Commentary on 2009 IAB-PwC Internet Advertising Revenue Report


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This presentation was made as the official guest commentary to the IAB's 2009 Internet Advertising Revenue Report prepared by PricewaterhouseCoopers.

The slides are narrated - press the play button to start the slidecast.

Note: In August 2010 I left GCA Savvian to form LUMA Partners. I can be reached at

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  • Thank you Sherrill. I appreciate the opportunity to address the IAB membership. The title of my commentary presentation is entitled “Rethinking the Market Opportunity” because of the tremendous upside potential of the interactive media channel. I plan to: give a historical perspective on where we are, point out some of the impediments to date, discuss trends that will likely lead to an inflection in growth, and challenge the IAB members to think about a materially higher bar.
  • As David pointed out, 2009 was a down year for internet advertising – one of only three years where the total spend actually decreased. We are all aware of the reasons for this drop. It turns out that a double-barreled recession coupled with a Wall Street implosion are never good conditions for an industry that relies on discretionary spending. But is it really discretionary? One could theoretically make the argument that advertising is necessary expense - a cost of goods sold if you will. I submit that one can definitively make the argument that digitally targeted tracked and proven advertising is a cost of goods sold if not a revenue driver. The interactive channel is on a inevitable long term growth path which to date has only been interrupted by severe recessionary environments. The fact that the interactive channel with its promise of targetability and trackability, only has $23 billion of spend after 15 years has to do with some impediments: Inertia of the ad buying is probably the biggest culprit. There is an entire infrastructure around media buying that is slow to change. But another important roadblock is measurement standardization, or the lack there of. There is confusion over what to measure: users, page views, clicks, time spent as well as who does the measuring: Neilsen, Comscore, Quantcast, Compete, Hitwise. You get the picture. Contrast that with television a channel in which no one argues about the value of a Neilsen rating point. Fortunately the IAB recognizes the issue and is working hard on standard setting to eliminate impediments to growth.
  • I am sure you are all familiar with the ubiquitous chart that maps media consumption vs. ad spend by media category. It seems inevitable that as more consumers spend time in online and other interactive environments, the channel should garner its fair share of ad budgets (arguable it could over-index due to the lean-forward interactive nature of the media). The disparity (currently at 3:1) can be explained as both a lag factor as well as a dearth of higher value brand advertisers. The interactive channel is still largely a home for direct response advertisers as with all new media channels. Remember the early days of cable TV when you didn’t have to stay up till 3 am to take in a Ginzu knife 60 second spot. We think that some of the latest innovations in digital will drive an increasing percentage of brand advertisers to the interactive channel.
  • This landscape page is a virtual “eye chart” of the display advertising ecosystem. With 22 categories and 192 companies, the chart gives you a sense of just how convoluted the display ad marketplace has become. You want to talk about impediments, how confusing is this environment to marketers who just want to place effective ads? I wont go through the landscape in detail – I’m saving that talk for the IAB Networks and Exchanges conference on May 3 rd where I am opening with a stage-setting review of the marketplace. Actually, it’s no surprise the display sector has developed like this. Most private companies are venture-backed and most VCs encourage their portfolio companies to focus on doing one thing very well. While this makes for good start-up advice it does breed an environment of point solutions. The downside to fragmentation is the inefficiencies of an over-loaded ad stack – basically too many mouths to feed on the way from advertiser to publisher. Compare this environment to search which has much fewer players and is much more efficient. The upside to a fragmented marketplace is the amount of innovation that results from having a lot of focused smart engineers tackle problems like media optimization. It is precisely this innovation that will benefit the interactive channel in the long run. We believe that substantial consolidation is coming to this sector. This consolidation will not only simplify the landscape by amalgamating the various categories into more comprehensive solutions, it will also bring new large entrants which will further mature the landscape and better enable more dollars in the pipe. We anticipate that besides the usual media, marketing and agency suspects, there will be entrants from the technology, network and data companies.
