From Madmen to Real Time Bidding – We’re Not in (Advertising) Kansas Anymore
Over the arc of the modern advertising business, we’ve seen several key developments – the rise of the agency, the first TV ad, the development of iconic brands and, with the emergence of the Internet, an increasing focus on digital advertising.
With the challenges that publishers have had directly monetizing their digital content through user fees, the dominant online business model that has emerged is based on advertising. In fact, of the top 25 web sites based on traffic, only three — Amazon, eBay and Craigslist — do not have business models principally focused on advertising or leveraging user data for advertising.
While digital advertising has developed significantly overall (think about the evolving search-based advertising model, or the emergence of interstitial video ads), it is clear that we are at an inflection point for the industry, providing a prelude to substantial impending changes. In particular, five current trends – the shift toward mobile, the increasing use of programmatic ad capabilities, the increasing importance of data, a restructuring of the ad network value chain and changing competitive dynamics – are fundamentally changing the nature of digital display advertising. These changes will affect the opportunities and prospects for all of the parties involved in digital display advertising, including brands, agencies, publishers and all of the ad network intermediaries, creating new winners and losers in the evolving ecosystem.
Mobile is eating the world
Quick quiz: Why is June 29, 2007 significant? No, it isn’t the date of Justin Bieber’s emergence from obscurity. Rather, it is a date that marks the fundamental redefinition of our notion of communication and computing – the launch of the iPhone. Although Steve Job’s visionary capabilities are renowned, it is unlikely that even he anticipated the degree of impact that Apple’s seminal device would have. A few stats: Over 3.6 billion smartphones have sold since 2007. Over 3 million smartphones are activated daily. Over 3 hours per day are spent using a smartphone by the average user.
And yet the impact of this increasingly mobile world is just beginning to be felt in advertising. While the amount of time spent on mobile devices has increased by almost 500% over the last four years, now accounting for 23% of time spent with media, only 11% of ad spend is on mobile. Given the secular shift that is occurring toward mobile, it is inevitable that mobile ad spend will increase. This increase will close the discrepancy between mobile’s share of time and its share of ad spend, most likely at the expense of print ad spend. With mobile ad spend growing at a 110% annual growth rate, this crossover will happen in the near future. By 2018, mobile advertising will account for nearly half of overall digital advertising. Clearly this is an increasingly mobile world – and while advertising has lagged in this transition, it is apparent that mobile will be a primary focus for advertisers and publishers.
2014 Media Spend vs. Time Spend
Programmatic ads are increasingly important
At one time, advertising spend was principally conducted through periodic direct negotiations between advertisers – AKA brands and their agencies – and publishers, who had the advertising “space” or inventory. While these direct negotiations still occur, the advent of ad networks and ad exchanges and, more recently, demand side platforms (DSP), supply side platforms (SSP) and data management platforms (DMP) is fundamentally redefining how digital advertising is bought and sold.
Digital Advertising Has Become More Automated, Efficient and Effective through the Use of Advertising Technology
Source: Bulger Partners analysis
These technology-based intermediaries are enabling a much more automated or “programmatic” approach to advertising. While key advertising parameters like price range or target audience are defined in advance by buyers and sellers, the transactions are conducted machine-to-machine. One version of programmatic advertising, called real time bidding (RTB), enables the offer, bidding and serving of a digital ad for a specific impression in less 200 milliseconds. This means that when you select a link for an article on a website, an ad that specifically targets you based on data reflecting your personal interests and profile is loaded concurrently with the article that you selected.
While this programmatic RTB model has typically been used as a way to monetize less desirable inventory, RTB is now the fastest growing segment of digital advertising. By 2018, RTB will account for over 30% of all digital display advertising, almost double its current share. And the programmatic model will account for about 60% of all digital display advertising.
Global display advertising spend by category (% of total spend)
Source: MagnaGlobal, eMarketer, Barclays
Data is the key currency
As advertising evolves from a tool for creating broad awareness of a brand – think about the multi-million Superbowl ads for brands you’ve never heard of – to a marketing tool that drives much greater engagement and, ultimately, action, the critical enabler is data. Or more precisely, data regarding the specific target of the advertising, including not only standard demographics like age, income and ethnicity, but also interests based on past purchases, browsing history and even geographic location.
