The digital media and advertiser landscape is staggeringly complex.
In the milliseconds it takes for a web page to load, dozens of companies you probably have never heard of are bidding in a furious auction to serve you an ad.
And that’s just one area: Programmatic advertising.
Investment bank LUMA Partners, the company famed for its “LUMAscapes,” has a new presentation on the state of digital media, that helpfully explains the biggest trends in the digital media industry in an easy-to-understand way.
LUMA Partners has kindly allowed us to publish the presentation and commentary, which summarises pretty much everything you need to know about the digital media industry in 2016.
In full, the presentation covers the latest issues affecting the sector, how public adtech and martech companies are performing, M&A activity, VC funding, and the most significant industry trends: Programmatic, mobile, content 2.0, convergent video, and adtech and martech convergence.
Digital advertising is doing great. Revenue grew 20% in 2015 and is set to surpass TV advertising next year as the largest category of ad spend. But you wouldn't know it from the press. Everywhere you look, all you hear about are the problems with digital advertising. It's no secret that the sector suffers from a fragmented ecosystem (as depicted by our eponymous LUMAscapes) and such a convoluted supply chain has been blamed for a series of issues that plague the sector. These issues have implications for all the key constituents from marketers to agencies, tech intermediaries, publishers, and consumers.
We force ranked the issues from the standpoint of their impact on the ecosystem as a whole with increasing importance from serious to critical to existential. The first four issues are either between constituents (Transparency, Header Bidding) or are universal problems that will eventually get solved via technology or consolidation (Measurement, Latency). The Privacy / Tracking issue is a big one with consumer groups, especially in Europe.
Then there's the bottom half of the list. These issues are critical if not existential. Let's take a closer look at these.
To assess the impact of Viewability, Fraud and Ad Blocking, consider the lifecycle of a media impression. Every load of a web page or video creates an ad opportunity (denoted in blue). However, ad blocking (now estimated at 22% in North America) prevents ads from being served to a person (a 'consumer' in our nomenclature). Of the ads served, some are seen by bots (machines that record fraudulent impressions) and another portion is delivered to humans but not seen.
Whether an ad is 'viewable' or not depends on the viewability standards that vary by platform. For example, in video, YouTube counts 30 seconds as a view whereas Facebook is 3 seconds and Snapchat 1 second.
Of the ads actually viewed, a small portion of these instigates engagement by consumers and an even smaller portion results in a conversion. These last two elements are primarily relevant for direct response advertising whereas brand advertising's objective is to help build demand generation or preference over time and may benefit from an impression alone.
If you analysed these issues from an economic perspective, there is significant value leakage. Marketers' 'lost value' is the sum of fraud and non-viewable impressions. In both instances they paid for an ad that was never seen by a potential consumer. Publishers on the other hand lose value from both fraud and ad blocking.
While we don't purport to have solutions to all of these issues, we would suggest that whatever solutions applied be done so with consideration of the principals of the marketing equation: the marketer and the consumer. On ad blocking in particular, we believe that the best way to prevent further proliferation of such software downloads is to create a better consumer experience. While we sympathize with the publishers' predicament and value the economic construct that supports journalism, forcing the consumers' hand with draconian measures is not the way to go. Consumer choice is here to stay!
The trend towards performance metrics in advertising serves to mitigate some of these issues. When marketers are paying for business outcomes and not proxies like impressions, it alleviates many ills from measurement to fraud. If the marketer is not paying based on impressions, it's irrelevant that impressions are not seen. This is a natural and healthy trend for both marketers and consumers. It's no wonder the companies that deploy these models have seen higher rates of growth.
Similar to the walled gardens of content from the '90s, Facebook and Google have put up walled gardens of data. The walled gardens are no surprise, given Facebook and Google's tremendous first party data assets and reach, which enable them to more effectively target consumers and deliver higher ROI to advertisers …
... and they are extending this advantage across third party apps and sites to further their dominance with the additional benefit of not degrading their owned and operated properties with more ads.
This begs the question: Will other companies with significant first party data join Facebook and Google as the third walled garden? With a sizable subscriber base and the recent acquisitions of AOL and Millennial Media, Verizon seems to be the most likely candidate.
