Month: February 2020

“It’s the nuclear winter of ad tech,” said Zeta Global CEO David Steinberg. “When everyone is running for the exit, walk in.”

What changed
Ad tech M&A is a dramatically different beast now compared with the middle of the last decade. The early-to-mid-2010s ad tech market was peppered with high-profile IPOs, an outpouring venture-capital dollars and big-name ad tech acquirers ranging from Facebook to Oracle.

But, for the most part, big-name strategic buyers have backed away from ad tech. VC investors didn’t see the returns they had hoped for and cooled on making further investments into the space. Many public ad tech companies — most memorably Rocket Fuel, which had a $2 billion valuation at its peak in 2013 but sold for just $122 million four years later — flopped. And not all the strategic deals worked as planned and some acquisitions were unraveled or quietly shut down.

Fast-forward to 2020 and it still seems almost nothing can chip away at Facebook, Google and, more recently, Amazon’s dominance of the digital ad market. Meanwhile, some observers say new privacy regulation and recent moves by browsers to throttle cross-site tracking will likely further consolidate the leading positions of so-called walled gardens versus smaller players that are more reliant on third-party cookies. And increased demands from marketers and publishers for transparency from their vendors cast a spotlight on the fees some ad tech players had previously been able to extract from the online ad daisy chain — adding a further financial strain.

Yet amid all the tumult, digital ad spending is not slowing down — and the current crop of ad tech acquirers are all too aware that there are bargains to be had.

Meet the bargain hunters
There were 56 ad tech M&A deals in 2019 — though just seven of those transactions were above $100 million, according to investment bank LUMA Partners’ Q4 2019 market report.

“We’re seeing a big bifurcation of deals between … capitulation transactions and the strategic transactions,” said Luma Partners vp Conor McKenna. On the “strategic” front, McKenna said there is interest from buyers for connected-TV ad specialists and ad tech companies in the areas of data and identity, especially those working on a solution for what comes after the third-party cookie.

Still, said Results International’s Langley, highly strategic deals are rarer now. It’s more about the firesales.

Zeta Global — a SaaS-based marketing tech company — has no aspirations to become an ad tech company but has picked up a slew of bargain-price ad tech assets in recent months, including the demand-side platform assets of Sizmek and IgnitionOne after both of those companies filed for bankruptcy.

Zeta’s Steinberg said such acquisitions are both “opportunistic and strategic.” On the strategy front, Zeta has been able to expand its customer base, he said. Plus, Zeta can differentiate itself from other DSPs by bundling in its deterministic data services for free, rather than the usual 10-15% of ad spend a marketer usually forks out on third-party data providers.

“If there were opportunities to buy other DSPs [and] migrate the customers to our platform … that’s where we would be very, very opportunistic,” Steinberg said. “Opportunistic doesn’t necessarily mean you’re [only] paying a dollar for it,” rather it means paying an amount that can be recapitalized very quickly, he added. “We’re not afraid to pay for these things.”

Tremor International has also emerged as another active buyer that has largely focused on attempting to merge and restructure struggling companies, including Taptica (the company’s former corporate name) and RhythmOne.

In January Tremor acquired Unruly Media for about £15 million ($19 million) from News Corp — a fraction of the £58 million (then about $90 million) in cash upfront that News Corp paid for Unruly in 2015. (Tremor is also guaranteeing News Corp £30 million ($39 million) in revenue over the next three years as part of the deal.) The move was part opportunistic — by making a landgrab for a non-core News Corp asset at a relatively low upfront price — but also part of a wider strategy to sharpen its focus on the video market.

German group Media and Games Invest is a relative newcomer in the space — albeit a smaller one. Last month it entered an agreement to acquire struggling mobile ad tech company Verve in the low double-digit million range. MGI Group’s portfolio includes Gamigo Group, provider of a free gaming platform; app-marketing platform AppLift; and app-focused supply-side platform PubNative.

The investment group’s strategy is to acquire both distressed assets and those on a good path to turning a profit that can be restructured and integrated into the wider portfolio said MGI CEO Remco Westermann. The company is running around two to five transactions a year and Westermann said its next acquisitions are likely to focus on expanding its geographical reach and in areas such as artificial intelligence, big data and performance advertising.

The PE play
Private-equity firms are also increasingly circling the ad tech space. Of the 114 deals advisory firm Results International counted in the ad tech sector last year, 20 were led by private equity firms or private equity-backed companies. (Results International uses a different methodology to LUMA Partners and defines a deal as any transaction where a company takes at least a 40% stake in another.)

The largest deal in ad tech last year was Blackstone’s reported $750 million acquisition of mobile ad tech firm Vungle. Elsewhere, Providence Equity was a highly active ad tech dealmaker, making four acquisitions, three of which it integrated into its portfolio ad-measurement company DoubleVerify.

