“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 Louis Moynihan, vice president of business development at Demandbase.
If you have been in ad tech a decade or two, you’re probably sensing a major sea change.
Online advertising used to be the immature sibling disrespecting traditional logic as it quickly created new processes and revenue models. Less than a decade ago, Adobe was simply a creative software maker, Google did text-based search ads and Oracle was all about ERP.
Online advertising eventually grew up and bypassed many of the traditional channels, creating a whole new set of players. And now Adobe has integrated software with creative, analytics, advertising, data management and marketing automation. Google is the ad standard in display, mobile, video, programmatic supply and demand. Meanwhile, Oracle has ingested so many large software acquisitions that we need a new definition for ERP in 2015.
The ad tech industry should pay attention to how the large software makers are positioning themselves and the acquisitions they are making – not just the ad tech acquisitions. The largest global software companies have invited ad tech to the adult table and the stakes couldn’t be higher.
Let’s pick one area and break it down. For example, the software titans went on a buying spree specifically targeting marketing automation. Why is the email channel getting a second resurgence a decade later?
You could argue that email is actually becoming less valuable, but the fact remains that email is the communication standard in business today. From a marketing tech stack perspective, email nurturing usually happens before a transaction closes, therefore it is mostly mid-funnel activity. To simplify things, the marketing tech stack consists of top-, mid- and bottom-of-the-funnel technologies. The software titans want solutions in all three. Recent mergers and acquisitions (M&A) activity proves marketing automation was an important mid-funnel layer with more value within a broader offering.
What makes this interesting is each of the titans has an area of expertise. Salesforce owns CRM in the cloud and acquired ExactTarget and Buddy Media to fill out mid-funnel, and bought Radian6 to fill out top-of-the-funnel. Salesforce is missing a DSP/DMP layer but since that’s no longer rocket science, they could easily build or buy.
Adobe has done an amazing job in acquiring Omniture, Day, Demdex, Efficient Frontier and Neolane. Since Adobe now has all the pieces, success is now dependent on final integration.
Oracle, which was the clear leader in on-premise ERP, is accelerating into the cloud with acquisitions of Eloqua, Responsys and BlueKai. It, too, has covered its bases.
Top Ad Tech Integrations
While the software titans had one area of expertise, they have all made acquisitions in the mid-funnel area. Much of the email channel M&A are now complete. I believe the next hot area of M&A is in the display (ad tech) area.
Here are the recent ad tech integrations made by software-type players:
- Marketo partners with Liveramp and Appnexus.
- Eloqua integrates with BlueKai.
- Adobe connects Audience Manager, AdLens and Adobe Campaign.
- Acxiom picks up LiveRamp to power the email/display data sync and offline/online data sync.
- Rocket Fuel acquires X+1, giving a massive DSP an even stronger DMP with analytics and website personalization.
So what’s the big deal? Anytime you take a large business that creates standalone value and you allow a customer to integrate a second value point, compounding value is created. It’s the wonderful math of 1+1=3. We are at a unique stage in ad tech history where ad tech is being connected into a larger ecosystem, and the intersection points are incredibly valuable.
There are many challenges and opportunities ahead. For instance, translating email addresses in CRM and marketing automation to cookie IDs is a very valuable intersection, allowing ad tech to benefit from the email channel customer base. Unfortunately, the challenge is one of scale as the email addresses available are only a subset of what’s needed, and of course the cookie ID methodology is under threat by the need for mobile IDs and cross-device rationalization. Don’t get me wrong: This is a high-value connection point, but there is a need for more evolutionary steps before it can scale.
In another example, the DMP world has proven itself very valuable, but there is now more emphasis on allowing a brand to control its own first party data, with less emphasis on third-party data. The opportunity here is to help the brand get more control of its own data by fusing those connections into marketing tech, where the stronger the connection points, the more value you bring to the brand and its first-party data asset.
Finally, after Adobe acquired Offermatica (via Omniture) a few years ago, Adobe Target has matured into the leading enterprise A/B testing solution. Salesforce and Google don’t really play in this field, but Oracle’s acquisition of Blue Kai will allow Oracle’s customer base to activate any data segment into any of the top DSPs and personalization software.
Combining advertising with website personalization is something Adobe and Oracle are uniquely qualified to do. This intersection will be highly valuable for ad tech. The challenge is data quality as customers will complain about data inaccuracies on a brands website more frequently than inaccuracies in an ad unit. In other words, first-party data will rule this convergence.
The cloud is where all marketing and advertising will end up, and the software titans are sitting on the most valuable first-party data (CRM/website). Those who control the marketing cloud connections will claim rights over much of the subsequent value, so it’s highly recommended that ad tech instigate those connections sooner than later.
From a valuation perspective, advertising revenue generally gets a 3x revenue multiple, while software business commonly commands a 10x revenue multiple. Everyone benefits from this convergence:
Advertisers: The brand gains huge efficiency in targeting onsite and offsite, and connecting its most valuable audiences from pre-funnel all the way through closed revenue. If the brand doesn’t gain value, no one will. The good news is the extra value is real.
Ad tech: Advertising companies that embrace marketing tech connections triple their valuation if they also embrace software industry business practices such as subscription pricing and customer success frameworks.
Software titans: The large software cloud companies acquire ad tech companies producing a few hundred million dollars a year in revenue at approximately 50% year-over-year growth rates, and post a 10x valuation on that revenue assuming successful integrations. The growth rates are very much needed by the software titans.
We are at a unique place in ad tech history where our successful ecosystem is converging with a larger successful ecosystem. I wouldn’t want to be anywhere else.