To date, this strategy has been extremely effective for Facebook and Google, each of which has garnered massive scale in digital advertising. A recent analyst study suggests that their combined share of all incremental ad spend has exceeded 85%, a frightening figure for the thousands of companies vying for the remainder. We would call this issue existential!
Finally there's the paramount issue of fragmentation, a condition that is unsustainable for both the principals and intermediaries. Marketers and publishers struggle with the complexity caused by the myriad of point solutions on the LUMAscapes. For the intermediaries, it's a constant challenge to differentiate and grow with so much competition, which has led to a pull back in venture funding. To vary into another analogy, Winter is here! The obvious solution is industry consolidation, and LUMA is doing all it can to help out in this regard!
Adtech and martech stocks have struggled, down 13% and 16% respectively on average since this time last year.
Trading multiples have fallen far more than stock prices, despite industry-wide revenue growth of approximately 25%.
Where has the value in the ecosystem gone? Facebook and Google are up 56% and 34% respectively over the last twelve months, reflecting a combined $250 billion increase to their market cap. To put this number in perspective, the combined single year increase of Facebook and Google is the equivalent to the market cap of P&G, the largest advertiser in the world, as well as WPP, the largest agency holding company in the world.
That pipeline has frozen, as leading companies push off IPO plans, raise large private rounds or focus on M&A.
VC funding fell 29% during Q3 2015 to Q4 2015 and has continued to fall into 2016. Even more shocking, the median value of U.S. startups has plunged from a peak of $61.5 million in Q3 2015 to $18.5 million in Q1 2016.
Despite the negative overall environment, a significant number of differentiated digital companies have successfully raised sizable new private financing this year.
While both the public and private markets struggle, M&A has been the one bright spot for digital media. On an annualized basis, 2016 continues the trend of up and to the right across most subsectors.
Perhaps the most encouraging trend we see is buyers across an increasingly broad set of industry verticals have focused on adtech and martech targets. These buyers bring differentiated customer and data assets driving strategic value and adding dynamic competitive tension for differentiated tech and data driven companies.
Beyond the usual suspects, we are continuing to see deeper interest from new entrants, including CRM, consumer internet,commerce, telco, media, marketing, tech services, and data.
As an example, telcos have come into the space in a meaningful way over the past twelve months. With large subscriber bases and valuable first-party data, Telcos have looked to improve their competitiveness in the digital world while driving meaningful revenue.
Recent M&A validates this telco interest, with Singtel, Telenor, AT&T, Verizon, Comcast and Telstra all making significant acquisitions. We see this trend continuing as other major players actively evaluate the space.
Over past few years, the programmatic market has exploded, with the initial inflection point coming in 2014. Growth has increased dramatically, prompting eMarketer to continually increase estimates in order to catch up with actual results. With estimates over $20 billion for 2016 -- programmatic is now a market with the scale to attract the interest of the large software companies.
While some are building in-house, programmatic capabilities are largely being acquired through M&A, with a significant increase in transactions over the last year.
Investors value companies based on growth, operating leverage and predictability of revenues. SaaS (software as a service) companies in general have these attributes. Contrast that with traditional media models, which are showing slower growth, low gross margins and I/O (insertion order)-based contracts. These differences are reflected by a wide disparity in valuation multiples.
Programmatic businesses are also showing high growth and software gross margins. While these businesses may not have contractual recurring revenues, they have de-facto predictable revenues since they have evergreen budgets.
Programmatic businesses are also showing high growth and software gross margins. While these businesses may not have contractual recurring revenues, they have de-facto predictable revenues since they have evergreen budgets.
As the connection between spend and results tightens, advertising becomes more predictable. Predictability is not something typically associated with advertising given that ads traditionally have been bought on an insertion order ('I/O') basis. But programmatic enables performance advertising to be an 'always on' expense, therefore reclassifying it from a discretionary operating expense to a cost of goods sold.
To appreciate how much progress has been made in the mobile advertising market, we think it's helpful to take a step back and revisit the experience of a few years ago. Early attempts in the space involved porting banner ads that were commonplace in desktop. Users hated these ads since they were disruptive to the app experience and usually not even relevant / targeted. Ultimately, they drove a poor user experience and held the market back, which was why we kept waiting for the year of mobile ads.
