The Great Ad Tech Squeeze: Platforms dominate tech, kickbacks and consolidation

Speaker 0 · 0:00

Hello. Welcome to this week's Media Unfiltered podcast. We've had a little break from Ian. We haven't heard from him for a couple of weeks. Hope you've had a nice break, not just from the pod, but also from the industry. And one of the things we're going to be talking about today, actually, primarily, the pod today will be focused on the ad tech industry. There's been lots of reporting that even in programmatic display, the industry, publishers and brands have seen that there's just too much money being taken out the middle without the value being returned. So it's interesting to get Ian's point of view on this on looking at actually ad tech as an investment, looking at the returns from the sort of the financial markets. We've had a lot of talk about, obviously, the trade desk. They've been in the press quite a bit. If you are following their market cap, you can see what's happened there. So is this the time is this the reckoning, should we say, for ad tech? Is there a lot of pressure now on the returns that they used to have, that they might have in the future? And is there a lot of pressure on to reduce that amount of friction in the middle of the industry? So with that in mind, Ian, let's just grab your views sort of overall from the sort of finance world on how they're viewing ad tech. Are they seeing all these changes? Do they understand what's happening in the world of advertising? How much activity and friction there is in the middle, how much value extraction occurs from a lot of players that perhaps shouldn't be there. That's a loaded question, I know. But, do you see that there are fundamental changes

Speaker 1 · 1:36

occurring within the ad tech industry? Well, I'll I'll put my neutral financial out. But I hope you haven't missed me too much, by the way. I, just thought of things. So I think bear in mind when it comes to investors, what they do is the share price is a reflection of their view on future earnings growth. So, yeah, it is part sort of narrative. It's part yeah. It's a lot narrative. In fact, it's also as well people taking what's happening in terms of current information and trying to extrapolate it moving forward. If you look at what's been happening in the DSP space, I mean, obviously, it will depend sort of of company by company. And I do want to come back to this question of, you know, which our tech players I think will do well and which sort of of which potentially could be more in trouble. But, essentially, I would say that the market is becoming more net I'd say more skeptical of the future growth potential. So if you take the trade desk, for example, in terms of what's happened, over the past year, its share price has has gone down 70%, altogether. The issue I mean, they had q one results that came out. I mean, they were, you know, they were generally actually okay in terms of the numbers themselves. But if you actually look in terms of the markets, I mean, the markets, the the q one results actually prompted the further share price fall, really because people were worried about sort of what's happening in the what's gonna happen to future forecast. And I think what the market is now realizing is look. You look at ad take, you take the Lumascape charts, and you look at it, it and it's a huge amount, you know, of companies that are in there, the vast amount sort of at various levels. And what they're saying is, quite frankly, that not all those companies are likely to survive just given the competition, but also as well the increasing signs that you've got the big platforms are looking to take their share of money as well. And, you know, Sean mentioned this point on the podcast, a few weeks back. You look at what's happening in the DSP market. Amazon and Google are taking significant share. Trade desk is staying the same, but if you look at the smaller post, they've been squeezed. I think that is likely to be sort of a good parallel for what's likely to happen in in the future. The simple fact here is that if you are if you are, for example, one of these big platforms, you need to justify the amount of money that you're spending on AI. And what that means is you need essentially to get revenues from wherever you can. And if you are these players, actually, the ad tech space is a pretty good area to actually look at. Now, you know, I don't think that all ad tech players will be impacted. What I would say is that I think those that can offer something that is differentiated so that that is unique, that I I think sort of isn't a generic product, I think those are tech players, and there's also like to be a geographical element here as well between The US market and the European markets. But I'd say those players actually sort of, should do in this sort of environment relatively well. But I think, as I say, I think there is gonna be, a role if I look at it, there's gonna be a squeeze in the space. And you can already see some of the players reacting to this. You know, Criteo, not looking to become OpenAI's first formal ad tech partner. That's a classic sort of case. They're saying, I think they've seen where the direction of travel is and what they're trying to do is position themselves as part of the choke point. The other thing you've also got here as well, and it's exemplified by publicist buying LiveRamp, is if we step back from them and think about exactly what, you know, ad tech really is and what its main purpose was supposed to be, ad tech is essentially in its fundamentals, media buying and planning for the digital space. And what it was supposed to be about was really sort of increasing efficiency within that space. Well, you know, this way it goes on to the second point. Yeah. That was a space that, you know, fifteen years ago, the agency should have really captured by themselves. They didn't. And I think what we're seeing now with many of the agencies is they're realizing that even though they wouldn't be able to get to a situation, for example, like the TV where they control the sort of the they're the intermediary between advertisers and the TV companies themselves. What I think you're seeing from the agencies is they do realize that they need to have a stronger presence in this space because, realistically, it should be part of their core offering. So you've got the agencies moving in, and that's another factor for the ad tech sector. And then I think if you look at the efficiency question, the big sort of point that we'd make here is that AI is the ultimate efficiency tool. And so, you know, from a structural standpoint, I think that AI has the potential to really sort of overturn the economics of the the ad tech space. So I think what we're gonna see over the next couple of years is I don't think we are gonna see a complete wipeout of the Antech space. I think, yeah, there were still very many players who survived. Those who offer differentiated truly value adding products arguably will actually thrive and will thrive very, very well. But I would say that I think that it is gonna be a a a lot of players. My feeling is that a lot of players will exit the market, either through consolidation

