LUMA's State of the State 2015 at DMS 15
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Luma Partners presents its annual analysis of the digital media landscape, emphasizing the ongoing empowerment of consumers and the rivalry between 'open' and 'closed' platforms, predominantly represented by Facebook and Google. The report highlights significant growth in the digital advertising market, particularly within programmatic advertising, while also addressing challenges such as fragmentation and supply-demand imbalances. The document indicates a changing ecosystem where larger, diverse companies seek strategic investments in ad tech and martech, potentially leading to a high failure rate among smaller companies.
LUMA's State of the State 2015 at DMS 15
- 1. LUMApartners LUMA Partners presents our annual State of the State in Digital Media which covers our views on the industry trends, the market, and the future of the ecosystem with a specific focus on digital media and marke@ng. We hope you enjoy it. Because this was our 7th (or 007th) DMS, we went with a James Bond theme.
- 2. LUMApartners Meet the Senior LUMA Team Terry Kawaja Brian Andersen Mark Greenbaum Dick Filippini Founder and CEO Partner Partner Partner Terry leads strategy, banking, marke3ng and content for LUMA. He’s also head comedy writer. Brian is LUMA’s marke3ng technology guru. He excels at coaching both liCle league and big clients. Mark runs M&A strategy and execu3on for LUMA. He’s never met a term sheet he couldn’t improve. Dick leads LUMA’s mobile and gaming banking coverage. You can find him holding court every February in Barcelona. terry@lumapartners.com brian@lumapartners.com mark@lumapartners.com dick@lumapartners.com
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- 5. LUMApartners Last year’s meta theme that the consumer is in control more than ever s@ll applies today and will con@nue in the future. There are really only two principals – the marketer and the publisher – every other party is a middleman. We believe that there is a newly empowered principal, the consumer, whose ac@ons will dictate how the industry evolves.
- 6. LUMApartners The over-‐arching theme that is front and center this year is the debate around “Open” versus “Closed” and how it relates to the overall digital media ecosystem.
- 7. LUMApartners The two domina@ng players, Facebook and Google, con@nue to baVle it out via “closed” plaWorms in hopes of increasing their market share…
- 8. LUMApartners Meanwhile, the ecosystem is looking for alterna@ves to “closed” systems…
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- 10. LUMApartners In March 2015, LUMA introduced the first of our Digital Brief series, called “The Good, The Bad, and The Ugly”, which outlined the current state of the digital adver@sing ecosystem.
- 11. LUMApartners First, the Bad. While the industry is working to sort out fraud, viewability and privacy concerns, we believe there is a more fundamental issue at stake: fragmenta@on and the supply / demand imbalance. There are over 2,500 companies across the LUMAscapes, yet there are only 200 strategic buyers.
- 12. LUMApartners Next, the Ugly. The supply imbalance is worse than it looks. In LUMA’s internal coverage priori@za@on, we focus our @me on the 50 most ac@ve strategic buyers. On the supply side, we counted only 150 companies that we think have a shot at an exit of $100 million or more. The conclusion is that there will be blood as we realize on what could be a 90% failure rate.
- 13. LUMApartners What’s the Good news you ask? For one, the digital ad market has never looked stronger. The total ad spend market is growing and spend con@nues to shif to digital, which is growing at a compounded annual growth rate of 35% to 2016.
- 14. LUMApartners Non-‐search digital is growing even faster with a 53% compounded annual growth rate through 2016, and programma@c is off the charts with over 200% growth. It is this con@nued shif to digital and programma@c business models that are aVrac@ng new strategic buyers.
- 15. LUMApartners This next point comes with a warning. Any investment banker calling for more M&A is akin to when you’re a hammer, everything looks like a nail.
- 16. LUMApartners However, what was once a small category of interested par@es has grown into a robust pool of strategic buyers. Deep pocketed companies from many different industries have a need for “right @me decisioning of consumer data”. The companies that have best perfected these capabili@es are in the Ad Tech and MarTech sector.
- 17. LUMApartners Well beyond the usual suspects, we are seeing interest from new entrants, including CRM, Consumer Internet, Commerce, Telco, Tech Services and Data. This is a phenomena that is sure to create quality exit opportuni@es for differen@ated startups. What beVer of an example is this than Verizon’s recent acquisi@on of AOL?
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- 19. LUMApartners We'd like to start off with how we define the Digital Media industry. We look at it as the intersec@on of Media, Marke@ng, and Technology. LUMA exclusively focuses on the sectors of Digital Content, Ad Tech and MarTech, which when seen through the lens of mobile, is in so many ways the catalyst that is accelera@ng and enabling disrup@ve change.
