The adtech sector has massive appeal for investors. Perhaps this is not surprising, given the growth potential, varied customer bases, limited regulation and low overheads in comparison with more traditional industries. Greater access to funding for adtech start-ups, who are characteristically more flexible and less risk-adverse than more established competitors, has led to increased innovation and a wealth of disruptive technology rapidly entering the market. The sector continues to present great potential for investors in respect of developing technology: recent research conducted by Gartner suggests that global mobile advertising spending is expected to reach $41.9 billion by 2017, up from around $13 billion last year.
So how does this affect global giants like AOL and Google?
You’d expect the big players in the tech market to be replicating or even advancing the technology produced by newcomers. Instead, we are seeing a spate, especially in the US, of acquisitions and investments in these new players by established tech providers. Acquiring an adtech start-up gives them an immediate innovation boost, in an industry where being on the cutting edge is key. They’re not just buying the technology – they are also buying the talent.
A prime example of this is Facebook’s acquisition of LiveRail last year, for somewhere between $400 million and $500 milllion. LiveRail was founded in 2007; it connects publishers to all major ad networks, demand-side platforms, trading desks and exchanges. Revenue at LiveRail grew an impressive 300% year-over-year with the company on course to hit $200 million in gross revenue for 2014. While it briefly considered an IPO, it was decided that combining LiveRail’s targeting technology with Facebook’s collection of user data would increase advertising revenue and user engagement (and would no doubt be a more lucrative option for the company founders).
This transaction is a perfect example of investment activity in the adtech industry; the purchaser’s goal is to acquire an adtech company whose service and/or technology USP compliments their existing offering. This allows the purchaser to stave off competition for market share and take advantage of the economies of scale it can offer. Comcast has made a habit of acquisitions in this area which include online video management tool, thePlatform, buy-and-sell-side media platform STRATA and ad-serving platform, FreeWheel. These transactions are intended to help Comcast build a powerful multiscreen solution and gain a competitive edge.
There is also a lot of pressure on purchasers to get these deals wrapped up quickly in order to draw large audiences and media buyers to their offerings before their competitors can catch up. Months before Comcast’s purchase of FreeWheel, AOL paid over $400 million for Adap.TV. At the time AOL was able to sell precisely targeted banner ads in real-time but was very much aware of the need to be seen to be a leader in online video. Adap.tv was another example of a successful newcomer; it had created technology which helped it drive innovation in the automation of global video advertising, and attracted many of the largest global advertisers and publishers as clients. In the process, its revenue increased by more than 100% per year for three consecutive years before the purchase.
These acquisitions and investments are not limited solely to video advertising. Other recent adtech transactions include:
- Yahoo’s purchase of BrightRoll, a platform for selling and delivering video advertising, for $640 million;
- the purchase by TargetCast Networks of Ripple TV which has expanded its existing offering to deliver local and national advertisements to over 1,400 locations on 3,425 screens;
- the acquisition by Walt Disney Co. of Maker Studios, a company which creates and produces its own videos but also has a distribution arm that helps to create and promote videos from around the world, for up to $950 million;
- the fundraising of a further $12 million by Personali, an online service that retailers can use to adjust prices and offer incentives to customers as they shop;
- the investment of $144 million by RTL Group in SpotXchange, which offers video supply-side platform and programmatic marketplace, for an initial 65% stake (but with the possibility of increasing their stake through the terms of an earn-out agreement);
- the further investment of $1.9 million in Local ID, a company aimed at giving clients a better understanding of what is happening at local level; and
- Dentsu Aegis Network’s 2014 acquisition of mobile adtech company Fetch, for an estimated £30 million.
The structure of these transactions reflect the big players’ commitment to retaining talent. Rather than offering these start-ups one big cheque, many of these deals involve earn-outs that incentivise the key innovators to stay put. The consideration paid by AOL for the purchase of Adap.tv consisted of $83 million in stock in AOL, while the purchase of Maker Studios by Disney comprised $500 million in cash and stocks and a performance bonus of $450 million.
Will there be more consolidation in the sector?
There is no sign of any let up in adtech investment activity; after all, being at the cutting edge is hugely important for the continued success of the big players in the industry. As long as adtech startups continue to innovate, big name buyers will be interested. Given the battering that adtech IPO stocks have taken this year, further consolidation is mutually beneficial – providing start-up founders and investors with an alternative exit strategy and means of growth.