Speaker 0 · 6:38

or effectively the other side just to act it themselves. You mentioned the trade desk. I've just got a quick question on that. Their their q one figures were not too bad. It was 12 top percent euro year compared to 19% in q four twenty twenty five. If you look at their stock price over the over the past year, it's down, you know, 40% or so. Just briefly, why do you think that's occurred? I mean, that's pretty good figures, but why is the market, not valuing their their sort of future growth potential in your view?

Speaker 1 · 7:08

Yeah. No. Look. I mean, on sort of what could seem sort of where we are now, I think it's down 70% years to date from from what can see. So it's even a bit more substantial. I think what you had before was if you look at where the trader is, the the trader doesn't generate huge amount of revenues in the overall scheme of things, certainly when you compare it with other media companies. So its stock market valuation will come from its multiple. And this is what the markets will do typically is if company if the markets think that you have a stock that is very high growth, is gonna grow its profits immensely over the next couple of years. It will apply to a very high multiple in terms of usually it's the either the price earnings multiple or the EBITDA multiple or if it's, you know, the opposite. If they think essentially that the yeah. It's gonna be essentially a cash flow business and decline, then you have a low multiple. And this is, for example, what you're seeing with many of the broadcasters, the the pure play broadcasting stocks. But if if you go back around let's go, you know, two years ago, the feeling of the trade desk would have been, this is an area where digital advertising will continue to grow, that the trade desk is the leading player within there, that essentially you look at the the big platforms such as Amazon and Google. Okay. They've got some share. Again, Trade Desk is is significantly sort of, has got significantly higher share than those two players. And so what analysts was thinking was the market growth looks very, very good. The actual sort of industry dynamics, there's no reason why this should be particularly changed. And usually with these types of stocks, what you see is very much and this will either do their price targets based on multiples, sort of multiples. So let's say 20 times price earnings or 30 times price earnings. What's more common is what's called a discounted cash flow model, which essentially takes future cash flows and then discounts them back to the current current value. Usually, in those sorts of models, these types of stocks, huge amount of value is what's called in the terminal value, and that's essentially will often do an explicit forecast for five years. That's the accumulation of all the forecasts so that they sit beyond those explicit forecasts. Many companies, particularly with tech companies, it can be over a 100% sort of a of the valuation, particularly the loss making sort of in recent years. And I think what's happened is that analysts, quite frankly, have taken a look at the future, and they've gone we were thinking this essentially was gonna be a business that actually was gonna continue to be very, very strong. You know, we'd get this sort of strong to the double digit earning revenue growth moving forward. Margins would continue to be high. Therefore, it should throw off cash. The overall market is gonna continue to grow. And therefore, sort of in terms of our future earnings forecast, yeah, we feel comfortable that actually, yeah, this is gonna be a stock that grows in the future. Because this also as well is another factor, markets are also thinking about is risk. Things that are are sort of seen as high risk, they will discount in terms of the price. Those that are seen as relatively low risk, they will apply a higher value. And, again, I think something like the trade desk given the area it was in and the stock it was, was seen as relatively low risk. That calculation for analysts investors, I think, has been turned on its head over the past twelve to eighteen months. And I think that's that's the core reason why you're seeing the share price really fall. You've had results that have been below expectations. You've had questions that have been asked about management strategy. You've got bigger competitors with much bigger balance sheets coming into the space. And what the investment community has said is, we just don't believe there is the growth for this company in the future that we thought there was in the that we thought, you know, eighteen months ago. And we also think as well that it's a riskier investment. And that's where I think you've got the can see the cause for the share price reaction. I've done, an awful lot of work in the programmatic space and the the ad tech space of what should and shouldn't happen in the middle. And it's very clear that there's too much value extraction