- 20. LUMApartners And change is occurring . . . Over the past few years, we have seen M&A ac@vity increase significantly across almost all of the LUMAscapes.
- 21. LUMApartners With an increasingly broad set of strategic buyers across various sectors illustrated on the Strategic Buyer LUMAscape.
- 22. LUMApartners We have seen plenty of ac@vity from each of the four buyer categories, as well as an increasing number of companies moving from the outer rings of poten@al buyers to the inner circles of ac@ve buyers.
- 23. LUMApartners In the public markets – last year saw a number of strong digital IPOs.
- 24. LUMApartners Post IPO trading performance has been mixed. While the public markets may not en@rely understand or know how to value Ad Tech business models, it has become clear that technology-‐driven, programma@c business models are being rewarded with premium valua@ons over tradi@onal media models.
- 25. LUMApartners Media companies have taken no@ce, with a number making moves to add programma@c capabili@es – either organically or through acquisi@on (with LUMA ofen advising on the laVer).
- 26. LUMApartners Further evidence of the market rewarding strong, technology-‐based business models, we’ve seen the Marke@ng SaaS entrants trading very strongly vs. IPO prices… or in many cases being acquired at strategic valua@on mul@ples.
- 27. LUMApartners It is also worth commen@ng on the very ac@ve market for private-‐company financings. In the last year we have seen over 20 companies raise rounds in excess of $20 million; and a number achieving valua@ons in excess of $1 billion – introducing the “LUMAcorns”: AppNexus, Sprinklr, and Domo!
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- 31. LUMApartners In 2012, eMarketer forecast the programma@c market to be $2 billion, growing to $7 billion in 2016. So the market was star@ng to look interes@ng from a market size perspec@ve.
- 32. LUMApartners In 2013, eMarketer increased its 2016 forecast about 10%, since the market was growing faster than expected.
- 33. LUMApartners But in 2014, the programma@c market exploded. Growth increased drama@cally and eMarketer significantly increased its 2016 es@mates to $12 billion – now a market with the scale to aVract the interest of the large sofware companies. 2014 was the inflec@on year for programma@c.
- 34. LUMApartners Programma@c capabili@es are now a necessity in digital adver@sing, with total programma@c spend in 2015 expected to represent more than 50% of total overall display spend.
- 35. LUMApartners While some are building in-‐house, programma@c capabili@es are largely being acquired through M&A, with a significant increase in transac@ons over the last year.
- 36. LUMApartners Investors value companies based on growth, opera@ng leverage and predictability of revenues. SaaS sofware companies in general have these aVributes. Contrast that with tradi@onal media models, which are showing slower growth, low gross margins and I/O-‐based contracts. These differences are reflected by a wide disparity in valua@on mul@ples.
- 37. LUMApartners Programma@c businesses are also showing high growth and sofware gross margins. While these businesses may not have contractual recurring revenues, they have de-‐facto predictable revenues since they have evergreen budgets.
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- 39. LUMApartners Mobile devices are ubiquitous and people glued to their phones throughout the day account for more than half of all internet traffic.
- 40. LUMApartners Yet, mobile ad spend has not kept pace with @me spent, as the adver@sing experience has not been op@mized for the device form factor.
- 41. LUMApartners The mobile ad experience has room for improvement, and companies are turning to deeplinking to address this issue. However, that solu@on is nowhere near pervasive.
- 42. LUMApartners Mobile adver@sing can help streamline the tradi@onal consumer purchase funnel.
- 43. LUMApartners In addi@on to deeplinking, new features, like a “buy now” buVon with one-‐click checkout can shorten the path to purchase.
- 44. LUMApartners Frequency capping is another cause of the subop@mal user experience. As a result, consumers receive an overload of ads for the same product, even when it is already installed on the phone…
- 45. LUMApartners While the mobile adver@sing market has achieved scale and con@nues to exhibit strong growth, it remains concentrated with Google and Facebook represen@ng more than half of mobile ad revenue (and Facebook exhibi@ng tremendous momentum).
- 46. LUMApartners The walled gardens are no surprise, given Facebook and Google’s tremendous first party data assets and reach, which enable them to more effec@vely target consumers and deliver higher ROI to adver@sers…
- 47. LUMApartners ...and they are extending this advantage across third party apps and sites to further their dominance with the addi@onal benefit of not degrading their O&O proper@es with more ads.
