How The Trade Desk Has Evolved For The Next Stage Of DSP Growth

The Trade Desk shocked many observers last May when shares jumped from around $50 to $90, and then again in August when the stock leapt to about $130. Now shares are trading at almost $200.

But what’s behind The Trade Desk’s monumental growth in the past year?

The company benefits from a smaller field of competitors, as rivals like Turn, AppNexus and Videology are snapped up by telcos and marketing clouds. But The Trade Desk has also placed winning bets on new products and markets that have kept it afloat while most independent ad tech companies are in decline.

AdExchanger examined some of the key updates and growth areas that have redefined The Trade Desk, and how the company has adapted to changes in the agency and DSP markets.

Keeping take rates high

Every marketing technology company talks up product investments, but most of those promises are unfulfilled, said Elgin Thompson, managing director at Digital Capital Advisors. But he said The Trade Desk’s “Next Wave” products, part of a new campaign planning and optimization suite, have already delivered immense value since launching last summer.

Seventy percent of The Trade Desk’s clients have adopted the Next Wave, CEO Jeff Green said on the company’s earnings call last week, and three-quarters of those are using Koa, a predictive targeting and optimization feature.

The new products are important revenue drivers, since they increase use of cross-device graphs and data on the platform. And increasing the ratio of data spend to media spend is important for The Trade Desk beyond just raw revenue growth.

For instance, The Trade Desk’s take rate, the percent it keeps of every dollar spent on the platform, was at 18.5% in 2018 and is forecasted to grow to about 20% in 2019. That The Trade Desk has maintained a high take rate while other DSPs have faced margin compression is a huge feat, and one that is supported by the platform’s data sales, which have better profit margins than actual media buys.

“The Trade Desk’s strong take rate would seem counterintuitive based on what’s going on in the market,” said Jay Friedman, president of the Goodway Group. “But what they’ve done is separate the base rate to buy media and build a number of products and services on top of that.”

The Trade Desk’s new tech also supports its high take rate by profiting off media savings through a tactic called bid shading. As publishers switch to first-price auctions and increase yield through tactics like dynamic floor pricing, buyers must be careful not to overbid on inventory, as they might in a second-price auction.

Koa, the Next Wave product, has reduced the average CPM clearance price by 20% for marketers using the tool, Green told investors. But The Trade Desk gets a cut of that 20%: So if a marketer bids at $12 CPM instead of a $15 CPM because the Koa tool predicts the publisher’s floor pricing and auction mechanics, The Trade Desk will take part of that $3 savings.

Agency buyers may not begrudge The Trade Desk’s high take rate as they have other platforms, like Rocket Fuel, the former ad tech leader that was hammered after going public and revealing a take rate over 50%.

“Smart marketers care less about working media dollars and more about returns,” Friedman said. “The dialogue we should be having is about whether marketers have the ability to decide if something enhances the campaign more than it’s costing.”

Agency ties

When The Trade Desk was founded almost 10 years ago, it seized an opportunity to win over agencies by pitching itself as a pure, agency-only platform. Meanwhile, those clients were cutting out other DSPs like Turn and Tremor Video that were trying to leapfrog agencies and go directly to brands. And the strategy differentiated The Trade Desk from competitors like AppNexus, with strong ties to media companies.

The more recent agency quagmire that The Trade Desk tactfully navigated was the brand in-housing trend. The Trade Desk works directly with brands now, but still frames itself as the third person in the room with a brand and an agency.

Programmatic buying started with outside trading desks and moved to integrated agency models. Today, there are many cases where the brand is the decision maker, said Evan Hanlon, US president of [m]Platform, GroupM’s internal data service.

Current relations are more “triangular,” he said, where the brand selects a DSP and brings the tech vendor into the relationship.

The Trade Desk’s method of going to agencies to support their bid to the brand, instead of trying to win in-house brand advertising budgets directly, has become “a model for many DSPs,” said Ashwini Karandikar, global president of Amnet, Dentsu’s programmatic business.

