The New World Order: the real media story from 2020

The UK advertising industry is excessively interested in a legacy model that is increasingly being outshone, argues Nick Manning

Last week’s announcement from Google that it would not permit e-mail based identifiers in Chrome sent shockwaves through the adtech industry.

The stock prices of the quoted adtech players fell sharply as a result. At the time of writing The Trade Desk is c.30% off its last peak, Pubmatic is down 29%, Magnite is down 35% and Live Ramp 36%. Red is the new black.

This event alone is likely to attract further attention from regulators across the world who are already concerned about Google’s market position; Google competes with the other adtech players and its decisions affect their value.

However, one commentator has pointed out that Google can appear to be protecting people’s privacy (which regulators like) while harming their competitors (which regulators don’t like). Their scale allows them to adopt this position.

While the adtech writedowns look dramatic, they are off all-time highs. The market has frothed heavily recently after a set of 2020 Q4 results that were breath-taking. The biggest media story of last year was the astonishing growth in digital spend as advertisers sought economy, flexibility and short-term performance in the face of severe trading difficulties.

Inevitably, acquisition-led ecommerce players boomed as retail outlets remained closed and digital channels are their first natural port-of-call. New habits have been formed.

Some examples illustrate the point. Google itself continues to grow at an incredible rate; its total advertising revenues grew by 8.9% to $147 billion in 2020, but more salient was their Q4 performance with a 21.8% increase, fuelled by YouTube which grew 46%.

In fact YouTube grew by 30% across 2020 despite the pandemic and with some categories such as travel almost wholly absent.

Google is not alone. There were dramatic Q4 revenue increases for all of the significant digital players. Facebook’s revenues grew by 33% in Q4 and beat even optimistic analysts’ expectations. Twitter, Pinterest and Snap also enjoyed strong growth and Amazon, of course, continues on its juggernaut journey as a massive force in e-commerce, web hosting and advertising.
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The shift to digital is not exactly news and it’s already a cliché that 2020 accelerated existing trends, but these numbers are still astonishing.

Meanwhile, in adtech the picture was similar. The Trade Desk’s revenues grew by 18.4% in Q4 and analysts are expecting 35% in 2021, although this will be tempered by Google’s news. Even after the stock price reversal, The Trade Desk is worth $30 billion, 13% more than the worth of WPP and Omnicom combined. It has established a strong bridgehead in Open Web display and video but its stock price is being boosted by the promise of Connected TV. This market is not going to be as dominated by Google and Facebook as online display is, so the market is betting that TTD can capture a big share.

Pubmatic’s post-slump stock price is still 70% above its flotation in December. Criteo is only 10% off its peak and has risen by 400% since January 2020. Clearly the market believes that retargeting is not dead, even if it is contributing to consumer dissatisfaction with advertising in general.

Taboola has announced that it is floating via a Special Purpose Acquisition Company (SPAC), becoming one of many adtech companies seeking a listing via this novel so-called ‘blank cheque’ route. Clearly ‘content discovery’ (a charitable term) is a lucrative business even if the user experience is not exactly enhanced by it. It is unfortunate that so much of publishers’ revenue is dependent on content that compromises their webpage design, but it is a reliable source of money when times are tight.

Google’s move has taken some of the froth out of the market but the growth of digital revenues in Q4 in particular was phenomenal. There was a release in pent-up demand and strong traffic around the US election, but the trends are enduring.

Unsurprisingly there has been a feeding frenzy in adtech mergers and acquisitions as the market bubbles, with standout acquisitions being the NBC/Freewheel purchase of Beeswax and Magnite’s absorption of SpotX for $1.2 billion, barely ten months after the merger of Telaria and Rubicon Project that created Magnite.

Even before the SpotX deal there were doubts expressed about Magnite’s valuation, but in the world of adtech valuations are not always logical. Expect more SPACs and IPOs as investors make hay while the sun is shining and once the Google news has been absorbed into lower valuations.

Much of the mania is predicated on the growth of mobile, digital video, streaming and connected TV in the US market. Television in particular is now back in vogue as investors anticipate meteoric growth in connected TV and streaming. Viewing figures for all TV channels grew in 2020 in the UK, but the bigger growth was skewed towards Netflix, the new Disney+ and on-demand channels. Once again TV retains its popularity and therefore its status as the most powerful medium. Digital transmission is propelling TV to new heights of potency, with more high quality programming than ever before for those who can afford it.

