExchanger, although much of the growth areas he cites are actually on the marketing tech side. “There is huge opportunity that leverages the application of data-driven technology to marketing and media,” Kawaja crows.
Not to be outdone, VC David Pakman also lauds the potential for ad tech to reap ever greater rewards. The media system is moving toward programmatic ad buying — see Gawker’s capitulation on this front — and that’s shifting value from those who gather audiences through content to those who can best mine incremental gains from those audiences through data. Guess who’s best at that: middlemen who don’t create content themselves but who employ data types to eke out incremental gains on direct-response campaigns.
Even agencies are getting cut out, Pakman writes, since they need to rely on the Rocket Fuels and Criteos to deliver good returns for clients:
The reason these companies are so valuable is that buyers on the exchanges are dominated by performance-oriented marketers today. Their dollars seek the best performance. The data-driven ad network layer is increasingly a case of the haves and have-nots. The better you perform relative to your peers, the more ad dollars you receive.
For publishers, however, the picture is arguably bleak. An academic paper released earlier this month from The Nesson Center for Internet Geophysics posits the theory that we’ve reached “peak ads.” The basic premise is the advertising arms race is leading to decreased effectiveness – more than 5 trillion display ads will be shown in the U.S. alone this year. Decreased effectiveness spawns more ads, which further decreases effectiveness. Even worse, the youngest audiences are the most immune to these ads and the mobile era makes them even less effective. You get the bleak picture.
[T]he outcome of the downward price trend is very clear: vendors will need to sell increasingly large quantities of advertising volume in order to maintain the same amount of revenue flow. Indeed, if the price drops deeply enough, vendors will only be financially sustainable if they can offer (and sell) massive quantities of inventory. To that end, Peak Advertising will drive the formation of highly monopolistic or oligopolistic market structures for advertising, since only the largest companies will have the scale of advertising inventory necessary to remain profitable. Smaller companies that are especially reliant on advertising will have difficulty remaining profitable and will face incentives to sell to companies with larger aggregate volume to sell.
Like most things in life, the truth lies somewhere in the middle. The recent spate of investments in content companies have led some to believe that even Silicon Valley is waking up to the critical role of content. (Imagine that.) Middlemen will have little to trade if audiences are not created with quality content. There comes a point where tech might optimize the whole system to zero.
Like all ecosystems, the media will balance itself out. Publishers will exert more leverage over the middlemen, and the value extracted from the audiences these publishers gather will be more evenly distributed between the creators and audience miners.
Image via Shutterstock
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