Data and identity scale

Ingratiating itself with agencies is old hat for The Trade Desk, but one factor that marks the next generation of the business is the powers of scale it has developed.

Now that The Trade Desk directs so much revenue to data companies – think cross-device graphs, location data or retail transaction data – it can “squeeze companies in its data marketplace for more margins,” said Beeswax founder and CEO Ari Paparo.

The Trade Desk’s Data Alliance product white labels data from third-party providers to sell to buyers. It helps some data companies because The Trade Desk has so many more agency relationships and data deals than a startup could win, especially if the data companies don’t care if the advertiser knows their name or not. But the margins on data sales through the black box Data Alliance are more favorable to The Trade Desk.

The Trade Desk’s new powers of scale are also a key part of its ambition to be a default for online identity services with its Unified ID solution.

Through this program, any SSP, DSP and programmatic data company can opt into The Trade Desk’s cookie footprint. SSPs get cookies from their publishers, but DSPs have the largest footprint since they bid across many SSPs. As the biggest non-walled garden DSP, The Trade Desk has the largest cookie pool and can offer the most benefits for high match rates with its platform.

“The Trade Desk reframing and pushing itself as the vehicle for brands and agencies to have their own identity assets and have those be portable across channels was a smart play,” Hanlon said. “As DSPs approach parity with each other and media becomes more programmatically enabled, I think they recognized that identity and portability could ultimately be their strongest value prop to buyers compared to walled gardens.”

Expanding to CTV and international shores

Whether The Trade Desk delivers on Wall Street’s growth expectations will come down to two emerging revenue categories: connected TV and international markets.

CTV sales “measurably helped the business” for the first time in Q4 2018, Green said during The Trade Desk’s earnings call last week.

The first generation of programmatic was marked by seemingly endless inventory and integrations, but broadcast media is more judicious. Green said The Trade Desk’s early inventory partnerships with broadcasters like Fox, NBC and ESPN will be critical as those companies compete more directly with the biggest DSPs – Google and Amazon – and increase their programmatic sales.

“Until media companies like Disney, A+E or Hulu have amassed enough scale and value to warrant switching [to an ad-free subscription model], they’ll need to have ads and will need a programmatic vendor,” Thompson said.

Global markets also hold immense potential but limited revenue right now. Sales outside North America account for 14% of The Trade Desk’s overall business, but Green said that figure eventually should grow to two-thirds, mirroring global economic markets.

Going from 14% international revenue to 67% is a big jump. But China could drive huge returns if The Trade Desk’s plan gains steam.

“The Trade Desk is the only mainstream DSP with a strong play in China, which is a differentiator for a brand that wants to target Chinese consumers,” Paparo said.

Dentsu is working with The Trade Desk more in APAC markets, Karandikar said. “They’re one of a few tech operators I’ve seen do a really good job building country-based models that create customized structures for that market,” she said. The Trade Desk’s deals in China with Tencent, Alibaba and Baidu, announced late last year, reflect that adaptability.

The big challenges ahead

So far, The Trade Desk has feasted on the low-hanging fruit of programmatic, winning business mostly from ad tech startups and earlier DSPs.

But its days of ease and plenty may be in the past, Hanlon said, because in the new competitive landscape there’s no choice but to compete head to head with powerhouses like Google, Amazon and AT&T’s Xandr with exclusive media and first-party data.

A heavy search and digital video advertiser, for instance, could be compelled by the advantages of Google and YouTube’s walled garden even if it would prefer an independent vendor. Similarly, a product manufacturer might be wooed by Amazon’s ad platform, Hanlon said. That means the number of independent DSPs a brand works with is being whittled down to one or two, and sometimes is limited to 10-15% budget carve outs for testing.

“The Trade Desk has by far the most momentum and penetration of the independents,” he said. “But the real risk is that they don’t have those incredible media properties and user data assets.”

The Trade Desk did not return requests for comment.

 

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