Fortunately, we've seen an evolution to better formats as smart companies have focused on improving the mobile ad experience. Chartboost was one of these innovators when they introduced interstitials that had a native look and feel -- note the wrapper around the ad creative that matches the publisher's art. Companies like Celtra, Facebook, and Snapchat have focused on how consumers use their phones for specific use cases and have developed best practices for presenting video ads in feeds.
Rewarded video has been particularly compelling -- most apps that utilise the freemium model see very low percentages of users convert to payers. They have a great opportunity to monetise the 95%+ that don't spend on in-app purchases, as users actually like the value exchange of earning their desired content without having to pay for it. This approach can scale for hardcore gamers that are willing to engage with brands at a deeper level for more significant rewards.
We've started to see non-game publishers turn to rewarded video to realize these benefits as well, such as Pandora with their Sponsored Listening program. Users can watch a short video ad and get an hour of uninterrupted listening. Pandora can enforce viewability and only charges the sponsor when users have engaged with the video for at least 15 seconds. The early results have been promising, as beta partners saw >10% increase in brand awareness and a 30% lift in purchase intent.
Up until now, gaming companies have (1) dominated the app ecosystem from both a revenue and time spent perspective and (2) been some of the most sophisticated marketers in mobile. App consumption patterns have now changed, with messaging & social surpassing gaming for most time spent in mobile apps according to Flurry's most recent report on usage trends.
Mobile messaging has become the hottest topic in the space with tons of press coverage on chatbots, AI and the conversational commerce opportunity. There are a number of players in the sector with scaled user bases, with many focused on specific geographies / demographics at least initially.
Advertisers are experimenting with messaging platforms to connect with consumers in new, engaging ways. This can be as simple as Swyft Media offering a Minions-themed keyboard, a powerful branding opportunity. Inmoji is making emojis interactive, so users can share brand experiences with a clickable Starbucks emoji that leads to an offer or gift. Snapchat Lenses like the Gatorade Sponsored Lens during the Super Bowl saw 160 million views that day, with average engagement time north of 30 seconds.
We've talked about your phone being the remote control for your life with the ability to push a button and access a range of services. Messaging apps are seizing upon the opportunity to integrate a number of these services into their experience and become more platform-like.
Tencent's WeChat has evolved from a basic communications app into a cultural phenomenon changing people's daily behaviour. WeChat's massive, mobile-only user base is using the platform and its integrated payment capability for a range of use cases beyond social networking and messaging, from booking a car to donating to charity.
Given younger generations prefer messaging apps to email, these platforms represent a natural channel for customer service. The example shown here is from Facebook's F8 showcase of how they're working to bring brands into Messenger. Kik is innovating in this area, focusing on building brand relationships higher up the funnel. It will be interesting to see if consumers are willing to interact with brands in the same way as they do with their friends.
Conversational commerce clearly has tremendous potential, but brands need to strike the right balance with consumers to pull this off successfully. Messaging apps are personal spaces, so it is critical to get the experience right / establish an authentic relationship. Brands can't be too talkative or users will turn them off. It is paramount to deliver the right message at the right time and the mobile marketing automation / CRM innovators will be valuable to delivering the appropriate user experience.
It's obviously early days for the bot market, but if messaging platforms can integrate these types of services in a great experience, they have the potential to realise similar success to what we've seen in the app ecosystem and change a number of brands' thinking with respect to their mobile app strategies.
We are seeing app fatigue, as most people only use a few apps regularly and Americans are now downloading an average of zero new apps per month, so messaging platforms represent an existential threat to apps. Some brands will have big enough audiences and high enough engagement that a standalone app makes sense, but many others may turn to messaging platforms as their go-to mobile solution.
The old media business model was disjointed and siloed. Separate teams were involved with each process with no way for each step to learn from each other. The new model uses technology and data to connect production, distribution and monetisation to create a feedback loop that optimises the overall business.
Publishing no longer is based on gut feeling or emotion. Instead of publishing content blindly, publishers have insight into how it will perform before it goes live with objective data.
How do publishers do it? Publishers constantly gather data and analyse signals to optimise content for trending stories, timing and unique headlines. This ability has become table stakes for any scaled publisher with the number of distribution channels and devices continuing to grow.
