The Reports Of My Death Are Greatly Exaggerated

If you look at current public market valuations, the recent IPO’s and SPAC’s, funding rounds, and the flurry of M&A activity in the space today, you can say AdTech is having a moment. At the time of writing this, publicly-traded AdTech companies have a combined market cap of over $160B compared to $5B just four years ago. This would be surprising to you if you had read the headlines of AdTech’s demise as recently as February 2020, when nuclear winter was declared and most investors and outsiders wouldn’t touch AdTech with a ten-foot pole.

Despite all of the positive macro conditions, there is a doom and gloom narrative that persists. Uncertainty looms around the deprecation of the third party cookie (3PC), which has been the enabling mechanism to target, transact, and measure digital advertising since its inception. Much has been written and pontificated that the extinction of cookies will further strengthen the walled gardens and the platforms that own first-party data through a direct relationship with the consumer (i.e. YouTube, Amazon, Facebook), and weaken everyone else in the ecosystem. There’s some truth to the first part of that statement, but this thinking is significantly discounting the second and third-order effects that will drive the next wave of AdTech innovation.  

With vaccination rates increasing and pent-up demand from the pandemic, economic forecasts are strong. Combine that with a continued low-interest-rate environment, Venture Capital and PE funds flush with capital to invest, and an increasing number of companies that are transitioning their businesses online: you have a perfect storm of conditions that are resulting in bright forecasts for digital Advertising.

AdTech Gets Fit

Instead of mourning the loss of the 3PC, the industry should be celebrating. We ate too many cookies over the years, and now it’s time to shed some weight. The 3PC has been overused and has led to inefficiencies across the ecosystem. It has become more and more ineffective over time as data integrity diminishes and the underlying infrastructure has become bloated. More importantly, utilizing 3PC’s for digital advertising was never going to be sustainable long-term without the consumer as part of the value proposition. 

Now the industry gets to start anew without the shackles of the past and build a mechanism that enables privacy by design that better articulates the value exchange of the content-driven internet to the consumer. 

The loss of the third-party cookie is a structural shift for AdTech and is analogous to inevitable paradigm shifts in computing and every other major industry. These shifts don’t have to be technical by nature, but they open the door for new technology developments, which then enables startups to disrupt incumbents, and ultimately leads to more startups and increased competition, and further innovation. 

Take the current state of streaming, for example. Faster internet speeds certainly paved the way for Netflix to distribute content directly to the consumer, but the structural shift was the ability to deliver high-quality content on-demand to a growing subscriber base. Both the existing distribution and business models were upended, enabling today’s streaming wars.

There are Two Ways to Make Money

As Jim Barksdale famously stated, unbundling and bundling are the only two ways to make money in any industry. The AdTech industry has been bundling for the past several years, as consolidation has occurred across buying and monetization platforms and the service offerings that enable them. With AdTech’s foundation being ripped out from under it, we are seeing core parts of the ecosystem begin to unbundle. 

The tools of the past that enable targeting, measurement, attribution, and optimization may not be sufficient for the future. With uncertainty also looming around the regulation of Google’s ads business in addition to the unproven nature of FLoC and their post-cookie solutions, Advertisers are starting to question the “all eggs in one basket” approach. Just look to the thirty-plus identity resolution solutions that have already emerged as the industry grapples with the future of addressable media.

With the crumbling of the cookie, the walls of the big tech platforms will become more impenetrable and fragmentation will increase across the space. The core tenant of consolidating on a unified buying platform, controlling reach & frequency, is being disrupted and will drive Advertisers to engage with complementary and alternative solutions to fill in gaps and deliver against their desired performance outcomes. 

It’s Time to Build

One of the original builders of the commercial web, Marc Andreesen, penned a call to arms to all startup builders and investors across every industry as we confronted the pandemic: to start building the future that we all want to see. 

As structural change is upon us in AdTech, innovation is spreading across many areas including but not limited to, identity and privacy management, creative, content creation, attribution, optimization, and non-user-based solutions.

New ways to engage consumers will be imagined and new business models will be born.

The building has just begun. It’s an exciting time to be in AdTech.

Sources:

1. “Without change, there is seldom opportunity” Andy Rachleff
2. AdTech Nuclear Winter (Feb 2020)
3. It’s Time To Build