For years, the digital advertising industry has operated within a system built for a legacy world that no longer exists. There used to be a few hundred top advertisers that bought media through a handful of agencies, all of which were large companies with deep financing, and the idea that they would be unable to pay was unfathomable. These marketers were advertising on a few hundred publishers, which were also large, profitable and could weather long payment cycles using their own balance sheets.
In this manageable environment, ad-tech margins were high, propelled by ad networks employing arbitrage tactics into which buyers had little visibility. This was acceptable because programmatic advertising was primarily leveraged by direct response advertisers who could measure success against hard KPIs.
The industry is maturing and evolving. Up from less than 10% in 2011, eMarketer estimates that programmatic will account for nearly 85% of total U.S. digital ad spend this year. However, the current marketplace is evidence of a new fragmented reality with thousands of publishers, a steadily growing advertiser base fueled by the rise of DTC brands and globalization and a complex web of specialist ad-tech companies in the middle. The old system no longer works.
Questions about the long-term health of programmatic technology providers have come to the forefront of industry dialogue due to recent bankruptcy news. What does a sustainable technology partnership look like, and how can you be sure that your partners are positioned to support your long-term success?
As programmatic evolves, new technologies emerged that have turned the industry on its head. Header bidding, for example, gave advertisers a choice of where to access inventory, opening opportunities for them to exert their buying power and gain more leverage and control in programmatic. Ad-tech companies are much more likely to operate as software businesses with thinner margins and fee structures that no longer allow for credit or payment risk. Can you imagine telling Amazon AWS you were not going to pay for their computing infrastructure until you got paid by your customer?
In this new world, every party across the digital supply chain needs to achieve new levels of diligence across their partner supply chain. Digital ad spend will surpass traditional for the first time this year, and programmatic is driving much of the growth. Strong partnerships with technology providers are imperative for the continued success of buyers and publishers alike.
However, all tech companies are not created equally. Here are three questions to ask technology partners to better understand if they are sustainable for the long-term.
Are you profitable?
In an ecosystem where many players are privately owned, in addition to financial and governance information not readily available, this can be difficult to assess. That’s why it is important to ask.
Efficient, profitable, cash-flow positive businesses are better equipped to weather any financial impact from market changes or downstream credit defaults. This means that they will be able to continue advancing the technologies that help their clients achieve their business goals.
This is not just true for the ad-tech industry, either. Take Southwest Airlines. While the rest of the airline industry struggled in the wake of the last recession, Southwest has managed to not only stay solvent but grow as it boasts its 46th consecutive year of profitability.
How much debt are you carrying?
The digital advertising ecosystem operates in an environment of continual ebbs and flows. Once the apple of the investment community’s eye, there will be a predicted 75% drop in VC investment in ad tech this year, amidst growing privacy regulations and walled garden dominance.
Without a steady stream of capital, bankruptcy becomes a greater risk in times of uncertainty. A debt-free company is able to control their own destiny and is not beholden to creditors in making the decisions about innovation and investment that will benefit their clients.
Further, it is important that companies look internally at whether they have adequate protection from credit default risk. This could come from putting sequential liability in place or having credit risk insurance.
How do you promote transparency in your business practices?
Over the past few years, there has been an acceleration of changes and innovations to meet the growing needs of brand advertisers as they enter programmatic. As such, transparency across the digital supply chain is now more important than ever, especially as demands continue to intensify.
It’s important to engage closely with your technology partners to understand how they operate their businesses, particularly with regard to complex technical and auction dynamics.
The digital advertising ecosystem is grappling with the aftermath of consolidation and bankruptcies. Following Sizmek’s bankruptcy filing earlier this year, many in the industry are asking what it means for the future of ad tech. As the industry continues to innovate and evolve, it can no longer operate under the assumption that ad-tech companies are commodities that can be interchangeable. If recent consolidation and bankruptcy filings have revealed one thing, it is that longevity and financial viability matter. Advertisers and publishers alike need to engage in an open dialogue with (and evaluate) their technology partners to ensure they are positioned to deliver long-term value.