"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 Eric Bosco, CEO at ChoiceStream.
Over the past year, we’ve seen news articles document the struggles of the software-as-a-service (SaaS) model in programmatic.
It appears that some major industry players made big bets on SaaS that seemingly did not pay off. Although some assumed that broad adoption of SaaS was the only way to mature this industry, I believe that the persistence of the IO model is actually a good thing for ad tech.
As advertising technology emerged, a lot of money from the investment community poured in. Leading players pushed toward SaaS-based selling in order to appease Wall Street’s demand for recurring revenue streams. Companies with predictable revenue flow gain far higher valuation multiples than those without, so those looking toward public offerings aggressively bet on SaaS. In addition to pressure from investors, there was the competition factor: Every company wants to be the first to succeed in establishing the new business model.
But marketplace realities simply don’t care about Wall Street’s need for smooth revenue flow. Buyers simply don’t buy this way. The media industry is fundamentally campaign-based and the distribution of advertising dollars still primarily originates from agencies, buying on a managed-service basis for discrete amounts of budgets. Large amounts of marketing budgets are tied to product and services launches, which are cyclical and time-bound.
Beyond that, extreme variations in spend throughout the year mean that a platform commitment is not necessarily compatible with the budget management system in place. For many brands, it simply does not make sense to maintain the technical staff and media expertise throughout the year just to support three seasonal spikes.
That many ad tech companies are snapping back from SaaS and embracing more diversified business models is actually a very good thing. As an industry that is on the fast track for innovation, advertising technology would have been slowed down by too much SaaS. When you’re constantly scrapping for that next IO, you work pretty darn hard to make sure you are hitting the current campaign out of the park. For examples of what happens in the reverse situation, just think of any licensed product that does not have to constantly resell itself – with a guaranteed pipeline, there’s likely to be a high level of complacency.
Competition breeds innovation. The taxi industry offers a good example. For years, yellow cabs and their equivalents were the only game in town until Uber launched its first black car on-demand service. As ridesharing began to be defined as its own industry category and more companies got into the game – Lyft, Hailo Cab and more – competition drove innovation in the offerings.
Expanding from black cars to lower-end, lower-priced vehicles, pooling rides and fare discount competitions to experiments with self-driving cars, the fierce battles for riders has spurred constant growth. Now even the once moribund taxi industry has had no choice but to innovate, launching a variety of apps and new payment options (and air fresheners).
Back in the ad world, the managed-service aspect of IO-based models also helps drive innovation, as technology providers can take on risks of experimentation that clients never would. They can test new strategies and products while keeping the client sheltered from the downsides of experimentation.
Ultimately, I am still bullish on SaaS. Large brands with the resources to invest in building teams and sophisticated approaches to data are already benefiting from SaaS models, and I expect the industry to tilt in SaaS’s favor in the long run. It certainly is appealing for technology companies.
But motivations of Wall Street and tech vendors aside, the IO model – which aligns more naturally with the existing structures of media and keeps everyone innovating – will continue to have value for the advertisers we are serving.