Blog / March 16, 2017

What’s Up with Ad Tech? Terry Kawaja Gets Candid

By Eyeview Staff

The following is an excerpt from Outcomes. Download the magazine to read the full article starting on page 30. 

We’re often led to believe that, as consumers in a market, the more options, the better.

But having too many options can often have a counterintuitive effect on our psyches known as the “paradox of choice.” When presented with an abundance of choices, consumers feel overwhelmed and anxious and fail to make any decision at all (a phenomenon known as “decision paralysis”). Consumers don’t want a seemingly infinite number of options, the theory argues. Instead they want a few they can quickly evaluate against one another and come to a timely decision.

The paradox of choice is controversial among economists, but if the theory is indeed true, then it certainly applies to brand marketers trying to assess which ad tech solutions to use.

The overly complex nature of ad tech is why Terry Kawaja, the founder and CEO of LUMA Partners, predicted a dismal future for the industry in 2015. The space was too crowded, too fragmented, too confusing; the companies not differentiated enough from one another to warrant their existence. A day of reckoning was looming, with many companies doomed to fail.

Two years hence and Kawaja’s comment seems eerily prescient. The number of ad tech IPOs has drastically decreased, and VCs are investing less than in previous years. Ad tech stocks have struggled, with trading multiples falling despite increases in revenue. The value in the industry is increasingly concentrated in just two companies, Facebook and Google, which account for the overwhelming majority (85 percent) of all incremental ad spend. “Winter is here,” Kawaja proclaimed in LUMA’s 2016 State of Digital Media report, referencing the long-awaited battle against the White Walkers in the television series Game of Thrones.

And yet Kawaja remains optimistic. The pool of potential acquirers is vast and varied, with publishers, data firms, CRM providers and telecommunications giants all on the hunt for ad tech solutions.

Kawaja sat down with us to speak about the industry-wide move to performance marketing, why TV remains the preferred channel for brand marketing and why credit card companies are poised to become major players in digital advertising.

Interviewed by John McDermott

Terry Kawaja LUMA Partners
Terry Kawaja, Founder and CEO of LUMA Partners

When we last spoke at the state of the ad tech industry two years ago when I was an editor at Digiday, you said “Winter is coming” for the industry, alluding to a coming shakeout for all the middling ad tech companies. Now, you’re saying “Winter is here.” What happened in those two years to bring about that change?

Terry Kawaja: It’s really just been the lapse of time. There were all these undifferentiated, unprofitable companies in the ecosystem that, once the VC funding dried up in early 2015, you basically start a stopwatch for when they run out of cash.

Now, we’re seeing cases of companies actually running out of cash. Their investors are not interested in continuing to fund losses unless they have a differentiated solution, and that leads us to the conclusion that winter is here. You will see more companies failing, closing down or capitulating.

That’s not a very rosy picture.

TK: No, but it’s in contrast to the few successful exits. I’ve frequently compared the ad tech market to A Tale of Two Cities, because you have a significant number of failures, but you also have some tremendous exits. In fact, 2016 set a record for the number of large-scale exits in the space. All hope is not lost.

Whenever I say a significant number of companies will fail, I often get the reaction: “Yeah, but that’s true of any startup sector.” And while that is true, ad tech is different in the sense that you have a disproportionate number of what I like to call “false positives” or companies that get to significant revenue—say, $20 million, $50 million or even more than $100 million—and still don’t have a sustainable model. In most technology industries, you’d declare that company a success.

So this is a problem unique to ad tech?

TK: Correct. And that’s because of the current nature of ad spend.

What do you mean by that?

TK: If you’re starting a tech company that sells software to a certain business vertical, you have to convince businesses that they need your product, that yours is the best.

Whereas in ad tech, there’s upwards of $600 billion a year spent on advertising, and that money has to find a home somewhere. It’s going to be spent; it’s just a matter of with which company. And each year, a larger share of that spend goes toward digital based on consumer usage. So there’s a substantial amount of guaranteed digital advertising spending each year, and therefore a substantial number of startups eager to get that cash. But it doesn’t necessarily translate into sustainable business models.

So if you were the CEO of a middling ad tech company, what would you do to ensure you’re one of the few that thrives.

TK: The key is to build something differentiated. You can go name-by-name down the list of big exits that happened in 2016, and they’re unique companies. These are not companies with close peers, whereas there’s a significant amount in the ecosystem that are duplicative of other companies.

Beyond that, you need more than pure scale. Scale for scale’s sake is irrelevant if there’s no exit opportunity. You have to get significant scale and sustainability for an IPO or to sell, which is how 95 percent of all positive outcomes occur.

“In ad tech, there’s upwards of $600 billion a year spent on advertising, and that money has to find a home somewhere. It’s going to be spent; it’s just a matter of with which company.”

The irony is that while many of these companies seem destined to fail, digital ad spend continues to grow. It’s just that most of the growth is going to Google and Facebook.

TK: Almost 100 percent of it, actually. It’s not a perfect apples-to-apples comparison because their reporting metrics are different, but the growth of Google and Facebook in the first half of 2016 was slightly more than the growth of the market overall. The market in general was essentially flat, meaning you have share shift among those companies.

That makes it seem like the only viable option for many firms is to sell to Google or Facebook.

TK: No, not necessarily. In fact, Google and Facebook have not been active in acquiring for some time. They’re growing ad tech solutions organically, building capabilities with their own engineering teams The bright spot in this market is there’s a very deep pool of strategic buyers from a variety of industries, whether they be internet giants like Google and Facebook, to CRM companies, to marketing technology companies such as Adobe. Telecommunication companies, both foreign and domestic, have been active in the market, and they are not done acquiring, not by a long shot. If Verizon doesn’t complete, it’s Yahoo! Acquisition, there’s plenty of other companies they could, and perhaps should, buy to give them the capabilities they need without having to pay that sticker price. And you have media companies stepping up. Time Inc., News Corp and Hearst all remain active in the sector.

Then you’ve got a slew of data companies, like Neustar and Acxiom, and the big marketing-services companies, like Nielsen, in the hunt for capabilities. You even have some agencies being aggressive, garnering technology capabilities of their own.

So no, it doesn’t have to be just Google and Facebook.

So there’s reason to be optimistic.

TK: Absolutely.

Can any of these acquiring companies potentially challenge Facebook or Google for scale?

TK: Yes. What is Facebook? It’s a 1.7 billion-person consumer network. What other companies have large consumer networks privy to first-party data, and that can do a good job targeting and delivering value to their consumers? Telecoms, which is why so many of them have bought their way into the industry over the past four years.
Now it’s a no-brainer for telecoms to be in digital advertising. And if you think of other companies that operate larger consumer networks, credit card companies come to mind. Continued on page 37 of Outcomes Magazine

Download the full version of Outcomes Magazine to learn why Terry thinks performance marketing is having a resurgence and why it doesn’t matter if ad bots are viewing your videos.

Eyeview Staff

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