"Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is written by Todd Van Fleet, managing partner at Van Fleet Capital Strategies.
The crowded nature of the ad tech landscape is well known but what gets less attention is the fundamental question of why the industry continues to support so many companies.
Certainly the overall size of the internet-driven ad market and its attractive growth rate are significant factors. But with the Big Three walled-garden platforms – Google, Facebook and Amazon – taking the lion’s share of each new dollar entering the market, other factors must come into play.
I’ll suggest a primary factor is an overabundance of partnerships that enable the survival of companies that would otherwise require additional investment to broaden their value proposition. I’ll further suggest this dynamic collectively works against the ambitions of non-walled-garden players as they seek to increase their share of the industry pie.
To be clear, partnerships can be helpful by cost-efficiently extending market reach. However, there are fundamental aspects of capital markets and the ad tech industry specifically that suggest long-term strategies should focus more on owning a broader portion of the value chain and less on leveraging partnerships to support growth.
Partnerships Don’t Drive Investment Decisions
Having evaluated the prospects of many publicly and privately held companies over the years, I can’t recall an instance where the investment thesis called for a significant portion of the revenue growth to be sourced through partnerships. The base case investment thesis is virtually always tied to how well the company controls its own destiny. Revenue visibility from partnerships is generally viewed as opaque at best.
In fact, the non-walled-garden ad tech ecosystem seems filled with partnerships having no direct revenue-generating function. These come mainly in the form of technology integrations to move data from one application to another. We see these everywhere given the desire to allow data to travel without bounds, coupled with a general bias in today’s economy toward open enterprise platforms, which spur innovation.
However, the more integrations established, the less valuable any one integration becomes. How valuable can a partnership be over the long term if there is no direct economic benefit from it? Moreover, how valuable can a partnership be if it isn’t proprietary?
The Ad Tech Value Chain: Connected, Not Discrete
In some industries, the value chain is comprised of a series of discrete outcomes.
The travel industry, for example, is filled with partnerships between airline, hotel and car rental companies. Each partnership offers a transparent benefit to the buyer, including free miles or points, for using one provider with another. Because events are discrete, there’s little or no impact to a provider from the experience a buyer has with a partner. I don’t penalize Hyatt for a bad experience with United; I can simply switch to another carrier that will likely offer the same benefit with Hyatt. There’s little to no incentive for these travel companies to broaden their services across the value chain.
Ad tech is different in that the value chain is connected to deliver a specified outcome for a buyer. If an outcome is substandard, how effectively can a buyer pinpoint where the weak link is in the value chain, given there are any number of technology and service providers involved in the process delivering that outcome, including agencies, consulting firms, data management platforms, data providers, demand-side platforms, creative teams, supply-side platforms and publishers?
Industries with connected value chains tend to integrate to deliver successful outcomes. The most integrated providers in ad tech today are the walled gardens, which could account for a sizable part of their relative success to date.
Outside of ad tech, we see this integration at work in the health care industry where the desire for better patient outcomes and cost containment is spurring the acquisition of physician groups by hospital systems. In the $100 billion drug development industry, there’s been a decade-long shift to reduce R&D costs while increasing the number of drugs successfully brought to market. This has given rise to half a dozen or more large, independent contract research organizations that have consolidated assets across the multistage development value chain.
To Better Compete With Walled Gardens, Do As They do
The walled gardens continually increase their understanding of consumers by investing in content, commerce and technology. This improved understanding drives more successful outcomes for buyers.
The walled gardens own the entire value chain. They own the content that generates the data and the technology that turns the data into advertising products buyers use to connect with consumers.
The walled gardens have partnerships providing direct economic benefit. Their technology integrations exist primarily to increase the number of ways buyers can give them more of their money.
Fewer Partnerships, More Ownership
The Big Three are likely to put more distance between themselves and the rest of the market the longer the non-walled-garden ecosystem chooses partnerships over ownership. Considering the sales pitch to buyers is often made through a small group of large agency and consulting intermediaries, there is precious little selling power in the market.
What selling power does exist seems to stem from the complexity of the value chain and the buyers’ strong need to keep up with the increasingly complicated consumer path to purchase. Pursuing a broader degree of value-chain ownership would likely improve industry selling power.
The good news for the non-walled-garden ecosystem is that buyers desperately need it to succeed as a counterweight to offset the growing industry imbalance. The threat posed to buyers by the Big Three is likely to grow as their consumer relationships evolve.
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