Editor’s note: After billions of dollars in venture capital investment and initial public offerings, a fragmented advertising technology (ad tech) sector is maturing and consolidating with new challengers rising to face Google, says Technology Business Research analyst Seth Ulinski.
HAMPTON, N.H. – As ad tech consolidation continues, new challengers are lining up against Google.
After billions of dollars in venture capital investment and initial public offerings (IPOs), a fragmented advertising technology (ad tech) sector is maturing and consolidating. On July 18 ad serving vendor Sizmek announced it would acquire programmatic ad‐buying specialist Rocket Fuel (Nasdaq: FUEL) for $145 million, including debt. In 3Q16 Sizmek was acquired by private equity firm Vector Capital for $122 million. By integrating Sizmek and Rocket Fuel assets, Vector Capital looks to assemble a formidable contender against Google, which has largely cornered the ad serving market via DoubleClick.
Rocket Fuel’s journey
In 2013 Rocket Fuel’s IPO raised $116 million, with a market cap that approached $2 billion during the first day of trading. Since then, the company has struggled to sustain a combination of revenue growth and profitability. Rocket Fuel achieved growth early on (e.g., 73.9% in 2014 and 18.0% in 2015); however, the company has been challenged to demonstrate a sustainable, profitable business long term, particularly as programmatic advertising has shifted from insertion orders and a managed service delivery model to a SaaS model based on volume. As a result, the company’s trailing 12‐month metrics for operating margin and net revenue were ‐14.2% and ‐23.8%, respectively.
Client demand for self‐service platforms resulted in increased transparency and control, as well as improved intelligence and operational efficiency. This put Rocket Fuel at a disadvantage since its user interface was built for internal staff rather than for agencies, trading desks and in‐house marketing teams. Another factor the demand‐side platform vendor contended with in the fast‐moving ad tech market was lack of an integrated data management platform (DMP). Rocket Fuel addressed SaaS and DMP shortcomings through R&D and the acquisition of peer X+1 for $230 million in 3Q14; however, this only solved for the technology side of the equation.
To build a profitable SaaS‐led enterprise, the company needed a road map for scaling the business, including go‐to‐market strategies for agencies,desks and inhouse marketing teams. The company identified trading desks of agency holding companies as a pillar to its corporate turnaround strategy, but cracking the agency code was a challenge until 3Q16, when Rocket Fuel signed an agreement with one of the top six holding companies.
Scaling a profitable SaaS business through agency holding companies and usurping incumbents has been a tall order for Rocket Fuel
In recent quarters Rocket Fuel CEO Randy Wootton stated that the company had signed agreements with agency holding companies, but that activation of campaigns was slow. This could be attributed to the strength of incumbents, such Google and The Trade Desk (Nasdaq: TTD), as well as Rocket Fuel’s previous efforts to work with brands directly, potentially disintermediating agency partners. Higher margin SaaS revenue streams required significant volume to offset the loss of lower‐margin managed services providing the revenue base. The Trade Desk, in particular, has been steadfast with a go‐to‐ market strategy focused on servicing large agencies owned by holding companies (e.g., WPP, Publicis). The Trade Desk’s effort to activate agencywide agreements established a growing SaaS business, providing an operating margin of 24.3% on a trailing 12‐month basis and 80.6% net revenue growth delivered while adding headcount and global offices.
In addition to navigating brands and traditional media agencies, ad tech vendors such as Rocket Fuel are in the early stages of forging strategic alliances with digital practices owned by IT services firms (e.g., Accenture [NYSE: ACN] and Deloitte) and management consultancies (e.g., McKinsey & Co. and The Boston Consulting Group). Ad tech vendors that partner with these services firms may find additional revenue streams as their tools are deployed within larger‐scale digital transformation initiatives.
As venture capital investment slows, new players emerge and M&A activity accelerates
Despite the exit of Rocket Fuel at a relatively low acquisition price compared to its peers, TBR believes public and private ad tech exemplars will still command healthy acquisition prices as enterprise technology and media technology heavyweights extend their value propositions. For example, Moat ($850 million) and TubeMogul ($540 million) each exited from positions of strength. This can be attributed to the fact that the larger $200 billion digital ad industry is powered by ad tech and will exceed 10% growth in 2017. In addition, the $200 billion TV industry is beginning to adopt tools from the digital realm (e.g., addressable TV, programmatic TV), creating additional ad tech opportunities.
As venture capital investments wither to less than $500 million in 2017, down from a high of over $2.5 billion in 2011, the ability to demonstrate sustainable, profitable business models long term is becoming the new mandate for ad tech vendors. A holistic view of the market landscape, including customers, partners and peers, will continue to shape vendors’ go‐to‐market strategies.
As M&A activity accelerates, vendors will also need to understand nuances such as delivery and pricing models that ultimately impact business performance and valuations.