1370 Avenue of the Americas New York, NY 10019 www.coadydiemar.com Media Maven The Ad Tech Marketplace: Let the M&A Games Begin? Volume 5 December 2010 For some time now, online advertising industry pundits have noted the complexity of the advertising technology landscape. Hundreds of companies now occupy the space between online advertisers and online publishers. A complex ecosystem has arisen comprising a lengthy list of intermediaries, including media buying platforms, demand side platforms, ad exchanges, yield optimizers, ad server or ad infrastructure companies and ad networks (of which there are several types: vertical, video, rich media, behavioral, contextual, performance based, and mobile). Each of these intermediaries relies on a wealth of data that is provided by data suppliers, data aggregators and data optimizers. In fact, it is data that powers the entire ecosystem. Given this wealth of intermediaries, it is no wonder then that a $5.00 CPM to the advertiser has become a $1.00 CPM to the publisher, with a plethora of middlemen taking $0.25 to $0.75 of each online ad buy. Can a few hundred companies in the crowded display advertising ecosystem prosper when the industry generates $8 billion in advertising, a fraction of total online advertising ($24 billion, with search accounting for $11 billion), not to mention television ($65 billion), newspaper ($26.5 billion) or radio advertising ($16 billion)? Or is this sector that ripe for consolidation? In 2010, while offline companies have acquired online companies (i.e., Hearst Corp. buying icrossing), there has been relatively little online consolidation within or across online categories (though Google, the search advertising giant, has been very acquisitive in the display ad space). Perhaps a relative lack of M&A could be attributed to the rising tide lifts all boats theory: in effect, why sell when business is growing rapidly. After all, the IAB just reported that third quarter industry revenues increased by 17% over 3Q 2009 levels. And yet, in the last few weeks, bold strategic steps have been taken within the display ad space by some of the industry s most prominent players. Could it be that the first shots have been fired signaling a new wave of consolidation? Online Video Continues to Surge In July 2010, according to comscore, 85% of internet users viewed at least one video online and 73% of video viewers viewed at least one video advertisement. In a recent presentation on the state of the internet, comscore noted that the total minutes of online video viewing had increased by 100%, while the total number of videos viewed increased by 71%, suggesting that longer-form content was contributing to an increase in time spent streaming.
Media Maven: The Ad Tech Marketplace: Let the M&A Games Begin? Page 2 Source: comscore Video Metrix, July 2010 In an analysis of the top ten video sites or networks (dominated by Google s YouTube), three of the largest sites/networks are video ad networks that create no content on their own but aggregate content from others and sell video advertisements, often as a pre-roll to the content, as shown in the chart below. Source: comscore Video Metrix, July 2010 Given the consumers predilection to spend more time online watching videos, it is not surprising that online advertising dollars are migrating to digital videos as well. As shown in the chart below, video display advertising was the fastest growing segment of the display adverting market in 2008 and 2009, and continues to be a growth leader in 2010.
Media Maven: The Ad Tech Marketplace: Let the M&A Games Begin? Page 3 Display Advertising Growth Trends 2007 2008 2009 1H 2009 1H 2010 Online Advertising by Segment Display - Banner Ads $4,456 $4,877 $5,100 $2,400 $2,700 Display - Rich Media $1,656 $1,642 $1,500 $704 $743 Display - Digital Video $324 $734 $1,000 $477 $627 Display - Sponsorship $636 $387 $383 $184 $242 Total - Display $7,072 $7,640 $7,983 $3,765 $4,312 Display Advertising Growth by Segment Display - Banner Ads 9.4% 4.6% 13% Display - Rich Media (0.8)% (8.6)% 6% Display - Digital Video 126.5% 36.2% 31% Display - Sponsorship (39.2)% (1.0)% 32% Total - Display 8.0% 4.5% 15% Source: Internet Advertising Bureau Since the majority of online video ads remain the same 30-second commercials that air on TV, it stands to reason that advertisers, particularly brand advertisers who are focused on reach metrics such as those found in TV, would welcome the creation of video ad networks that bring scale to the online world. Online Video Networks The Prettiest Girl at the Dance Although it is too early to say with conviction, it would appear that the M&A dance in the ad tech space has begun, with the first significant deals between notable ad networks. Given the proliferation of ad networks, it is not surprising that M&A has begun to pick up in this sector, particularly since scale has always been an issue in online advertising. One would expect