Forbes Agency Council guest post by Dvir Doron, CMO of Cedato, May 19th
Advertising technology software has grown in recent years as networks, exchanges and analytics suites have brought targeting, automation and measurement superpowers to advertisers and publishers.
But whereas venture investors poured money into ad tech just two short years ago, the outlook has turned decidedly more bearish. Follow-on rounds have become rarer, debt financing more commonplace, and larger players, like telecommunications and marketing services, are circling to buy up stricken vendors.
The reason is not just market clutter, though it is true that ad tech is embarrassed by so many “me too” software providers. Investors are also seeing something unappealing in the business model that advertising itself has relied upon for years.
Shifting The Model
That is why, in pursuit of the same kind of exit that Moat earned to Oracle, ad tech suppliers are now making a change that other tech firms did some years back — pivoting toward software-as-a-service (SaaS).
While software used to come in cellophane-wrapped boxes that commanded a single and often hefty fee, SaaS applications are hosted online and tend to require a smaller, regular fee, like a monthly subscription. That’s why SaaS spending is now growing five times fasterthan its traditional counterpart, as many IT consumers make the switch.
The ad industry, by contrast, has remained locked into its dominant pricing model for decades. Ad agencies, which buy ad space from publishers on behalf of brands, don’t charge their clients a standard price but rather a revenue-share fee proportionate to the amount of money their client is spending — typically 15 percent or more.
As the ad tech platforms of Silicon Valley have come online to fuel these trades in the digital realm, they have mimicked this same old revenue-share model of Madison Avenue, keeping a further 15 to 30% of brands’ media budgets before any ads are even bought.
Making The Pivot
Advertisers and publishers have long been in the dark about the practice of the revenue-share model, and there are good reasons why they are now clamoring for it to stop. Middlemen looking to hold onto the largest possible slice of their revenue share are more likely to buy cheaper ads for clients than quality inventory, maximizing the amount kept for themselves.
But there are now compelling reasons why the ad tech suppliers serving agencies and advertisers also want to pivot.
A SaaS company is a more resilient one because operating a recurring revenue plan gives founders more predictability about their future business pipeline. That is in contrast to yoyoing between feast and famine in a business that is still subject to the seasonal campaigns of advertisers. As a result, service-based ad tech businesses are now thought of as more solid, more dependable and more appealing to investors and acquirers.
The landscape is shifting. Slowly but surely, ad tech vendors are launching in the service arena, either adding on products or pivoting entirely toward those with which customers can go online to manage their own advertising fortunes for a regular fee.
There are significant advantages to vendors’ bottom lines. Becoming a service doesn’t just mean taking an evergreen paycheck. It also means you empower your customers to manage their own campaigns and results through your platform. No longer is your company solely dependent on employing staff to facilitate ad deals on customers’ behalf.
Now it is SaaS ad tech firms, not incumbents, that are attracting VC dollars again, and which are commanding higher valuations, too.
Look at the sales prices of the platforms still wedded to the revenue-share model, and you will see the tears of founders who did not sell for the sums they had hoped to. There are people like my friend, an ad tech entrepreneur who sold his firm for tens of millions on a lowly 1.25x revenue multiplier, but who could have reaped a 5x or even 6x return had he not deliberately avoided the option to follow the SaaS route.
Making this change will not be easy. Sure, new ad tech suppliers are emerging fresh in the market with SaaS baked in, and incumbent vendors are able to make the necessary tweaks to retool their offerings. Both of these things are happening, and companies like my own have seen the value in services for all strata of the supply chain for a long time.
But pulling the lifeblood of the industry — the advertising buying agencies — along with us will prove more challenging. This is a business that, as a report from the Association of National Advertisers exposed, has long been wedded to an opaque and complex structure of rebates, kickbacks, back-handers and commission fees. However, change is vital. If both brands and their technology suppliers are to make a profitable future, we must ensure that ads are delivered at their service.