Editor’s note: New business models create a mixed bag for vendors in ad tech. Here’s a look at the future from Technology Business Research Analyst Seth Ulinski. This is the first of a two-part report.
HAMPTON, N.H. – The $32 billion advertising technology (ad tech) market is a faster‐growing subsegment of the $200 billion digital ad industry. With an 11.8% CAGR projected through 2021, ad tech is fast becoming the lynchpin for planning, executing and optimizing omnichannel campaigns for digital channels, including advanced TV.
However, there are many other opportunities arising in the ad industry for ad tech vendors such as Google, Criteo (Nasdaq: CRTO) and The Trade Desk (Nasdaq: TTD) as well as multi‐line technology vendors that directly or indirectly operate in this market, including AT&T (NYSE: T), Verizon (NYSE: VZ) and Comcast (Nasdaq: CMCSA). As a result, TBR believes ad tech is reaching an inflection point whereby three varying futures are possible, namely that ad tech will continue to add value through the monetization of content, require innovation to add value, or hold little to no value.
Future No. 1: Ad‐supported content — a business model under pressure as consumer viewing shifts to digital channels and subscriptions
The current ad‐supported model that is the lifeblood of many content owners will remain intact despite pain points such as ad fraud and ad blockers, two plagues in the digital realm, as well as cord‐cutting, which impacts multichannel video programming distributors (MVPDs). With the legacy ad model facing headwinds, media technology vendors able to leverage infrastructure, subscribers, content and ad tech will be insulated, and in some instances able to increase revenue and profits. AT&T aims to do this with the pending acquisition of Time Warner (NYSE: TWX), as AT&T CEO Randall Stephenson implied that advanced TV ad targeting will command a premium, allowing the company to decrease ad load. The fact that a major telecom vendor is considering fewer ads highlights the value proposition of data‐driven ads, both for marketers that seek higher ROI and for consumers who have become overloaded with brand messaging.
Future No. 2: No advertising — not feasible for most media owners
Consumers have limited disposable income for subscriptions, making it highly unlikely that media will shift exclusively to subscription‐only formats made popular by Netflix and Amazon. Meanwhile, media heavyweights such as NBCUniversal (owned by Comcast) and Time Warner (soon to be acquired by AT&T, pending government approval) are generating billions in advertising revenue and profits. A seismic shift to subscription‐only businesses would be a massive and risky undertaking for these key players.
Future No. 3: Ad‐infused — augmented reality and virtual reality technologies support variations of the legacy ad model
Pressure on the incumbent ad model will create more opportunities for ad‐infused models, including product placement, fueled by augmented reality (AR) and virtual reality (VR). While AR and VR are in their infancies, this niche market will become a legitimate channel that captures billions in ad dollars as marketing and technology blur the lines between brands and content owners, creating a new customer experience (CX). This is where pure plays, CX clouds and media technology vendors will capture growth in the next five to 10 years.
While three potential futures are most likely for those companies already immersed in ad tech, enterprise software vendors and device manufacturers are in the early stages of rolling out ad tech‐ enabled platforms that will flourish in the consumer‐centric data economy. For example, Verizon is offering discounted mobile plans to consumers in exchange for monitoring device behavior. This “give to get” approach will pave the way for Data as a Service (DaaS) revenue opportunities via Verizon’s approximately 150 million wireless subscribers. In advance of its Time Warner acquisition, AT&T is already planning to bundle HBO content for “free” as a means to retain and grow its base of 135 million wireless subscribers. It would be logical to anticipate a similar data strategy that either directly or indirectly fuels content and advertising across other AT&T assets. On the digital native side of the vendor spectrum, Google continues to invest in studios to help produce new YouTube video content, while Facebook is experimenting with different frameworks for user‐generated video production as well as curating and syndicating professional content through its site and app, as well as Oculus, the company’s VR business unit.
Part Two: Market leaders