451 Research: Ad attribution startups garner early exits in shift past pay per click


InsightaaS perspective: 451 Research is one of the world’s leading sources of insight into cutting edge technologies – including areas that are important to InsightaaS and our principals, such as cloud, collaboration, analytics, and sustainable IT. As regular visitors to this site are aware, InsightaaS.com works with 451 Research to bring occasional thought leadership pieces to our readers.

Today’s piece is an excellent example of why and how 451 matters to its clients, and the industry as a whole. 451 is renowned in VC and startup circles for its coverage of M&A activity. In this piece, author Scott Denne (whose past credits include work for VentureWire and The Wall Street Journal) looks at two recent deals involving ad attribution firms: the purchase of Adometry by Google for $150 million, and the acquisition of Convertro by AOL for $89 million, both on May 6, 2014.

The piece highlights the importance of connecting finance and IT industry savvy: Denne is able to provide expert commentary on deal valuations, buyer motivations, and the implications for other firms (such as Visual IQ and MarketShare) which may now also be in play as potential acquisition targets. Denne also expands his scope to consider whether and why established industry titans Adobe, Oracle and Salesforce.com might be looking to purchase ad attribution companies. As he says at the end of this piece, “As enterprise software vendors continue to deepen their marketing software offerings, they will inevitably push past the world of organic marketing and into paid advertising and ad tech…Owning an ad attribution vendor would enable enterprise software companies to step into ad tech with a sales model similar to their own.

By Scott Denne of 451 Research; special to InsightaaS.com

Scott Denne, M&A analyst, 451 Research

Scott Denne, M&A analyst, 451 Research

Media companies are paying up for ad attribution vendors, which promise to properly value advertisements by analyzing marketing and audience data to determine what led to specific purchases. While the ability to model and divert ad budgets based on what’s working is valuable in itself, the potential to upend established ad-tech business models is driving the high prices for ad attribution startups.

AOL and Google recently announced ad attribution acquisitions on the same day. Both buyers come to ad attribution with a similar profile but different motives, and both are publishers that also own their own ad-tech stack. For Google, the purchase of Adometry is a defensive move; for AOL, reaching for Convertro is an offensive play designed to boost sales of its video stack.

Acquisitions

More than any other vendor, Google has benefited from the dominant method of selling online ads: pay for performance, which typically means charging advertisers only when a person clicks on an ad or some other performance criteria is met. Most of the $50bn in advertising Google sold last year was sold on a cost-per-click basis. In addition to presenting an opportunity to draw advertising dollars from offline budgets, ad attribution poses a potential threat to that model because pay per click gives most of the credit, and most of the money, to the last ad before a purchase.

Google already faces declining prices for its ad offerings. Last quarter, the average price it could charge for a click dropped 9% from a year earlier. In 2013, the average price declined 8% and in 2012 it fell 12%, compared with a slight increase in 2011. Owning Adometry enables Google to know when and how to adjust its cost-per-click business model if metrics other than cost per click become the dominant currency.

Select ad attribution M&A

Date announced Target Acquirer Deal value Trailing revenue multiple
May 6, 2014 Adometry Google $150m* 7.5x*
May 6, 2014 Convertro AOL $89m 8.1x*
May 24, 2014 DC Storm Rakuten Not disclosed N/A

Source: The 451 M&A KnowledgeBase *451 Research estimate

For AOL, the pickup of Convertro isn’t about protecting an established ad-tech empire, but growing one. AOL’s current advertising business generates $1.6bn – about half of Yahoo’s and a fraction of Google’s. After several years of hunting for content acquisitions, AOL has turned its focus to building out its ad-tech stack. The $89m (plus $12m in potential earnouts and employee retention) for Convertro is about proving that those purchases can generate value for advertisers, especially its $465m Adap.tv buy – AOL hopes to use Convertro to help lure television budgets into digital video. Today, the entire digital advertising market is smaller than the television ad market and AOL, along with nearly every other ad-tech firm, aims to shift some of that spending into Web and mobile video.

