“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 Jamie Hill, CEO at adMarketplace.
Over the past few years, there has been a recurring narrative in the ad tech trades: Ad tech is having a midlife crisis. An ad tech bubble is approaching.
I’ve been involved in ad tech for nearly two decades and have seen plenty of peaks and valleys in the digital space. I can confidently say there is no crisis in ad tech. There is a crisis in venture capital (VC).
Criticizing VC is foreign territory for me. I’m a firm believer in the merits of capitalism, so this is not a takedown of VC as a whole – it’s a critique of current trends involving VC firms in the ad tech space. Put bluntly, the last decade has brought forth an unprecedented boom in ad tech companies and the market can’t support the glut.
This shouldn’t be surprising. The allure of ad tech’s market potential will always be enormous. Digital advertising is a multibillion-dollar industry, but all the excitement surrounding second-wave ad tech led to rash decision-making in Silicon Valley VC circles. Some immature, derivative companies received too much funding too early and, after heavy prompting from the VC firms backing them, went public before demonstrating the ability to actually generate profit.
Too Much Of A Good Thing
The internet technology sector is an extremely dynamic industry. Things move fast. Trends change quickly. New technologies come and go.
The near simultaneous rise of both mobile and social media created plenty of opportunities for investors and facilitated a gold rush that was similar to the early '90s dot-com boom. Apps and mobile-friendly were hot. And anyone who claimed they had a way to monetize these sites had access to all the VC money in the world.
The concurrent rise of programmatic, mobile web 2.0 and apps proliferation created a fertile environment for new ad tech companies. Programmatic buying is far more efficient than manual media buying, and mobile and social created more opportunities for advertisers to reach consumers.
But programmatic and mobile web 2.0 created a large marketplace for third-party ad tech companies lacking proprietary technology and unique services. Programmatic impression fraud injected fear into an already uncertain marketplace. And profitability took a back seat to revenue generation, creating a boom of unsustainable businesses and the false sense of a thriving marketplace.
Some private equity is necessary to start ad tech companies, but too much private equity becomes negative when it encourages companies to cut bad media deals and inhibits them from generating profit.
Mo’ Money, No Profit, Mo’ Problems
Private equity wants to see revenue growth, and any company can be a billion-dollar business if it is not worried about being profitable.
We are now witnessing the inevitable fallout from this shortsighted strategy. The industry is overweight with programmatic, display and content companies that are doing hundreds of millions in revenue but can’t turn a profit because they buy traffic for more than the advertiser is willing pay. They run impossible margins to boost revenue and subsidize it with VC.
Paying too much for traffic acquisition and strategically placing revenue growth over profitability artificially creates a marketplace that doesn’t reflect the true value of traffic acquisition costs. The content discovery space is essentially a war between a few companies with endless funding that are making increasingly bad media deals. This is completely unsustainable.
In the past year we’ve witnessed lot of publicly traded, VC-funded ad tech companies trading less than cash. This isn’t due to a failure in ad tech or even a failure in programmatic. It’s due to a failure on behalf of many VC companies to demand a clear path to profitability and wean their investments off an endless flow of free money.
What Do We Do About It?
This is not an ad tech crisis, but a correction. Any potential ad tech bubble can be easily avoided by investing heavily in performance-oriented companies with proprietary technology and a path to profitability, and I anticipate this shift is well underway.
Ad tech is fine and venture capital is fine, but the whirlwind romance between the two is over, and we are witnessing the clear separation between winners and losers at the end of a VC boom. If a lack of endless capital is considered a crisis, then sure, ad tech is in crisis. For those who trust market forces, we are merely witnessing a healthy culling of a saturated market.