The traditional private equity playbook isn’t necessarily about hoovering up distressed assets but involves acquiring a company and seeking to wring out as much cost as possible in order to sell it on at a profit-based multiplier in around four-to-five years.

For a long time, private equity firms were put off by the variable nature of revenue in ad tech businesses, at the whims of insertion orders and unpredictable advertiser budgets. Right now, those types of ad tech businesses only manage to attain “abysmal” valuations of 0.75x to 1X net revenue, said Sam Thompson, senior managing director in the media, marketing and enterprise technology division at advisory firm Progress Partners.

But in recent years, more ad tech companies have attempted to shift their businesses away from managed service to models that generate recurring revenue. True “software as a service,” businesses can fetch anywhere between 3X to 7X revenue in the current market, Thompson said.

The changing nature of ad tech buyers is the sign of a maturing sector, repeating a path well-trodden in the enterprise software market, particularly in areas such as enterprise resource planning and customer relationship management software, said Results International’s Langley.

“It’s really a sign of consolidation and cost-saving and synergies rather than strategic growth,” Langley said. “The value [in a mature market] is less driven by topline revenue growth and more about cashflow and profit.”

“It’s easier as creators to share information with other creators because we personally experience these [changes] on the daily compared to partner managers. They are just given information,” said Roi Fabito, a YouTube creator who goes by the name “Guava Juice” and has more than 14 million subscribers on the platform.

Creator-centric group chats have been around for at least a few years. The sizes of these typically private, invite-only forums can vary from tens to hundreds of creators. But creators have found these forums to be more vital within the past year or so as Facebook and YouTube make changes to their platforms’ algorithms in response to scrutiny from regulators, consumer advocacy groups and advertisers.

YouTube creators’ group chats were abuzz in September 2019 after YouTube announced that it stop serving targeted ads on videos that it considered kids’ content. “Nobody knew what to do, so creators were reaching out [to ask one another] what to do,” said Carter Sharer, a YouTube creator with more than 6 million subscribers who also serves as CEO of Team RAR, a collective of YouTube creators.

Platforms’ algorithm changes are particularly popular topics of discussions in these group chats. One group chat on Discord that Sharer belongs to has messages organized into 12 categories, including one dedicated to YouTube’s algorithm. Some creators feel like the group chats are the best option for finding out about changes to the platforms’ algorithms and how those changes may impact their videos.

“I don’t know if even YouTube gives the YouTube reps enough information [about the platform’s algorithm changes and their potential impacts on creators]. Even for YouTube, it’s hard for them to see how it’s going to affect people until they actually make changes,” said a YouTube creator who asked to remain anonymous.

In these groups chats, creators will often relay information they’ve gleaned about potential algorithm updates to see if others have heard the same or seen the change reflected in their videos’ analytics. In some cases, the members of the group chats have access to programs that are able to scan wide swaths of the platforms to gauge whether a change has been made that impacts specific creator communities, Sharer said. Fabito recalled one instance when a fellow creator posted a message to a group chat telling the other members to delete all copyrighted songs from their videos because YouTube was taking a stricter stance on people using that protected music.

Helpful as these groups chats can be for creators, they are not necessarily a replacement for creators’ partner managers at the platforms.

After YouTube announced the kids’ content change in September, Sharer talked to his YouTube partner manager who offered to run a program that would assess his channel’s risk of being penalized by the change. The program judged the risk for Sharer’s channel to be minimal, but the partner manager also made clear that the assessment was not a guarantee of how the actual change would affect his channel. Ultimately YouTube’s assessment proved correct for Sharer, but it wasn’t until Sharer talked to more creators with channels similar to his and heard that they weren’t worried about the change that his own worries subsided.

“Since we’re all creators, we’re here to support each other because we’re all against the algorithm, to be honest,” Fabito said.

That is less than the 54% of Americans who said they were “satisfied” with their jobs in an August 2019 Conference Board report.

The same poll last year found that 63% of agency professionals said they were happy.

Here’s where things get interesting: Those who said they worked at holding company-owned agencies were less likely to say they were happy than those at independent agencies. About 33% of them claimed to be happy, while a whopping 57% of those who worked at independent agencies said they were.

Meanwhile, 64% of 200 publishing executives surveyed reported that they are happy at their jobs, according to research conducted by Digiday in November.

“The intention is put everything in the hands of the influencers,” said Jennie Jones, associate brand manager for RXBar. “Our marketing team is really stepping back and allowing them to have the freedom and control over the marketing, one hundred percent.”

