Ad Tech’s Flip Factor

The economy is in the doldrums, but it’s boom times in advertising technology. The growth of ad exchanges and programmatic buying has created a raft of opportunities. Venture capitalists continue to pour money into the sector and there’s a percolating M&A market.

Underneath the champagne bubbles, however, there’s a troubling picture. Many companies are being constructed out of whole cloth not so much to solve real advertising problems but to be sold down the line for a quick buck. It’s never been cheaper to start a company, leading to many new entrants in it for the short term. The cascading effect of this is to create an overcrowded landscape — witness the famous Luma Partners chart — that creates unnecessary complexity.

“What’s going on in ad tech is insane,” said Will Margiloff, CEO of Ignition One, a digital media technology firm. “And the guys at the bottom of the food chain who can’t figure out how to make a business model out of this mess will fail.”

New companies take advantage of the chaos in the industry and attempt to focus on an element of ad technology that others aren’t, using an army of publicists and start-up friendly media outlets to rise to the top of the newly carved niche-within-a-niche space in ad technology. The end result is that advertisers lose out, left with an array of small companies providing rather murky value, adding complexity to an ad- buying system nearly everyone agrees needs to get less complex. There are far too many features and products masquerading as viable companies.
Many startups don’t attempt to offer end-to-end ad buying and campaign management services, offering instead a focus on a single element of the campaign management and evaluation process, like ad verification. The problem with this approach is that while Startup A may have a highly efficient display campaign management platform, Startup B’s verification process may be flawed, causing a client, using both startups for a campaign, to have a skewed assessment of the overall effectiveness of strategy.
“The investors did this,” said Mike Nolet, CTO of AppNexus. “They created this madness in the market.”
The Luma slide has become something of a running joke of the digital industry, but some figures are saying that there is something a little mid-90s about investors’ willingness to pour investments into ad technology companies with few significant differences between them. One firm’s investment dollars feeds the acquisition of a smaller company by another firm’s more established company, also living on investor cash. The more startups that emerge and get funded, even with small seed investments, the hotter the industry looks, and the easier it is for venture firms to raise money to buy more startups. The more startups that a larger ad technology company is able to buy, the stronger it looks, and the more attractive it becomes to investors. Somewhere in all this, the true value to advertisers has been lost.
Nolet believes that like in the ’90s, investors are throwing money at any business model that sounds like it might take a slice out of Google’s or Facebook’s  ecosystem. This willingness on the part of Wall Street to fund often half-baked business models actually hampers ad technology innovation as companies develop technology as an offensive play against the Google-dominated ecosystem, rather than attempting to innovate beyond the status quo.
Many startups seem to be taking the easy way out and simply endlessly rebranding copycat platform services as well. Investor Laurent Ohana, whose Parkview Ventures recently invested in image advertising startup Stipple said that the flow of ever-hopeful startups shows no signs of dissipating.
“Almost daily another ad tech startup comes into my office, claiming that they are going to change the face of digital advertising,” said Ohana. Ohana finds that truly disruptive technology in the industry is a rare find and believes that most wanna-be startups are recycling old ideas without having the boldness to tackle the core problems of the industry; measurement, inventory quality and data management.
This leads to a landscape burgeoning with companies, investors and even digital agencies intent on feeding a perpetual cycle of industry fragmentation.
Hooman Radfar, CEO and founder of Clearspring, is less dismissive of the ever-growing throng of ad technology companies. Where others see chaos and get-rich-quick schemes, he sees a flowering of entrepreneurialism. “Admittedly, we are in the early stages of the game, so it’s still a bit difficult,” said Radfar. “The value of an alternative, more open ad tech ecosystem fueled by multiple players will become clearer as Google and Facebook become even larger forces in this space. Advertisers are becoming leery of a system dominated by only two or three players.”
But will this entrepreneurial burst benefit brands and solve the big problems of making digital advertising more efficient and effective? That’s an open question.
“Most brands objectives are to sift through the clutter and get to what they value, what really matters,” said Joanna O’Connell, an analyst at Forrester. Brands are losing interest, according to O’Connell, in dealing with anything other than clear-cut, comprehensive solutions, regardless of how hip a startup’s “tech stack” may seem.
That process of anointing a handful of startups with difference by creating buzz, has caused controversy in the last few months, but it isn’t only small startups merging. Microsoft is buying into ad technology through a slew of partnerships with larger independent ad technology providers. Smaller companies from every corner of the industry are being helmed by industry veterans, who stand to benefit not only from the gold rush in ad technology but from their ability to draw blue-chip clients to their fledgling firms.
“We need to be using less technologies, not more,” said Margiloff. “There are just too many startups to get any scale on their solutions and this process should be moving towards simplification, not more silos for strategy.”

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