The growth of digital channels of all kinds is the big media story of our times, yet the ad industry tends to be distracted by the fortunes of the advertising holding companies, including reams of coverage of the latest figures from WPP, Omnicom et al. It is to be expected given their extraordinarily high share of the global advertising market, the fact that so many people work for them and they attract a lot of attention from UK analysts. But the UK advertising industry is excessively interested in the legacy model that is increasingly being outshone.

The performance of S4 Capital is a much better barometer of where the action is.

Taking a wider view of overall trends in 2020, a few clear points emerge that will affect the advertising industry:

1. The days when the media market was dominated by big broadcasters, publishers and the network media agencies is coming to an end, and this gradual process is now becoming a slide.
2. In traditional media the US lagged Europe for some time but the real action is now led States-side by the giant tech-led players and the buy-side is struggling to keep up. Old thinking doesn’t solve new problems.
3. Television (and its ‘video’ associates) continues to be both the most powerful medium and with internet-led services and Smart TVs it will solidify its position with consumers throughout the world. Connected TV is powering the growth of the adtech sector on this basis.
4. It is a more competitive marketplace than online channels as the giant digital platforms are not as well-established in it. Audiences will continue to fragment over many channels with quality programming produced at high cost key to adoption.
5. These changes in TV will pose a real challenge for advertisers as audiences continue to fragment into subscription and on-demand options where ads are no longer the primary funding source.
6. Advertisers will seek audiences in BVOD and online video as buyable audiences migrate there, especially for younger and lighter viewing groups. Smart advertisers are seeking the help of audience tracking and attention specialists as the audience measurement system struggles to cope.

What is undeniable is that advertising money will continue to gravitate towards digital channels across a broader spectrum of options as advertisers chase increasingly elusive audiences. Video-led advertising will thrive as more options emerge, just as Tik Tok has done, and affordable bandwith increases. Programmatic trading will become established in Connected TV with the shortcomings of automated trading (such as ad fraud) a danger in such a huge market.

The implications are profound. Even now the adtech intermediaries are benefitting far more from these trends than the advertisers who fund the whole advertising eco-system and the established publishers who provide the audiences that advertisers want.

The media platforms who are benefitting the most are those for whom content is free and user-generated, with minimal costs of production and modest traffic acquisition costs. Bottom-line margins are extraordinary as a result. The market is unbalanced, with media owners who provide healthy, professionally-produced and costly content disadvantaged and scrambling to find new revenue streams.

One key question now is whether and when there will be a shift in the balance of the industry back in favour of advertisers and high quality publishers. They are watching the big digital platforms and adtech players grow like crazy with mounting concern.

Many advertisers are generally extremely hard-pressed unless they are in high-growth e-commerce sectors or technology; big-spending categories such as travel and automotive are in a distressed state post-Covid. Retail is either distressed or grocery-led and artificially buoyed up by lockdowns.

In these conditions advertisers tend to seek savings to protect profitability, and no doubt this is happening again. However, there is little to be gained by squeezing the ‘usual suspects’. Asking media agencies for yet more cost reduction in both media costs and fees is a zero sum game, with often phantom numbers used to present a fictitious result. Putting pressure on the media agencies to push down on media costs harms the traditional broadcasters and publishers and helps the big digital platforms (who don’t need the help). It also harms the media agencies themselves.

Such ‘savings’ are illusory when advertisers need true economies.

And it’s harder for advertisers to get at the well-padded margins that the adtech industry enjoys as these are often beyond the scope of the media agencies and their contracts, with the media agencies frequently involved and benefitting from this lack of advertiser reach.

The real dividend for advertisers can be found through savings in programmatic. The ISBA/PwC report in May 2020 demonstrated that online programmatic trading is inefficient, with c.50% of an advertiser’s budget going into transactional costs, not ad exposure. The report also showed just how hard it is for advertisers to get inside the black box of the programmatic trading systems in order to control and manage data and costs, yet this is where the real economies lie in the New World Order.

In effect advertisers are often paying double the cost of media inventory when all transaction costs are applied.

In this landscape we can expect advertisers to double down on their scrutiny of digital inventory and adtech costs in order to find the true economies they need to improve business performance. Procurement departments should focus on this nut to crack.

Last year was unquestionably the tipping-point in our industry where the shift to digital (and especially in digital TV) became a landslide.

From now on we should pay a lot more attention to the results of the big digital platforms, connected TV players and the adtech industry to truly understand the advertising market and start to address its iniquities.