The marketing and sales of the new flavors will be dependent on the work of the influencers, according to Jones, who explained that RXBar isn’t putting any paid media dollars, not even to promote the influencers’ content, behind the initiative. The company is also not promoting the new flavors on its owned channels. 

Following the hot chocolate flavor debut with Sager, the hope is for RXBar to work with dozens of other influencers in similar arrangements to generate buzz around limited edition flavors via the influencers’ social platform. The company is currently vetting other influencers across a variety of channels including Instagram, Pinterest and YouTube that it has worked with to roll out other new limited edition flavors with them.

“We’re at the point with our brand maturity where we’re looking for unique ways to interact with and engage our consumers,” said Jones of why the company is rolling out the new initiative. 

The hope of the program, which was developed by the in-house marketing team, per Jones, is not only to use influencers to “open up doors for a new channel for sales” but to “gain from consumer feedback as well as influencer feedback that will help [RXBar] from a research and innovation standpoint to come up with new flavors and future launches.”

As for payment, the arrangement between RXBar and the influencers is similar to that of an affiliate marketing campaign. The company is incentivizing influencers to push their audiences to buy the flavors as quickly as possible, as the faster the new flavors sell out the larger the payment will be for the influencer. RXBar declined to share the exact financial arrangement it has with Sager or what it will set up for other influencers. However, Jones did share that, “what [Sager] makes will be up to him and his effort in supporting the flavor.”

It’s unclear how much the effort will cost the company as RXBar declined to share those figures. However, the company did say that less than 20% of its marketing budget is allocated to influencers. During the first 10 months of 2019, the company spent $228,000 on marketing, according to Kantar’s data, which doesn’t include social media spending. Over the course of 2018, RXBar spent $6.8 million on media, per Kantar.

Using influencers early on in a process to create new products is a smart strategy, according to Alexa Tonner, co-founder of influencer marketing shop Collectively. But relying fully on influencers for the promotion of the product could prove troublesome, said Tonner, adding, “When you work with influencers these days you’re at the whim of the algorithms.”

Sway Group founder and CEO Danielle Wiley agreed that without paid media the initiative could be difficult for influencers: “A lot of influencer marketing is higher up in the funnel. We have seen that it takes a very specific skill set to yield an immediate click to buy, or visit a grocery store.”

“A lot of work will go into each influencer’s promotion of these bars,” said Sway. “If, for some reason, their audience doesn’t buy, was there enough of a base pay incentive to have made that worthwhile? Additionally, the most effective influencers are those who have a good balance of sponsored and organic content. Participants in this initiative will need to be cautious of that, as there is a risk of alienating their audience if their feed is suddenly all RXBars all the time.”

The Times has ambitious goals to reach 10 million subscribers globally by 2025 and is aggressively growing its headcount to hit that target. Off the back of record growth in 2019, where it added 1 million digital subscribers across its news, cooking and crosswords product, international growth is fertile ground for growing subscribers.

“We’ve proven that people are willing to pay for quality journalism and we are seeing this is an increasingly positive consumer trend around the world,” said Charlotte Gordon, vice president of international growth, speaking from Axel Springer’s paid content summit last week. “Internationally, we now have more than 500,000 subscribers to our core digital news offering.”

Breaking news, a commoditized service with countless competitors producing it for free, works best at retaining existing subscribers rather than acquiring new ones. It’s a lesson News UK’s The Times of London learned when it swore off breaking news to focus on more differentiated reporting.

“Investing in breaking news shows [The New York Times] fancies its chances of being a relevant feature in the 2020 news environment,” said media analyst and senior adviser at Trillium Partners Alex DeGroote.

The move shows the publisher’s statement of intent as a global brand rather than one for American expats. According to The Times, over half of its U.K. audience is British, as opposed to U.S. readers living in the U.K., which is a common assumption made about U.S. publishers’ international audiences. The U.K. is also The Times’ second-biggest international market after Canada. In June last year, it launched a week-long Brexit-focused series on its news podcast “The Daily.”

“The acid test of any business is, is it hiring? Media is all about growth, new projects and products,” said DeGroote. “It reinforces the importance of the U.K. in a post-Brexit world, that it’s a relevant place to invest in journalistic talent.”

Reader revenue is where the New York Times is seeing future growth, but it’s also growing advertising revenue during a time when there’s a lot of pressure on digital advertising. The publisher has fiercely guarded the user experience across its products. Rather than serve potentially irritating consent messages to European audiences in the wake of the General Data Protection Regulations in May 2018, it turned off behavioral targeting in Europe. By continuing to sell contextual and geographical targeting to advertising it was still able to grow its European ad revenues.

“In a world where most of our competition is free, the journalism and product experience of The New York Times has to be far better than our competitors because we rely on paying subscribers to fund our independent journalism,” said Gordon.