As publishers have mastered the ability to reach large audiences at scale, marketers have turned to them to create branded content and native advertising. To fulfil this demand, a large majority of the top publishers have formed dedicated studios to create content for these clients.
Publishers have effectively become the new agency, by bringing capabilities to marketers that the traditional agency lacks: distribution. Publishers are no longer simply a destination to sell media inventory. They can now play a leading role in the planning, creation and distribution of marketing campaigns. This trend is indicative of the evolving skill-set and ambitions of the modern publisher.
Among the challenges publishers face during the 'distributed' age of media, the greatest is platform risk. Publishers are being forced to adapt quickly or lose significant traffic with every algorithmic change from the leading distribution platforms.
As traffic to publishers' home pages plummets, their dependency on referral traffic grows. Search and increasingly social have become the primary referral channels from where most visitors come from. Therefore, it is no surprise that Facebook and Google lead referral traffic by an overwhelming margin for web traffic as a whole. Although this may look different for premium publishers.
The media landscape continues to change rapidly, with new trends and challenges emerging every year. As the landscape shifts, it becomes essential to acquire other publishers with either niche, yet highly engaged audiences or with tremendous scale and distribution proficiency.
During the early days of digital video, YouTube led the way and quickly became the de-facto web destination for video. YouTube has sustained its success by building an ecosystem of creators and advertisers that pushes great content and viewers back to the platform.
But now the industry has hit an inflection point. Dozens of competitors have emerged as mobile and OTT video have exploded in recent years. Each has its own unique value to consumers, showing how video continues to evolve beyond desktop video and how technology is creating different viewing and capture behaviours.
When Facebook introduced auto-play videos in the News Feed, it was a watershed moment for mobile video. Consumption for this format took off and quickly showed the potential for video in the mobile context.
Through apps like Periscope and Facebook Live, users are broadcasting their lives and sharing content wherever they are. 'Live' video is no longer reserved to TV. In fact, audiences watching live video through mobile now match, if not surpass, audiences watching TV.
Snapchat has created true mobile-first video advertising by not only reformatting ads vertically, but by also introducing interactive experiences native to mobile, such as swiping and shareability.
Digital video is enjoying a surge in marketing spend as marketers allocate more money into premium content, which is very limited in supply but high in demand. Digital video is also increasingly being bought and sold programmatically. The programmatic video market is expected to grow at a compounded annual growth rate of 172% from 2013-2016.
Although the digital video market is growing at a staggering rate, it pales in comparison to the TV market, which is expected to surpass $70 billion this year. The world's major marketers reserve most of their advertising budgets to TV, which is the largest and most preferred channel for brand advertising.
However, the outlook for the TV market seems challenging. Upfronts, which are often used to gauge the health of the market, have shown weak interest from TV's major advertisers over the past few years. While the Upfronts are expected to increase marginally in 2016, TV companies are still on their heels as consumers continue watching content on multiple screens and marketers adjust their advertising spend accordingly.
In addition to the Upfronts decline, in 2015, we saw the selling points of TV and digital players reverse. TV networks were introducing new data products after feeling pressure from marketers to provide more granular targeting, while Digital companies were selling marketers high quality content that they felt deserved premium dollars because of their coveted audiences and engaging content. We've seen this trend continue into 2016 as the two sides continue to converge their offerings.
For the digital players, this has been a successful strategy, as the ad spend for original digital video has continued to increase with advertisers beginning to view it as premium content. Since 2014, the average annual ad spend on original digital video has increased 114%, from $2.1 billion in 2014 to $4.5 billion in 2016.
While we would hesitate to say that 'Programmatic TV' is actually here, companies are certainly making steps in the right direction. NBCUniversal, for example, announced NBCUx for Linear TV in February, allowing advertisers to use data and automation to build media plans for linear TV inventory. Similarly, AT&T recently partnered with Videology to create a private marketplace for advertisers to buy linear TV inventory programmatically.
What is clear, is that monetisation of 'Programmatic TV' won't follow programmatic monetisation on digital. Where digital programmatic has focused primarily on real-time bidding ('RTB') and open auctions, TV will be more cautious with its inventory in order to protect its premium distinction and keep prices up. Instead, Programmatic TV will focus more on targeting and workflow automation.