consolidation between two ad networks in order to retain target-ability but at greater scale. However, this month s announced deals took the shape in two forms: (1) display ad networks acquiring video ad networks; or (2) two video ad networks merging. In the first instance the rationale is probably twofold: 1) to acquire technical capabilities necessary to compete in video, and 2) to acquire a foothold in the fastest growing category of online display: video. Perhaps this explains why in the last month alone, three of the four largest online advertising acquisitions have consisted of a video ad network or video ad serving company being acquired. For example, display ad network Specific Media acquired video ad network BBE; display ad network Undertone Networks acquired Jambo Media, a video ad serving company; and Tremor Media acquired ScanScout, a merger of two video ad networks. These deals follow on the heels of AOL buying 5Min Inc. in September, another example of a display ad network company acquiring a video ad platform. Announced Buyer Seller Purchase Date Buyer Seller Description Description Price ($MM) Sep-10 AOL 5Min Inc. Online Content/Ad Network Video Ad Network NA Oct-10 Specific Media BBE (Broadband Enterprises) Ad Network Video Ad Network $55.0 Nov-10 Tremor Media ScanScout Video Ad Network Video Ad Network NA Nov-10 Rubicon Project Fox Audience Network DSP Ad Network NA Nov-10 Undertone Jambo Media Ad Network Video Ad Serving NA
Media Maven: The Ad Tech Marketplace: Let the M&A Games Begin? Page 4 A Horizontal Merger Highlighting the Benefits of Scale On November 7 th, video ad network Tremor Media announced it was buying video ad network ScanScout. Ad Age noted that the combined entity served a collective 667.5 million video ads in September, a close second to Hulu s 794 million (Brightroll was #3 with 476.4 million, and Google was #4 with 242.5 million). In an interview Tremor Media CEO Jason Glickman noted that scale provides for three things: 1. deeply targeted audiences in meaningful numbers 2. the right audience where purchase intent is likely to occur, and 3. the ability to reach a very large audience at an optimal reach (offering both real reach and frequency). By merging with ScanScout, Tremor has created the largest independent source of video ad inventory to more effectively compete for ad dollars. Looking at the chart on the following page, we believe the Tremor Media/ScanScout deal will be replicated by other video ad networks who find the need to achieve greater scale in order to more effectively compete with the likes of the new Tremor/ScanScout. A General Ad Network Enters the Video Ad Network Space On October 18 th, display ad network Specific Media acquired video ad network BBE. While the Tremor/ScanScout deal is a merger of two video ad networks to create one significantly larger ad network with unparalleled scale, the Specific Media/BBE deal is the second type of deal we may be seeing more of in the future. In this case, Specific Media, one of the largest online ad networks, acquired BBE giving Specific Media the ability to serve video advertisements online, a capability the company lacked prior to the deal. BBE s CEO Matt Wasserlauf noted that the online ad marketplace is in need of consolidation, and the Specific/BBE deal provides customers a one-stop solution: the ability to buy across all display types: banners, rich media and video. Mr. Wasserlauf also noted that Specific is a leader in targeting, and BBE is a leader in delivering reach. The targeting that Specific Media brings to BBE creates a leader in video targeting. Specific Media CEO Tim Vanderhook describes the deal as bringing data analytics and targeting into the video space. Mr. Wasserlauf s comments are interesting, because in the mostly VC-backed ad tech space, most firms focus on doing one thing extremely well, rather than provide one-stop shopping for clients. If this
Media Maven: The Ad Tech Marketplace: Let the M&A Games Begin? Page 5 approach were adopted by more ad tech firms, it could unleash an unprecedented amount of consolidation in the space. Let the M&A Games Begin? As shown in the chart below, video ad networks have become much more prominent in comscore s monthly rankings when comparing September 2009 (5 video networks were listed in the top 25) and September 2010 (11 video networks are now listed in the top 25). In the chart below, it is important to note that potential reach is a theoretical concept and not the equivalent of actual audience. comscore Ad Focus Ranking (U.S.) Unique Visitors (000), Total U.S. - Home, Work, and University Locations SEPTEMBER 2009 SEPTEMBER 2010 Unique % Unique % Rank Property Visitors (000) Reach Rank Property Visitors (000) Reach Total Internet : Total Audience 198,378 100% Total Internet : Total Audience 212,874 100% 1 AOL Advertising 181,163 91% 1 Brightroll Video Network (a) 211,761 99% 2 Yahoo! Network 176,208 89% 2 TubeMogul Video Network (a) 207,553 98% 3 Google Ad Network 171,180 86% 3 SpotXchange Network (a) 206,347 97% 4 Tremor Media (a) 167,930 85% 4 Firefly Video (a) 201,129 94% 5 ValueClick Networks 163,037 82% 5 Tremor Media 196,518 92% 6 Yahoo! Sites 159,765 81% 6 YuMe Video Network (a) 191,497 90% 7 Specific Media 156,840 79% 7 BBE (a) 190,409 89% 8 Google 156,820 79% 8 ScanScout Network (a) 184,468 87% 9 FOX Audience Network 155,473 78% 9 Yahoo! Network 182,918 86% 10 Microsoft Media Network 153,412 77% 10 AOL Advertising 182,457 86% 11 24/7 Real Media 150,821 76% 11 Advertising.com Video Network (a) 182,155 86% 12 Brightroll Video Network (a) 148,374 75% 12 Adconion Video Network (a) 181,163 85% 13 YuMe Video Network (a) 143,643 72% 13 Yahoo! Sites 177,973 84% 14 Traffic Marketplace 143,275 72% 14 Google Ad Network 176,041 83% 15 Tribal Fusion 137,091 69% 15 Google 172,211 81% 16 Audience Science 136,777 69% 16 Tidal TV (a) 172,024 81% 17 interclick 135,328 68% 17 ValueClick Networks 169,864 80% 18 Collective Network 134,518 68% 18 Digital Broadcasting Group (a) 168,209 79% 19 Adconion Media Group 133,246 67% 19 Turn Media Platform 162,646 76% 20 Casale Media 132,222 67% 20 Jivox Video Network 161,845 76% 21 Turn, Inc. 131,163 66% 21 24/7 Real Media 161,716 76% 22 Advertising.com Video Network (a) 124,802 63% 22 AdBrite 157,076 74% 23 Digital Broadcasting Group (a) 121,483 61% 23 Collective Network 153,088 72% 24 Burst Media 120,077 61% 24 Specific Media 152,873 72% 25 AdBrite 118,797 60% 25 Microsoft Media Network US 150,905 71% (a) Potential reach (a) Potential reach IMPORTANT NOTE: Potential reach is theoretical and not equivalent to the actual audience numbers shown for non-video networks. Source: comscore Media Metrix comscore s list of top ad networks suggests a litany of potential mergers and acquisitions among and between general ad networks and video ad networks. We would not be surprised to witness more acquisitions of video network companies by display ad networks, especially those display ad networks that do not yet have video ad capabilities. Likewise, it would not surprise us to see video ad networks acquire each other in a race to keep up with Tremor and ScanScout, which were the 5 th and 8 th largest networks. Final Thoughts
Media Maven: The Ad Tech Marketplace: Let the M&A Games Begin? Page 6 While the display advertising marketplace has seen its share of M&A over the last two years, most of this reflected offline companies acquiring online companies, and therefore failed to reduce the pool of companies competing in the space. The latest acquisitions suggest a change is underfoot: that the long forecast wave of consolidation may be at hand. If so, we may finally see a sector with fewer, more profitable companies competing in a more simplified, less chaotic ecosystem. It also seems logical that traditional video service providers, such as cable companies, network and local TV companies, or TV rep firms should evidence interest in this space. For example, television advertising has rebounded strongly in 2010, and in our opinion, TV-centric companies should consider using their generous free cash flow and video expertise to move into the online media space. Last year, LIN Media (formerly LIN Television) acquired Red McCombs Media, providing LIN, a traditional media company, with the skill sets necessary to compete in the digital world. In a fast moving marketplace, standing still or simply rationalizing the portfolio are not the only options. As we have stated before, we continue to believe that those companies that best marry their traditional platform with new media platforms will likely be the companies best positioned to prosper in the coming years. Sincerely, Chris Ensley (212) 901-4160 chrise@coadydiemar.com About Coady Diemar Partners We provide mergers and acquisitions, private capital placement and strategic advisory services to growth companies in a number of industries. We have a breadth of transaction experience, industry knowledge and institutional relationships and provide clients creative solutions and unparalleled access to ideas and capital. We are acutely sensitive to the specific and unique requirements of each client and opportunity. For more information on Coady Diemar Partners, visit our website www.coadydiemar.com. Contact Colin Knudsen at Colin@coadydiemar.com or Scott Estill at Scott@coadydiemar.com for additional information or to arrange a meeting. If you currently do not receive our newsletters and would like to be added to our distribution list, please contact Ryan Williams at ryan@coadydiemar.com. Independent Advice. Seamless Execution. This announcement is neither an offer to sell nor a solicitation to buy securities. This announcement appears as a matter of record only. Coady Diemar Partners is a registered broker / dealer with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority (FINRA). Copyright (C) 2010 Coady Diemar Partners, LLC. All rights reserved.