- 48. LUMApartners Mobile devices have the poten@al to bridge the gap between the physical and digital worlds...
- 49. LUMApartners ...and leverage contextual informa@on to personalize marke@ng messages and facilitate welcome interac@ons.
- 50. LUMApartners However, adver@sers need to be aware of a consumer’s state of mind and take ac@on accordingly, so that messages are really facilita@ve, rather than interrup@ve / annoying.
- 51. LUMApartners Payments represent a final piece of the puzzle, in that they can help solve aVribu@on and close the loop for marketers. Payments solu@ons integrated into mobile devices provide incremental data for personaliza@on and create addi@onal opportuni@es for marketers to re-‐engage with consumers.
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- 53. LUMApartners If you were to draw up a fully integrated adver@sing plaWorm for enterprises, it would look something like this – integrated planning, execu@on and aVribu@on with common data and campaign management, and a feedback loop to the planning sofware to adjust / op@mize spend.
- 54. LUMApartners The reality is different. Execu@on of marke@ng campaigns – especially media campaigns – are typically performed outside the enterprise. Digital agencies running digital programs, media agencies execu@ng TV buys, and many other specialized networks for other channels. And each en@ty is planning and measuring its campaigns / channel independently.
- 55. LUMApartners But there is an “enterprise stack” emerging. A planning solu@on to allocate the spend, a DMP to manage anonymous data, a CRM to manage customer data and an aVribu@on system to measure results. With more robust SaaS offerings, integra@on will increase within these stacks and with partners’ systems. “Big data” enables the real-‐@me analysis for op@miza@on.
- 56. LUMApartners The unifying element between Ad Tech and MarTech is data-‐driven marke@ng. Recently there have been a number of strategic acquisi@ons by large sofware and media companies of data-‐centric capabili@es – DMPs, online-‐offline data and aVribu@on, which also represent “Enterprise Stack” capabili@es.
- 57. LUMApartners DMPs have emerged as the system used to integrate adver@sing channels by centralizing anonymous audience data. CRM systems have long been used to coordinate marke@ng ac@vi@es to known customers. Consumer companies have a big advantage in linking adver@sing and marke@ng func@ons due to having logged-‐in customers with both data sets.
- 58. LUMApartners Companies that are not in the consumer internet space compete with email, which remains the highest ROI marke@ng channel. Now, email – the actual email address or hash – has also become the “connec@ve @ssue” for marke@ng. It is being used very effec@vely for targe@ng and aVribu@on, as well as linking “marke@ng” and “adver@sing.”
- 59. LUMApartners E-‐commerce is actually one segment where the Digital Adver@sing “Dream” is becoming a reality. E-‐commerce is unique in that digital adver@sing is more closely coupled with the actual sale. Addi@onally, personaliza@on is becoming much more cri@cal to its success. Therefore, @ghter integra@on of execu@on channels with a common personaliza@on “hub” is required.
- 60. LUMApartners While DMPs are excellent for segment-‐based analysis / execu@on, though they typically don’t enable 1:1 targe@ng necessary for e-‐commerce. Where 1:1 personaliza@on is necessary, we see predic@ve marke@ng plaWorms emerging as the core data management and personaliza@on system to coordinate interac@ons with consumers across various channels.
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- 62. LUMApartners Device matching has become a marke@ng impera@ve as marketers aim to provide consistent experiences to consumers across all devices. Companies that have perfect knowledge of the consumer have a clear advantage to deliver a cross-‐screen experience. Firms without logged-‐in consumers use matching techniques to deliver cross-‐screen capabili@es.
- 63. LUMApartners Cross-‐device has become a marke@ng impera@ve due to the shif in paradigm. Five years ago there was one device shared by mul@ple users. Today, we live in a world where each user has mul@ple devices.
- 64. LUMApartners But it isn’t just about linking devices. It is about coordina@ng ac@vi@es across all consumer touch points, online and offline.
- 65. LUMApartners We typically talk about adver@sing and marke@ng in siloed technologies, such as targeted TV, cross-‐device and linking online and offline data.
- 66. LUMApartners But the reality is that all of these point applica@ons are part of one major uber-‐trend: iden@ty. While 2014 was the inflec@on point for “programma@c,” we believe that “iden@ty” will be a key focus area for marke@ng in 2015 and beyond.
- 67. LUMApartners Recently we have seen a number of companies make moves to improve their iden@ty capabili@es. Facebook has long focused on people-‐based marke@ng. Acxiom acquired LiveRamp to add online to offline capabili@es. Oracle acquired Datalogix, and then subsequently announced the Oracle ID Graph to connect iden@ty across marke@ng channels.
