Internet advertising is hot. Everyone wants a slice of it. An entire “advertising technology” subculture has sprung up in San Francisco and elsewhere. There are hundreds of these startups, algorithm-driven middlemen and personal-data-gatherers, trying to find a niche between advertisers and the media.
Hardly a day goes by without one of them urging me to sign up WOLF STREET on their platform. It’s always the same spiel. They claim that their algos work better than anyone else’s and that their platforms are easier to use and produce better results. But nothing differentiates them from anyone else out there, and you wonder how they ever got tens or hundreds of millions of dollars in VC funding.
Investors were seduced by the boom in Internet advertising. Two weeks ago, IAB and PwC reported that ad revenues in the US in Q3 reached a record of $12.4 billion, up 17% year over year. Not many sectors have this kind of growth.
“Brands are tapping into the ubiquity of digital screens, now an undeniable vital part of consumers’ lives, as they seamlessly move from smartphones to PCs to interactive televisions throughout the course of their day,” explained IAB CEO Randall Rothenberg.
Hundreds of startups are elbowing into that space to invent a better mousetrap, collect more data on you, follow you “seamlessly,” as Rothenberg said, from device to device, and cover every second and aspect of your life – to bring, as the euphemism goes, marketers and consumers together. In doing so, these startups want to take their cut.
The problem is that Google – with $14.7 billion in “Total Advertising Revenues” in Q3 – already hogs much of that space. Part of its technology is based on ad-tech pioneer Doubleclick, a dot-com highflier that crashed and burned to become a penny stock before Google picked it up. Other giants in this space include AOL, Adobe Systems, Facebook, and Yahoo. Together, they’re squatting on a huge share. What’s left for the hundreds of me-too startups? A few crumbs.
Many of those that have gone public haven’t done so well. Even the lucky ones, like Rubicon Project, which automates, as they all do, the buying and selling of advertising. In March 2014, it started trading at $17.50, “popped nicely on the first day,” as Business Insider put it at the time, and soared 27% in three weeks. Then reality set in. For the first three quarters of 2014, its losses on a GAAP basis jumped 118% while its revenues rose only 50%. Not a propitious trend. It now trades at $15.48.
Others haven’t been so lucky. Ad-buying software outfit Rocket Fuel went public in September 2013 at $29. Its shares soared 93% on their first day, closing at $56.10. Losses piled up quarter after quarter, and now the shares trade at $16.12, down 44% from its IPO price, and down 71% from its first-day closing price.
Ad-tech firm Tremor Video went public in June 2013 at $10 a share. Having spilled red ink ever since, it now trades at $2.45 down 75%.
Mobile-ad network Millennial Media priced its shares at $13 at its IPO in March 2012. They doubled to $26.27 during their first day of trading. That was all the fun that was going to be had. With declining revenues and soaring losses, the company is turning into a penny stock, now trading at $1.53, down 88% from its IPO price, and down 94% from its first-day pop.
So the IPO as an exit for VCs and other investors is becoming an increasingly dubious option. Instead they’re now trying to unload their stakes by selling it to another company, before it’s too late. It’s been a big party:
Ad-tech M&A transactions in 2014 jumped 32% from a year earlier, to 100 deals, the Wall Street Journal reported; and the value of these deals more than tripled to $7.5 billion!
The buyers? Big tech and media companies that can use their shares as currency, of which they can print an unlimited amount and that can use “acquisition accounting” to make their adjusted numbers look better.
In December, Oracle acquired Datalogix, which “aggregates and provides insights on over $2 trillion in consumer spending to deliver purchase-based targeting and drive more sales,” as Oracle explained – spying on consumers being the hottest industry out there.
In November, Yahoo, flush with Alibaba moolah, acquired BrightRoll for $640 million. CEO Marissa Mayer wrote in her blog post at the time that she expected revenues of the “leading programmatic video advertising platform” to come in at $100 million in 2014. Video is not only one of Yahoo’s “four strategic pillars” – the others being search, communications, and digital magazines – but “one of our growth businesses,” along with mobile, social, and native advertising, that might “help us transform and modernize Yahoo’s display business and return it to growth.”
So BrightRoll is going to save Yahoo. You can’t pay enough for that. Plus, “BrightRoll’s approach not only benefits advertisers and publishers, but also improves experiences for consumers, through better quality, more relevant advertisements,” she pointed out. Ah yes, the Holy Grail: This is for your own good.
In July, Facebook acquired LiveRail, a “leading publisher monetization platform for online video,” as LiveRail describes itself, for $400 million to $500 million, according to TechCrunch.
And so on. In total, 100 ad-tech acquisitions worth $7.5 billion, in an environment controlled by a few giants. According to the Wall Street Journal, it’s boiling down to an inevitable “shakeout”:
Meanwhile, a host of online ad firms are chasing finite ad dollars. Witness the number of companies that provide “demand-side platforms,” for example, which are essentially software tools that automate the process of buying online adverting. There are dozens of companies on the list, including MediaMath Inc., Turn Inc., DataXu Inc., The Trade Desk Inc., AudienceScience Inc. and Merchenta, to name just a few.
And they’re trying to compete with Google, AOL, Facebook, Adobe Systems, and the like. Alas…
There isn’t room for even 20 major online ad companies in the long-term, let alone the hundreds that exist today, said Terence Kawaja, chief executive of Luma Partners, a boutique investment firm focused on digital-media. “I don’t know what the right number is, but it’s probably less than 10,” he said.
So investors are trying to get out while they still can, while billions still get shuffled around because billions no longer matter in an upside-down world of endless liquidity and zero cost of capital. The hope is that each time these billions get shuffled around, they beget more billions. Now the stock market no longer plays along but instead sends these startups to purgatory or worse. So the game continues behind closed doors. For many of these cash-burning ad-tech startups, time is running out, and deals must be made soon. Yet there are only a limited number of buyers. So this will be an interesting year.
And other signs of trouble in startup land have emerged. Read… This Is a Sign the Startup Bubble Is Totally Maxed Out: It Resorts to (um, Sexy) Junk Mail to Disrupt