Speaker 0 · 11:02

occurring, and and many of the peep many people in the industry are starting to realize this and and build new models as a result. However, one of the things that doesn't get discussed enough is the fact that the big platforms own the pipes now. They make a tremendous amount of money through ad tech. And we talk about Trade Desk, obviously, declining as a as a sort of independent, if you like, DSP. What's taking share is Amazon and Google. You know, Google make, their revenues are around 30,000,000,000 in ad tech alone. And, actually, it's something that doesn't get discussed. I don't think that's a good thing to be in. Obviously, there's three main companies that taking taking up to 90% of new media spend in advertising, and they control the pipes. Don't you think that's an area of major concern for publishers and brands around the world and something that perhaps we should do a little bit more to to shine a light on? Well, look. I mean, I I I look at things from a from a finance angle. So in terms of

Speaker 1 · 12:02

sort of I think you're you know, I think the the point that you say, I mean, it is gonna be certainly for publishers, they're gonna look at this and say, you know, what do we need to do? I mean, the the the point I put a post upon this a few days back. The analogy that I used then was to say that, actually, if you look at what's happening in Antec at the moment, a lot of it is really it's got parallels in in the Standard Oil case of the nineteenth century and and the early twentieth century. And what happened there was that really where Standard Oil gained its power, it wasn't really because it was huge per se. Actually, many of the independent refiners of those times, they may have been small, but they were very efficient. And some of them did actually have real scale. What actually Standard Oil sort of was particularly successful at was it controlled the choke points. So, for example, if you look at Rockefeller, what essentially he managed to control or do with deals with the railroads to essentially establish the pricing between the oil being extracted and then deliver to the the market. So it was really that that squeezed out the independent providers. I think if you you think about the the sort of ad tech space here in terms of what we're getting, I think, you know, my my view is this is not necessarily a a competition sort of element to this. I think if we would see to the competition, what you would get is you would get better products. You would get sharper pricing that would come through. I think probably what you've got here is more this choke point issue that is really really is the factor here of what's happening in ad tech at the moment. And, again, this is why I think for publishers, also as well for many of the smaller ad tech players, You know, what you're really seeing is, as you said before, you're seeing consolidation at the DSP level. And, you know, the big platforms, they will control also as well vast amount of infantry, vast amount of data. They will have elements here at the pipe. And then you've also as well got the agencies that are trying to move back into this space as well. And I I think all of what does that mean? Well, quite frankly, it's hard to see how that sort of dynamic changes over time. I think that's probably where it goes. Now whether actually publishers should, you know, you would argue any platform, again, like the oil refineries back in the nineteenth century. Sure. You know, what you would need is you would need, you know, you would need a route to market. And, obviously, they need their own route to market. The question is how they can do that in an environment where, quite frankly, their ability to tap in capital is probably quite restrained. And, obviously, they don't have the scale of the major players. So, again, I think it comes back to this point before that I think, you know, AdTech obviously covers a a a multiple of different players. I think those that have got genuine defensibility, whether it be in terms of proprietary data, whether it be in terms of very strong client relationships, etcetera, what they will be protected from here is, you know, they can argue, look. You know, we have something here that you should actually pay for. Those that essentially are seen as effectively commodities, again, they just sit in the middle, sort of are more at risk. I think if you were to look at the trade desk specifically in terms of things, I think for The Trade Desk, I think, you know, what they need to think about really is what is their raise on DTRA in this new world. And, obviously, they are coming from an environment where some of the news flow has not been particularly great from their standpoint. Now you can argue on either side whether that's justified or not. But there is obviously sort of, you know, if you are gonna set yourself up as an independent sort of DSP that sits, you know, isn't part of the big, tech platforms, and you're gonna make independence really core to your case and why therefore

