Five important memes for the digital advertising industry

By Eric Picard, CEO of Rare Crowds

This is an “open source” deck: My license request. If you improve any of these slides, please send them to me. If you use any of these slides, please attribute them to me. These slides have all been presented publicly in the past.

eric@ericpicard.com

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2011 IAB Data on Advertising

Online Advertising Revenue, 2011Display-Banners 22% $6,974,000,000Video 6% $1,902,000,000Mobile 5% $1,585,000,000Display Sponsorship 4% $1,268,000,000Rich Media 4% $1,268,000,000Online Classifieds 8% $2,536,000,000

Search 47% $14,899,000,000Lead Gen 5% $1,585,000,000Email 1% $317,000,000

Total $31,700,000,000

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Expected Growth in Advertising

27.2

33.237.0 37.4

41.1

47.4

54.7

63.4

75.2

91.0

0

10

20

30

40

50

60

70

80

90

100

2006 2007 2008 2009 2010 2011P 2012P 2013P 2014P 2015P

$ B

illi

on

s

19.2

24.125.5 25.7

28.0 28.929.9

31.232.7

34.2

0

5

10

15

20

25

30

35

40

2006 2007 2008 2009 2010 2011P 2012P 2013P 2014P 2015P

$ B

illi

on

s

Global Online Advertising Spending (2006-2015P)

U.S. Online Advertising Spending (2006-2015P) Non-U.S. Online Advertising Spending (2006-2015P)

17.2% CAGR (‘10-15P)

4.1% CAGR (‘10-15P)

8.0 9.111.5 11.8 13.1

18.6

24.7

32.2

42.5

56.7

0

10

20

30

40

50

60

2006 2007 2008 2009 2010 2011P 2012P 2013P 2014P 2015P

$ B

illi

on

s

34.1% CAGR (‘10-15P)

Source: AM. Mindpower Solutions Research, August 2011

Meme 1: Power Base in Advertising Ecosystem has shifted due to Media Fragmentation (Buyers drive the market)

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Seller Dilution• Before 1984 <20 Media Channels, and few publishers per channel• By 2005 this had doubled to 40, but with the Internet, the number of publishers

has significantly increased per channel• Amount of inventory in the market has exploded• Huge competition between publishers for dollars

Buyer Concentration• ~6,000 Advertisers control >80% of ad spend• In last ten years media buying has consolidated – now most dollars flow

through 6 Agency Holding Companies worldwide• Media Agencies control the market – and drive technology adoption

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Huge and Fragmented Ecosystem

Worldwide – Approximately 6,000 Advertisers account for >80% of all ad spending (~5,000 in US account for >90% of US ad spending)

Omnicom

12 holdings from $30M - $1.33B Annual Billings

WPP

10 holdings from $30M - $1.32B Annual Billings

Interpublic

20 holdings from $4.5M - $1.44B Annual Billings

Publicis

10 holdings from $2.8M - $1.01B Annual Billings

Havas

4 holdings from $20.3M - $528M Annual Billings

Most of the WW ad spend controlled by 5 major agency holding companies (6 with Dentsu)

American Media Inc. Belo Corporation Bertelsmann AG Cablevision CanWest Global

CBSCitadel Broadcasting Clear Channel Comcast Community Newsp.

Copley Press Cox Enterprises Cumulus Media Dow Jones Corp. Emmis

Fisher Freedom Gannett General Electric Hachette Filapacchi

Hollinger Journal Register Knight Ridder Landmark Lee Enterprises

Liberty Media Lin TV Corp. McClatchy McGraw-Hill Media General

Meredith Corp. Morris News Corp New York TimesNews World

Primedia Pulitzer Reed Elsevier Rogers Scripps

Sinclair Standard Radio Stephens Media Time Warner Tribune Company

Advance Publications

Cisneros

Corus Entertainment

Entercom

Hearst

Liberty Group

Media News Group

Pearson

Sony Corporation

Viacom Vivendi Universal Vulcan Inc. Walt Disney Washington Post Young Broadcasting

Media ownership rolls up to approximately 60 companies WW – with thousands of holdings

Hundreds of vendors across thousands of implementations, and thousands of internal IT solutions – few of which communicate with each other

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Media Fragmentation Changes Power Base