Context

The term ‘ad attribution’ isn’t new, but past methods of attribution have done little more than list the ads a consumer saw ahead of a purchase. These methods have little sophistication beyond weighting ads by factors such as where in the chain they were viewed. Currently, most marketing software and demand-side ad-tech vendors have some form of weighted attribution reporting.

What’s been developed by Adometry, Convertro and their main rival Visual IQ are statistical methods that use data beyond cookies. They pull in demographic data, set-top box data, search engine data and other marketing data to build algorithms that provide a picture of what’s working and why. And because they can use data beyond cookies, the techniques they’ve developed are applicable to traditional media such as TV, print and radio, and could help steer some of those dollars online.

Potential targets

As the last remaining pure-play ad attribution vendor with any scale, Visual IQ would get the initial look from any acquirer looking to enter the space. Founded in 2006, Visual IQ was the first of the recent crop to attempt to model and optimize advertising spending across channels. We also believe it to be bigger than Adometry, which generated $20m in revenue in the 12 months leading up to its sale to Google.

One of the more recent entrants to the space is MarketShare. For the past decade, the company has sold software-enabled services for media mix modeling services. Media mix modeling uses data analysis to divvy up ad dollars at the start of a campaign, setting the overall strategy. Early this year, MarketShare launched an ad attribution offering to help guide spending during the campaign. A successful combination of media mix modeling and ad attribution would garner interest from suitors. A purchase of MarketShare could be expensive as it has more than $50m in annual revenue and has raised about $65m in funding from Elevation Partners and FTV Capital. Just as likely as being taken out, MarketShare could turn acquirer, picking up another attribution provider to expand its own offering. The company has made two acquisitions in the past.

In addition to Visual IQ and MarketShare, there are few ad attribution companies. They include recently launched Abakus and other players such as C3 Metrics and OptiMine that have expanded into attribution from related offerings.

Potential acquirers

Facebook has shown the value it places on ad attribution through partnerships with data providers such as Acxiom and Datalogix in an attempt to prove that its ads lead to sales. Since people don’t go to Facebook to buy things (at least not in the way they go to Google’s search engine), Facebook is in a challenging position to sell ads based on clicks. Not only would an ad attribution purchase aid that struggle, it would also be a nice complement to Atlas, Facebook’s ad server business. Ad attribution is a natural extension of an ad server business, since data from ad servers is needed to feed attribution calculations. Today, Atlas offers its own attribution product, but it is a basic weighted attribution report, rather than algorithmic attribution.

Another ad server provider that could make a play for an attribution vendor is Sizmek. The company recently rolled some existing reporting tools and new capabilities into an attribution product, though it doesn’t offer algorithmic attribution capabilities and will seek a partner for those. While Sizmek might purchase a small firm, Visual IQ or MarketShare would be a big bite for a company with a $280m market cap and about $85m in cash.

Since many algorithmic attribution vendors have a substantial data integration services element to their offerings, these companies could draw bids from IBM and Accenture – two IT services providers with substantial ambitions in the CMO suite.

Having built up a stack of marketing applications in recent years, enterprise software companies such as Adobe, Oracle and salesforce.com could be potential ad attribution buyers. This is particularly true of Adobe and Oracle, which own audience data management platforms through their respective acquisitions of Demdex and BlueKai. Those products collect and sort audience data, so improving audience analytics on top of those capabilities is a natural extension.

As enterprise software vendors continue to deepen their marketing software offerings, they will inevitably push past the world of organic marketing and into paid advertising and ad tech. Almost all ad-tech companies generate cash by taking a cut of the ad spending flowing through their software, with no long-term subscriptions or upfront licenses. That makes it a very different business model and helps explain why most enterprise software providers, despite a hunger for marketing technology, have steered away from ad tech. Owning an ad attribution vendor would enable enterprise software companies to step into ad tech with a sales model similar to their own.

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