- 68. LUMApartners Addi@onally, while Verizon did not acquire Aol with “iden@ty” as a strategic ra@onale, it will be very interes@ng to watch how Verizon and Aol integrate their capabili@es since Verizon does have the mobile data that can @e iden@ty across devices.
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- 70. LUMApartners Last year, LUMA created a report @tled “The Future of (Digital) TV", which explores the convergence of tradi@onal TV and digital video. This in-‐depth analysis can be found on our website (lumapartners.com/ presenta@ons) and…
- 71. LUMApartners In fact, the deck has been viewed over 400,000 @mes, and with great qualita@ve feedback.
- 72. LUMApartners Digital video is enjoying a surge in marke@ng spend as marketers allocate more money into premium content which is very limited in supply but high in demand. Digital video is also increasingly being bought and sold programma@cally. The programma@c video market is expected to grow at a compounded annual growth rate of 172% from 2013-‐2016.
- 73. LUMApartners Although the digital video market is growing at a staggering rate, it pales in comparison to the TV market, which is expected to surpass $70 billion this year. The world’s major marketers reserve most of their adver@sing budgets to TV, which is the largest and most preferred channel for brand adver@sing.
- 74. LUMApartners However, the outlook for the TV market seems challenging. Upfronts, which are ofen used to gauge the health of the market, have shown weak interest from TV’s major adver@sers over the past few years. Consumers are watching content on mul@ple screens and marketers are adjus@ng their adver@sing spend accordingly.
- 75. LUMApartners Last year AOL held its first Programma@c Upfront event. What was most impressive about the event was not what was said, but rather who was in the crowd. AOL was able to aVract some of the largest media buyers to an event that promoted capabili@es that didn’t yet exist.
- 76. LUMApartners Tradi@onally during Upfronts season, TV networks pitch programming to marketers that featured great plots, casts, and high produc@on quality. Meanwhile, digital companies sold marketers on their data-‐driven approach to targe@ng and adver@sing. The opposing sides played to their strengths…
- 77. LUMApartners But in 2015, the selling points have reversed. TV networks are introducing new data products afer feeling pressure from marketers to provide more granular targe@ng. Digital companies are selling marketers high quality content that they feel deserve premium dollars because of their coveted audiences and engaging content.
- 78. LUMApartners To sa@sfy their adver@sers’ needs, TV networks are offering data products with similar capabili@es to digital adver@sing. NBCUniversal, for example, is combining Comcast’s subscriber data with Experian and Acxiom’s credit card data to help adver@sers like Chobani target yogurt-‐buying consumers.
- 79. LUMApartners Digital companies, on the other hand, are increasing their investments in original content. Ever since the success of NeWlix’s House of Cards series, other leading digital companies have produced premium content of their own to keep consumers on their proper@es longer and aVract major adver@sers.
- 80. LUMApartners The percep@on of addressable TV is that there are only two sides of the coin, linear and programma@c TV. The reality, however, is that there are mul@ple node points in between the two offerings that each have their own unique capabili@es and challenges.
- 81. LUMApartners Alterna@ves to TV are growing quickly. OTT (Over-‐the-‐Top), offers consumers programming they want to watch, with more flexibility and far less money.
- 82. LUMApartners Programma@c video is a fast growing market, but the most lucra@ve opportunity is the en@re TV and video market. The companies that offer solu@ons to the challenges and needs of stakeholders in the TV and digital video ecosystems will be the ones that gain the most from the 100% opportunity.
- 83. LUMApartners In the TV ecosystem, there are many types of stakeholders with different needs. Marketers desire premium content to exist alongside their messaging. Agencies seek more efficient planning and workflow capabili@es. MVPDs want solu@ons that enhance the customer experience. Networks seek tools that increase their revenue.
- 84. LUMApartners At LUMA, we are firm believers in the convergence of tradi@onal and digital video. A key to this convergence will be M&A. Both sides of the ecosystem will bring their strengths. Addi@onally, integrated ad buying workflows will unite TV and digital ad buying.
- 85. LUMApartners This consolida@on is already occurring with over 30 scaled transac@ons in the past two years.
- 86. LUMApartners The buyers have come from a variety of sectors: consumer internet, sofware, media, telecom. We expect both the pace and diversity of transac@ons to con@nue as the tradi@onal and digital video sectors con@nue to merge.
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