When you consider the size of the opportunities, it becomes clear that the real winners will be those companies that are focused on solving problems for the 100% opportunity. Programmatic video is a fast growing market, but the most lucrative opportunity is the entire TV and video market.
While the buying capabilities continue to expand for both TV and digital video, marketers are still blind to what the optimal mix is. This provides a massive opportunity for companies focused on the 100% opportunity, which are at the forefront of assisting marketers in solving this issue.
As TV and digital video convergence takes place, we've identified three major game changers that could have a material impact on the ecosystem. First, and rarely mentioned, is government regulation. For some constituents, impending changes from the FCC pose a significant threat to their businesses. For others, they present huge opportunities. Second, we note that a breakthrough technology could materially change things, for example, Apple TV. Finally, alternative distribution could exclusively licence must see content.
The FCC has proposed rule changes to allow consumers to use any kind of set-top box regardless of their cable providers. This initiative stems from the issue of rising set-top box prices, which the Consumer Federation of America believes is causing consumers to overpay $6-$14 billion annually. However, the FCC's proposed changes have major implications beyond the box.
Sweeping changes to the industry will enable technology leaders, such as Apple and Google to disrupt the traditional TV model. Under one interface, the TV experience of the future will bring cable, video-on-demand (VOD), OTT and apps together. Content, distribution and monetisation will be upended as they will no longer be confined to restrictions and limitations of legacy business arrangements among the broadcast and cable networks.
The industry is taking notice as evidenced by Rovi's recent acquisition of Tivo and it won't stop there. We expect strategics to make major moves before the dust settles.
The convergence of TV and digital video is being watched closely by the largest strategics from telecom to media. These major players are aiming to capitalise on the opportunity to monetise their large customer / user bases in the largest advertising market.
There are several major trends in digital marketing that are driving the ecosystem, such as mass personalisation, content marketing, mobile marketing and B2B marketing. While we are only focusing on the adtech / martech convergence in this presentation, we went through the other trends in depth in our State of Digital Marketing presentation, which can be found on Slideshare (link below)
Before we start, we want to level set for a moment, as often times the actual marketer's goal gets lost in all the noise while discussing marketing trends, companies and technologies. But the goal is clear: drive more revenues … at the lowest cost.
A key focus area for marketers trying to achieve this goal is to optimise the customer experience through delivering the right message, at the right time, to the right person. From the 'marketing clouds' down to small start-ups, technology vendors are focused on providing solutions to enable this (or at least an element of this) for their clients.
What's interesting to note, is that while both B2C and B2B marketers are seeking to optimise the customer experience through personalisation, they are doing it through different tools. B2C marketers are working at the convergence of adtech and martech to reach consumers on a personalised level through earned, owned and paid media. Meanwhile, B2B marketers are working at the convergence of martech and sales tech to identify and personalise messages to the highest quality leads.
At LUMA, we started using the chart on the left years ago to discuss the role of the data management platform (DMP), which was to manage cookies (and now mobile IDs and other identifiers) to unite the upper portions of the funnel. In the past couple years, 'predictive marketing platforms' have emerged for 1:1 marketing (particularly for retail), with DMPs being used more for segment-based marketing.
While DMPs, CRMs and predictive marketing platforms are the individual tools being used by Marketers, the real goal of these tools is for Marketers to identify and understand their audience.
The reason is that audience is the driver behind mass personalisation and the 360 degree marketing cycle. By truly identifying and following your audience through the marketing cycle, marketers are able to effectively plan, message and measure consumers on a personalised level, at mass.
Audience is the key because it brings together both a consumers user profile and identifies them across channels. By truly understanding audience, Marketers can not only determine who you are and what you're interested in, but also identify you in different settings and across channels.
As a result, identity is critical to providing a consistent customer experience. Facebook has long focused on, and had significant success with, its 'people-based marketing' solutions. Other large software vendors have responded with acquisitions (such as LiveRamp and Datalogix), or organic development / partner programs.
The unifying element between adtech and martech is data-driven marketing. While there have been many acquisitions in adtech and martech independently, a key strategic area is the convergence of these markets (the light grey area). Identity has been the main theme for strategic M&A so far in 2016, with Telenor acquiring Tapad and Oracle acquiring AddThis and Crosswise. We expect this activity to continue as adtech and martech converge around data.
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