9,000

Advertisers

6,000

Advertisers

6Agencies

MillionsPublishers

19772012

PublishersHundreds

>500,000Advertisers

>400,000Publishers

GoogleSearch & Contextual

1Google

$750B

$6B

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Media Fragmentation

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Media Fragmentation

Meme 2: Market Complexity is driving automation to decrease cost of media buying, selling, and management

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Huge revenue drop between offline and online• Almost one hundred percent revenue drop from traditional to digital

distribution for media companies• Huge complexity in managing media sales in digital (ad operations, RFP

Response, etc…)

Agency Compensation based on hours spent, not value provided• Because most agency compensation comes from billable hours, they have not

invested in workflow automation• Media fragmentation is causing this model to break – digital media amplifies

this: agencies can’t hire enough bodies to do the work• Market complexities need algorithmic and compute intensive solutions to

further growth – agencies need to change their game

Associate MediaBuyer

Buy/Sell Process – Today for premium

Media Planning &

Buying Workflow

Campaign Management & Trafficking

Workflow

Billing & Reconcilliation

Inventory Availability & Reservations (Sales Tools)

Campaign Management

WorkflowReporting Billing

Media Research

Tools

Media Buyer Associate MediaBuyer Ad Operations Billing Coordinator

Ad Operations

Sales Executive

Sales Planner

1

2

3

3

5

7

Account Manager

6

Reporting & Analytics

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1. Buyer decides what web sites to buy

2. Buyer and Seller negotiate deal

3. Hand off to internal teams for workflow

4. Buyer ad ops sends ads to publisher

5. Seller ad ops inputs ads

6. Buyer reviews results, compares reports, compiles

7. Seller sends bill to buyer

8. Buyer reconciles the bill and pays

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Publisher revenue against inventory

Remnant “Wholesale” Inventory sold to Ad Networks

Targeted Inventory sold via Ad Exchanges

Hand Sold Audience Targeted Inventory

Hand Sold Premium Inventory

Hand Sold Sponsorships

Display Ads, Video Ads, Mobile Ads, and Social Media Ads are all sold this way. Packages are made up of inventory from each layer in the ‘layer cake’.

Meme 3: Market inefficiency has created arbitrage opportunity

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Existing buying processes leave lots of unsold inventory• Only a minority of existing inventory is managed by a ‘direct’ human sales force • Sell-through of any human sales force follows a similar curve – leaving a

significant amount of inventory unsold• Traditional Ad Network model is to take risk on inventory by procuring

‘wholesale’ from publishers and selling to buyers• Now with Ad Exchanges, networks can procure in real-time – a model designed

by default to reduce risk• Agency model has begun to adopt the ad network model – with trading desks

* Includes: Ad Networks, SSPs, Private Exchanges, and Ad Rep Firms** Includes: Media Agencies, Creative Agencies, Trading Desks*** Includes: Ad Exchanges and DSPsThis slide represents Display, Video, Mobile – based on Rare Crowds Analysis of Marketplace

Advertising Ecosystem Impression / Dollar Flow

Note: Ad Servers, Yield Management Systems, Analytics, DMPs, etc… Take out about 8-10% of spend in total as they pass through the ecosystem

20%

ADVERTISER AUDIENCEAgency**

Keeps 10-25%

Large Publisher(Direct Reserved “Premium”)

Keeps 75-90%

Large pub(Remnant)Keeps 40-80%

Publisher Aggregator*

Keep 10-80%

(May include multiple vendors)

Small-Med PublishersKeeps 20-60%

65%

25%

5%

20%

25%

25%

FLOW OF ADVERTISING IMPRESSIONS (US)Percent impressions

40%

35%

40%

35%

Ad spend100%

Exchanges, DSPs ***Keeps 10-20%(may include multiple vendors)

FLOW OF AD SPEND (US)Percent Dollars Captured (in yellow)

25%

5%

Per Impression Price D

rops

Meme 4: Consolidation is about to happen

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Hundreds of vendors in the ad tech ecosystem • Each sector has significant number of competitors• Probably not enough ecosystem scale to support more than 3 vendors per

category• Consolidation will happen quickly once it starts

Ultimately there will be between 1 - 4 large platform ‘stacks’• One will be Google• The others will be some subset or consolidated mix of the following:

• Yahoo• Microsoft• Adobe• IBM• AppNexus• AOL• Facebook• Amazon

• SAS• SalesForce.com• Experian• Accenture• Ebay• Rubicon Project• Pubmatic• Etc…

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The Google StackAd Networks

AdMob

Mobile

DFP

Publishers

DFAGoogle

Advertising Platform

Ad Sense

Ad Words AdSense

Advertisers

Ad Agencies

Other Vendors

Data Companies

Other vendors

AdMeldInvite Media

Google Display

Network

Google / Doubleclick Ad Exchange

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Meme 5: We're just at the beginning of the digital revolution

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Traditional Media is transitioning to digital distribution• Tablets are the biggest driver we have ever seen of transition from consumption

of media (especially print) to digital delivery• Connected Televisions are another huge driver of digital consumption• This includes Xbox, Roku and other set top boxes• Different media are good at different things, we’re still trying to determine what

new media types are good at• Until we can drive revenue to traditional media companies closer to what they

get from traditional, they will intentionally slow this transition

We have significant upside across the board for display, mobile, video and social – Search will continue to grow too!

• Display advertising is a good catch-all for most media types• Display is easily broken down into two large buckets: Brand and Direct Response• Direct Response in display inventory that sits high in the purchase funnel will

always sell at a very low price (low yield for publishers)• Better sell-through in display through increased efficiency of the buying and

selling process will drive brand adoption

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HD RadioSony makes HD Radios

Sony vs. Philips

Sony = Quality & Prestige

I Need a Sony HD Radio Now!

Who has the best price on Sony HDR?

I love my Sony HD Radio, I want other Sony products!

You should also buy a Sony HD Radio!

Impression Volume

Vehicle Category Awareness

Brand Awareness

Brand Consideration

Brand Preference

Purchase Intent Purchase Retention (Customer Loyalty)

Customer Advocacy

Huge TV

Huge Radio

Huge Newspaper

Huge Out of Home(Billboards)

Very Large Magazines

Large Online Display

Medium to Large

Direct Mail

Small to Medium

Mobile Advertising

Small to Medium

Web Site

Small Search

Small Email

Medium Online Video

Tiny (potential to ‘catch fire’)

Word of Mouth / Viral

Example:

Purchase Funnel to Advertising Vehicle= Appropriate / Effective

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Purchase Funnel to Display Advertising Volume & CPM

High Imp. Volume Low Imp. Volume

High CPMLow CPM

Category Awareness

Brand Awareness

Brand Consideration

Brand Preference

Purchase Intent Purchase Customer

RetentionCustomer Advocacy

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One Advertiser - $20M Budget & Target Avg. CPM Allocations

Category Awareness

Brand Awareness

Brand Consideration

Brand Preference

Purchase Intent

Purchase Retention Customer Advocacy

Bran

d Fo

cus

DR

Focu

s

$11M$15.00 CPM

$3M$18.50 CPM

$.75M $14.50 CPM

$.25M $11.00 CPM

$.5M $0.20 CPM

$90 CPA

$1M $0.50 CPM

$90 CPA

$3M $30.00 CPM

$90 CPA

$.5M $18.00 CPM

$90 CPA

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Other platforms are focused on limited market segments

Category Awareness

Brand Awareness

Brand Consideration

Brand Preference

Purchase Intent

Purchase Retention Customer Advocacy

Bran

d Fo

cus

DR

Focu

s

High Yield

High Yield

Med. Yield

Med Yield

Low Yield

Low Yield

HighYield

High Yield

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Search focuses on Direct Response near the Purchase

Category Awareness

Brand Awareness

Brand Consideration

Brand Preference

Purchase Intent

Purchase Retention Customer Advocacy

Display Marketplaces focus on DR advertisers

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Industry must take a holistic view

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Creating a virtuous cycle on yield

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Brand vs. DR by inventory and revenue

$$$$$

¢

Brand

DRDR Paid Search

Brand Display

DR Display

Inventory allocation of Online Advertising within the purchase funnel in 2012

Ball Size Represents Proportional Revenue as of 2012

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Mobile has huge upside especially with tablets!

Paid SearchBrand Display(includes Video and Rich Media)

DR Display

Ball Size Represents Proportional Revenue as of 2012

Mobile Ads