Orginal content provided by BDO United Kingdom
Andy Viner, Audit Partner, BDO UK
I am not psychic, but I would advise companies in the advertising technology space to gear up for a round of AI and data driven mergers and acquisitions.
The reason is the AI capabilities and sophistication levels of a new generation of ad tech solutions, which enable advertisers to understand consumer behaviour and target their ads much more efficiently.
To paint a picture: the new generation of ad tech companies enable a switch as profound as moving from a shotgun to a sniper rifle.
The hunt gets specific
A (very) brief history of advertising would be that it has gradually gone from targeting crowds to the individual consumer. The latest example of that trend is programmatic ad buying, which involves analysing large amounts of consumer data and internet traffic in order to target specific online ads towards specific groups and individuals.
A company like Rocket Fuel uses one kind of this technology to decide whether and what to bid on upwards to 80 billion of the daily ad-auctions that take place in split seconds whenever you open a webpage. The company grew its platform business by 165% last year.
These solutions have proven very popular. Research from eMarketer shows that programmatic digital display ad spending in the US surpassed $22 billion in 2016, representing a 40 percent increase over 2015’s total.
Following the pellet
With all that success, it might be strange to hear that companies in the space are going to be turning to M&A in order to stay competitive.
Part of the reason is that while programmatic ad buying happens on the basis on better data and clearer analysis of customers than before, it still relies on a shotgun approach. A specific advert for a product is shown to a user or user group at different times and on different websites, with success measured on whether it leads to a purchase.
However, the last click in a consumer journey usually builds on at least 20 visits - to different websites. It isn’t necessarily the last site you visited that made you decide to buy something.
To use the weapon analogy from earlier, what the current generation of ad tech companies can do is single out a target, but you are still using a shotgun and firing many pellets at the target.
A new generation of ad tech companies are using advanced AI and machine learning to chart the flight of each individual pellet and identify exactly which one strikes true. This analysis lets companies use their marketing and advertising budgets in much smarter, more efficient ways.
This analysis lets companies use their marketing and advertising budgets in much smarter, more efficient ways.
The full journey
Imagine a family that start talking about where they want to go travelling. They use the family laptop and start by checking out travel articles, blogs and websites like TripAdvisor. They talk about different possibilities and narrow down the list to a couple of places. A final round of surfing the web, and the journey destination is decided. Then there is the hunt for hotels and flights, which involves further searching, before everything is booked. The whole process probably takes a couple of weeks from start to end.
The questions for advertisers are: where in the journey from talking about a holiday to committing to going to a specific location did the family decide where to go, what airline to take and what hotel to stay in?
This can be described as the tipping points, which has always been incredibly difficult for advertisers and advertising agencies to identify. Until the advent of AI.
The term AI gets thrown around a lot these days, so let me make clear what I mean in this context. Here AI is a term for computer systems that are able to analyse the complex connections between media exposure, advertising and product purchases in a way that is impossible for humans due to the huge amounts of data involved. These systems use machine learning to gradually become better and better at identifying tipping points and evaluating consumer behaviour.
Enter player 2
A few examples of these new companies are Abakus, NeuralOne, C3 Metrics, Manthan Systems and Visual IQ. Their solutions gather huge amounts of data from all the kinds of online platforms that companies advertise on and uses AI to analyse the context of a given advert view. This includes who saw different versions of an ad, where and when. It correlates that with other customer data and can analyse the entire customer journey and pinpoint what advert made the customer commit to a purchase.
The exact way that the new generation of companies achieve this is their core intellectual property, which is to a large extent what makes them valuable. Much more so than any revenue or profitability figures. Their core value is their technology and its potential, which is a large part of the reason why they are extremely protective of it.
The central difference to companies like Rocket Fuel is the level of detail that they can give advertisers, in essence a level that involves identifying exactly what adverts in the customer journeys make customers commit to making purchase.
Their core value is their technology and its potential, which is a large part of the reason why they are extremely protective of it.
A perfect M&A moment
As we have seen from recent trends in ad and marketing tech M&A, there is much demand for these types of companies in recent years.
As one Business Insider article puts it:
“Plenty of ad tech companies are getting snapped up by larger firms, raising VC money (although, admittedly, some of the rounds aren't as big as they used to be), or simply steadily growing their businesses quarter-on-quarter.”
Innovation continues to be an important competitive factor for advertising companies – and a way to differentiate from competitors. Then there is the added factor that advertising companies are fighting an increasingly difficult battle with online giants like Facebook and Google.
Both arguments for M&A activity involving solutions like the ones mentioned in this article. In an environment of fierce competition, M&A is a way to bolt on new solutions and services much quicker.
Then there is the added fact that companies outside the traditional boundaries of advertising are sitting on troves of both data and cash, perhaps not quite knowing what to do with either.
In an environment of fierce competition, M&A is a way to bolt on new solutions and services much quicker.
A good example is telecoms that have masses of data on their customers, but have somewhat struggled to find good ways to monetise it. A final thought is that AI-assisted programmatic ad buying is moving into TV and streaming services – a market expected to be worth $17 billion by 2019.
Add the fact that Abakus has already been acquired by SAP at the end of 2016, and there seem to be plenty of good reasons why we could soon see a lot more M&A involving the next generation of AI-assisted programmatic ad buying companies.