Speaker 0 · 15:49

you should take a a sharper increase. Your your reputation counts for a lot. One of the things that you mentioned here is about agencies getting involved with ad tech more and more, and we've talked about it a lot. Obviously, they compete now with very low fees, and they need to recoup income through media trading, via many means, you know, applying data and ad tech kickbacks. I'm not particularly comfortable with this practice because it doesn't necessarily lead to the best solutions being implemented to buy the best media at the best prices. And, generally speaking, when you see this in markets where ad tech is pretty complex, it's, it's designed to have certain level of opacity, which then creates all the margin and and and some some bad behavior, perhaps. How do you feel about agencies making margin that way using ad tech as a way of kicking back fees to their business? Do are you are you comfortable with that business model, Ian? Do you think that's a good thing for agencies to employ that particular tactic? I think I don't have any I don't see any particular problem with the agencies

Speaker 1 · 16:55

sort of of running their own proprietary desks. I mean, it's something that happens in investment banking as long as they are, you know, they're relatively upfront about what they do, and advertisers know what's happening. Happening. I mean, my view is always caveat and tough. It's the job of the advertisers to actually sort of focus on the relationship. I think what we've had over the number of years is that for the agencies over the past twenty five years, media has been pretty much the driver of their overall corporate profitability. But as the structures media has changed, as more advertising spend has gone online, less has gone into areas such as TV, where the agencies used to make their money, what they need to do is actually maintain that profitability from other sources, and this, for example, is where proprietary trading comes in. Ultimately, at the end of the day, and I think also as well the agencies are blamed for this as well, is media buying and planning. And arguably, if Creative as well was actually actually sort of well enumerated, there probably wouldn't be a sort of reason for this. Mhmm. But what's happened in the agency space, particularly when it comes to pricing and media, is there has been this downward spiral simply because people compete on price. And when people compete on price, what is sort of what is the signal that gives to advertisers that effectively it's a it's a commodity where the actual sellers of the product do not add value? So I think arguably in terms of this question of whether they should be doing it or not, people, again, will have different views. I've given mine. But arguably what needs to be fixed is the underlying problem, which is the underlying problem is the services that they offer the agencies offer are seen by clients as a commodity.

Speaker 0 · 18:32

Therefore, they are lowly priced, and therefore, the agencies can't make enough money. It's that that really needs to change, and that, I suspect, will take a long time. Now I think what's gonna be interesting is when you see these particular business model from from a lot of companies with rebates and kickback fees and, which is built ultimately from from opacity, I think we're gonna see a drive in the ad tech world to have fewer steps, lower cost, major pressure on fees and a simple solution. Perhaps AI will do that. We're seeing DSPs turn into SSPs in order to create that, and I think we're gonna see consolidation. I worry that there's gonna be too much power in the, major platforms. You know, they're the shop window and the pipes and the media for this industry. I think that's something that we need to keep an eye on. And I think for premium publishers out there, they have to, clean up and simplify their processes too and understand the tech that delivers the best value for the clients that are putting the money in and the publishers who we should be seeing as much as that money going towards working media. That is the only way that premium can survive in these, sort of complex ecosystems. I've seen it. I've analyzed it. And, and I think that the premium world need to understand and and build their own solutions. Not necessarily build their own tech, but work with sort of other partners that white label it and and control it. Because if they don't, they, they'll be arbitrage pulled and there'll be lots of some naughty things that occur in the middle that that don't necessarily help them maintain their CPMs. Well, Ian, this will be great. We're gonna be covering this a lot over the year and, we'll come back with some data. We'll be back on next week. And as usual, this is definitely not investment advice.

Speaker 1 · 20:18

Alright. It certainly is. Alright. Thanks, Justin. Thanks, everybody.

Speaker 0 · 20:21

Take care.