Michael Walrath is the former CEO of Yahoo!'s Right Media.
I believe that there is a cycle of innovation at work in digital advertising. Where we are in the cycle at any given time depends on many factors, including the economy, availability of capital, supply and demand imbalances, M&A appetite, etc.
Let’s take a look at the cycle. We’ve got to start somewhere, so let’s start with an ad recession.
Recessions and Innovation
I think we can mostly agree that recessions suck, yet they also set the stage for periods of great innovation. How?
Recessions cause growth to slow, revenues to suffer and some really lackluster financial performance. This is especially difficult for the large public companies that have to talk about how badly things are going…all the time.
During downturns, these companies naturally reduce their investments and ambitions to bolster financial performance, creating a vacuum of unmet market needs. Entrepreneurs see an opportunity to serve these needs and talented people shake loose from established players. Capital is harder to come by, so only the best ideas and teams tend to get funding during these times. It’s counter-intuitive, but I believe that history shows that the best companies often start during difficult markets. These companies are forced to show more focus, discipline and flexibility than over-capitalized companies founded during strong markets. The business models of recession vintages are often built on worst-case scenario assumptions. Once the recovery starts, their fundamentals can and do improve.
On the tail end of a recession we will see periods of intense innovation. Companies create technologies and services to meet market needs and grab a piece of the value chain. This part of the cycle drives innovation, but it also increases market noise and complexity. I think this innovative and disruptive phase begins during the depths of the recession, but really becomes visible as the market begins to improve. For historical context, the last really disruptive period began somewhere around early 2002 -during the deep, advertising recession that began in early 2000. During this prior period, we saw the rise of ad networks, behavioral targeting, ad exchanges, etc. One of the most disruptive innovations of that period is the liquid marketplace (made up of exchanges and networks) which did not exist previously.
Recovery and Peak Complexity
As the market improves, the disruptive nature of all of this innovation begins to take its toll on market participants. Typically, the funding environment improves along with the market, so we see a marked increase in the numbers of companies competing for a given niche. There are more companies chasing each market opportunity. The marketplace gets crowded, noisier and more complex, and despite the rising tide we start to observe the first signs of innovation fatigue. The customers of this innovation become frustrated with the need to understand how all of these new offerings impact them (not to mention the need to pay for all of them separately). They want innovative solutions that help solve their problems, but they don’t want to take 20 meetings a week to understand all the new offerings.
Return to Growth and Consolidation
As our market returns to real growth, some really interesting things begin to happen. Large players are in a better position financially and become more aggressive with their product plans. They see the opportunity to consolidate the disruptive players and broaden their offerings. This is attractive to all market participants. Innovators get a payday through M&A, the consolidators broaden their solutions, and the customers get the value of the innovation -but with fewer vendors. Consider the mergers and acquisitions of 2007 as the most recent example of this behavior.
Of course our market remains cyclical, the consolidation phase and peaking market (all too soon) be followed by another recessionary market. This recessionary market once again wreaks havoc on the investment and integration plans of the consolidators – which in turn sows the seeds of the next disruptive phase. Wash, rinse, repeat.
So, where are we now in this cycle? I believe we are in the relatively early days of the next cycle of innovation and disruption. Over the last 12 – 18 months we’ve seen increasing numbers of disruptive startups despite the difficult advertising market and tight capital markets. Now that we’re beginning to see signs of growth in the digital ad markets, I believe the level of disruption, capital deployment and complexity will begin to rise. While we’ll almost certainly see M&A this year, I suspect we have several years of this phase ahead of us before we see the broader consolidation phase of another bull advertising market.
In the next installment, I’ll discuss how this latest phase of innovation and disruption is playing out on the demand side of our marketplace.