While data have been previously used in marketing campaigns, the technologies and techniques related to cookies, tagging, pixel tracking and geo tracking are enabling advertisers to capture user data to a level of specificity that would have been unimaginable a generation ago. These specific data are critical for enabling the programmatic RTB model because they allow an advertiser to understand the characteristics (and hence potential value) of each specific target of an advertising impression and bid accordingly.
The rise of data brokers, also called data management platforms (DMPs), means that user data are not limited to data that a publisher owns, such as data the New York Times have on its readers. Rather, DMPs gather data from previous website interactions and integrate off-line data from sources like Experian or Equifax to provide a more comprehensive picture of a specific users’ characteristics and interests. These data are provided real time to advertisers to enable their RTB bidding.
Even with the backdrop of data use that is quickly permeating virtually every industry segment, the programmatic model’s use of data is noteworthy for its sheer volume, speed and real-time nature, enabling advertising micro targeting done to the individual level and fundamentally redefining the notion of mass advertising.
Vertically integrated players are emerging
At one time there were clear dividing lines between the key players within an advertising ecosystem, including the brands, publishers, intermediaries, agencies and, more recently, ad networks. However, through a series of organic and increasingly inorganic means, several organizations including Google, Facebook, Twitter, AOL and others, are building vertically integrated advertising models. In this vertical model, the organization has some combination of DSP, ad exchange, ad network, SSP and/or DMP capabilities.
Vertical Integration Through Organic and Inorganic Growth is Changing the Dynamics of Digital Advertising
Industry Consolidation Favors Ad Tech Incumbents.Source: Bulger Partners analysis
The critical additional element of this vertical integration is the company taking on the added role as a publisher. All of these organizations have amassed very large amounts of information on their users’ interests and behaviors as part of the users’ interaction with their content. As noted previously, these data are critical assets to enable precise targeting of an ad – and the vertical integration model enables this superior targeting to be delivered via their in-house ad networks. It is unlikely these data will be shared via DMPs to other DSPs, since proprietary data provide a distinct advantage for the in-house DSPs. Furthermore, through efforts like Facebook’s Atlas ad network, these vertically integrated ad networks will increasingly be used for third-party inventory, in addition to in-house inventory.
In addition, other large players are pursuing this vertical ad network model, including Verizon through its acquisition of AOL. While Verizon is not a publisher, it does have access to a substantial amount of information on their mobile phone service subscribers, including the interests reflected across the app and web traffic activity of each subscriber.
With the emergence of these large, vertically integrated ad networks / publishers, the dominant business model for digital advertising is being redefined, likely leading to an increasing number of major players who will move to this model.
New winners and losers are being defined
These trends are redefining the digital advertising competitive landscape. First, it is likely that the mobile display advertising space will be increasingly be dominated by Facebook for the following reasons: (1) the sheer ubiquity of Facebook – ironically, the expansion of their user base to Gen X, often criticized as a harbinger of Facebook’s downfall, means they can increasingly target this prime advertising demographic; (2) their superior user data that are sourced from both the users’ time on Facebook and also on the various other web properties and apps that use Facebook IDs for login; (3) their expansion to third-party inventory; (4) their expansion as a publishing aggregator with Instant Articles. All of these factors will increasingly make Facebook the primary one-stop shop for both advertisers and publishers and could drive Facebook’s share of mobile display advertising to almost 58% by 2018.
Expected Global Mobile Display Ad Market Share
Source: MagnaGlobal, eMarketer, Barclays
On the opposite end of the spectrum, it is likely that the heavily fragmented ad network ecosystem will face substantial consolidation. While some DSPs may be able to overcome their data-disadvantages through superior and differentiated machine learning algorithms and targeting analytics, it is likely that many of the less differentiated players will be either acquired or competed away. And the current situation where 75% of the brand/agency ad spend goes to the ad network intermediaries is likely unsustainable, with competitive pressures resulting in declining media margins, especially for DSPs.
As with many other examples of technology-driven disruption, the digital advertising business is going through substantial changes. While it is difficult to predict with complete precision the medium and longer term implications of these trends, one thing is certain: the digital advertising world of 2020 and beyond will be as different from today as the overall digital advertising world is from the Mad Men era of the 1950s. The only constant is change – and that change is accelerating.
[Contributed by David Wong. Marina Camin, Associate with Bulger Partners, contributed to the research for this article.]