The Great Ad Tech Cleanup

"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 Terence Kawaja, founder and CEO at Luma Partners.

Following the acquisitions of Rocket Fuel, MaxPoint Interactive and YuMe and the divestiture of Tremor Video's demand-side business, there will be no public ad tech companies with an I/O media model by the first quarter of next year, except for Criteo, which is its own category.

It’s the end of an era, but let’s walk down memory lane to understand how the Great Ad Tech Cleanup came to be.

In July 2005, DoubleClick, one of the few internet companies to have outlived the dot-com bubble, was taken private for more than $1.1 billion by private equity firm Hellman & Friedman. Two years later, Hellman & Friedman sold DoubleClick to Google for $3.1 billion, and the rest is history.

For seven years, there were no ad tech companies listed on the public markets in the US until Millennial Media went public in March 2012. Portfolio managers had little understanding of the sector due to the lack of public ad tech companies prior to Millennial Media’s IPO.

Millennial Media, a leading independent mobile ad network at the time, had a successful IPO, pricing above the range at $13 a share and a market cap of $974 million. The company finished its first day of trading with its share price rocketing to $25 and a market cap of $1.9 billion. Investors were excited about the growing mobile advertising market and the company’s story. But this would be the highest point in Millennial Media’s journey as a public company.

When companies go public, they are often primed to beat expectations for the first quarter they report earnings. In May 2012, Millennial Media committed the cardinal sin of missing its first stub quarter’s earnings. Investors punished the stock in response: The share price plunged, falling more than 13%. Millennial Media would never recover.

A year later, video ad networks Tremor Video and YuMe both filed their S-1s. But there was an adverse selection S-1 filer problem at the time, meaning that although the most scaled advertising technology companies had gone public, they had legacy business models based on I/O-based media. They were traditional ad networks focused on insertion orders, manual workflows, heavy managed services and media arbitrage.

Although they often marketed themselves as technology- and data-driven, these ad networks had little predictability in their revenues and profitability. They were not platform companies that used automated, self-serve programmatic technology with a percentage-of-media-spend margin model, which represented the next generation of ad tech companies. Like Millennial Media, Tremor Video and YuMe would disappoint the market with unpredictable earnings, and their stocks cratered.

There was the possibility that any new ad tech company to go public would, unfairly or not, become associated with the underperforming ad networks. Any future IPO candidate would find it difficult to escape the sector’s negative investor sentiment created by them. Rocket Fuel, another ad network, went public later in 2013 and, sure enough, it followed the same downward trajectory as its counterparts.

In April 2014, Rubicon Project went public as the first pure-play programmatic company. It would seem like a turning point for the market, but even after beating expectations for 10 quarters in a row, according to Seeking Alpha, the stock also plummeted from the association with the I/O-based ad networks.

The conflation of platform and I/O-based models led to the fall of Rubicon Project (in addition to header bidding headwinds) and the underperformance of TubeMogul, which went public a few months later. They were collateral damage from the reckoning of the ad networks.

It was clear there was a confusion around ad tech business models. To distinguish I/O-based media companies, platform media companies and SaaS companies, they could be laid out in four different categories:

1. Network 1.0: These companies typically transact manually with insertion orders, sell ads based on CPMs and arbitrage media to generate revenue.

2. Network 2.0: These companies share the same qualities as their predecessors, but were driven by ROI, rather than CPMs.

3. Programmatic: These companies transact ads in real time in an automated fashion, offer self-serve technology, treat media as a pass-through and generate revenue from a percentage of media spend, transaction fee or usage license.

4. Software-as-a-Service: These companies, more typically non-ad tech companies, offer self-serve technology, sell monthly software subscription fees and do not generate revenue from media.

Fast-forward to late 2015: Millennial Media was acquired by AOL for $1.75 a share, a far cry from its high of $27.90 and IPO price of $13 a share. More ad network acquisitions followed with valuations that were fractions of what they once were.

Rocket Fuel was acquired for $2.60 a share, or 9% of its IPO price. MaxPoint Interactive was acquired for $13.86 a share, or approximately 30% of its IPO price, adjusted for MaxPoint Interactive’s reverse-stock split. YuMe was acquired for $5.25 a share, or 58% of its IPO price. Tremor Video sold its demand-side business to focus entirely on its supply-side platform.

If I had invested $1 into the Nasdaq from the time of Millennial Media’s IPO five years ago until YuMe announced its sale in September, that $1 would have become $2.08, more than doubling my money. But that same $1 invested in the I/O-based ad network cohort during that same period and prior to their sales would become $0.27 on average, a loss of nearly three-quarters of my money. There is no wonder why negative sentiment around ad tech has been so strong and persistent over these years.

But the consolidation of the space and the Great Ad Tech Cleanup will help the sector over the long term. The remaining cohorts of Criteo, Rubicon Project, Telaria (formerly known as Tremor Video before it divested its demand-side business) and The Trade Desk will improve the opportunity for true advertising technology platform companies to seek an IPO and ultimately obtain a fair valuation in the markets.

Follow Terence Kawaja (@tkawaja), Luma Partners (@LUMA_partners) and AdExchanger (@adexchanger) on Twitter.

3 Comments

  1. Thanks Terry, great summary. Today one could buy ALL of Rubicon for $11 million adjusting for their cash (RUBI @ $3.40). How is that a helpful public market comp for someone like AppNexus whose last funding round was rumored to be at $1.2bn? Thanks!

    Reply
  2. Great summary and overview, Terry, thanks for publishing. In addition to business/revenue model concerns, I think it's fair to say that quality and fraud filtering concerns, which started to receive much attention in 2013 and 2014, were a huge factor in reduced valuations. Until new technology models (not just policy or working groups) emerge that eliminate the threat of fraud, the market will continue to consolidate to the duopoly and constrain valuations.

    Reply

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