  • Fortunately it appears the deal market is back. 2009 saw an increasing level of M&A activity in the technology sector and 2010 feels strong. Not a bubble mind you, but rather a robust marketplace for inorganic growth. OK, maybe you could call the mobile market frothy since the Admob and Quattro deals alone constitute more than double the size of the entire mobile marketing marketplace. The major players in media, marketing and technology have all been active as strategic companies seem to have regained their M&A sea legs after what was effectively an acquisition strike that lasted for 18 months. This M&A environment will be conducive for the much-needed consolidation I referred to previously.
  • Looking forward, one of the challenges for PwC will be preserving the sanctity of the spend categories for their report. We are witnessing a substantial convergence taking place within the purchase funnel. The funnel starts with an impression and works down through search, leads, customer acquisition and finally a sale. And the connecting tissue to all of these levels is data. While each category has their typical players, we are seeing migration up and down the funnel. Media companies like Yahoo who typically sell impressions on a CPM basis are moving down the purchase funnel towards more performance advertising. Witness their reported interest in Yelp as an example. At the same time, ecommerce companies like Amazon and Ebay are moving up the funnel towards search and media. These companies are moving up funnel to take advantage of the larger marketplace and to leverage their data DNA. In a math-oriented world where media is optimized based on audience segmentation data, players with rich proprietary data sets can really take advantage. Things are likely to get quite interesting as these internet titans end up in each other shorts. Think about the coming battles as companies like Yahoo, Google, Microsoft, Adobe, Ebay, Amazon Cisco and Apple all are competing in the same segments. Stay tuned!
  • While the roughly $8 billion display market is large, it pales in comparison to television which enjoys ad budgets of over $70 billion. Online video may be small at $1 billion in ad spend but it is forecasted to grow quickly. 2009 saw a major inflection in terms of consumer video viewership. And consumers also don’t seem to mind the pre-roll and interstitial advertising – it reminds them of TV. The real opportunity is with the convergence of online video with digitally addressable TV. Arguably, all digital video will be addressable and therefore susceptible to the targeting, measurement and optimization that the online channel is currently perfecting. So rather than interactive stealing ad share from TV, TV is becoming interactive. This is where things really get exciting. Besides the sheer volume of dollars, it also brings brand advertisers more into the interactive realm. Very few companies have a substantial presence across media channels but we see real opportunity for a new category of “converged media” companies going forward.
  • One of the key impediments to growth in the interactive channel is attribution. Or perhaps better stated, broken attribution. Just within online channel, the attribution chain is broken. Our current structure rewards only the last click which means that plenty of publishers responsible for a major contribution towards demand creation are leaving dollars on the table (dollars which usually end up in the pockets of Google and other search players. Perhaps a bigger issue is that of online to offline attribution. Take the example of a person researching 3 or 4 different websites to research a new car purchase. The consumer reads expert and consumer reviews, configures option packages and studies pricing data for a particular model of car. He or she than promptly breaks the chain by walking into a car dealership and buys the car. No attribution. No payout to the publishers who were responsible for creating the demand with the consumer in the first instance. The same issue happens with TV advertising. Fortunately a variety of companies are working on solutions, all of which require substantial technology and advanced data mining. If the attribution problem is resolved, the sky is the limit. In such a world of targeted, optimized and attributed closed-loop advertising, Wannamaker somewhere is smiling.
  • I want to end my presentation with a challenge. A digital gauntlet if you will. Most industry research firms are forecasting linear growth of interactive advertising at a rate that has it doubling over the next 5 years to $50 billion. This would still have it 50% lower than the TV ad spend is today. These forecasts are linear and evolutionary. What is needed in the interactive industry is some revolutionary thinking. No one can argue that the technology is revolutionary. Think about the capabilities of new devices like the iPhone and Android phones and the iPad. Think about the tremendous innovation that applied math has brought to media optimization and the implications of taking that same technology to TV video and eventually offline transactions. Think about the new and unique data sets like the social graph, location-based services and the set top box. The sky is the limit. The marketplace will consolidate and it will simplify. The maturation of the marketplace will drive both efficacy and efficiency of interactive advertising. So why be satisfied with $50 billion when $100 billion sounds a lot nicer. That’s my “call to action” to the IAB members.
  • And just in case you are having trouble sizing the 9 figures that is $100 billion, some helpful relativity. $100 billion buys you: One year of Obamacare One year of war in Iraq and Afghanistan $100 billion is the total bank bailout by the FDIC (and therefore you and me) or you could purchase slightly over half the outstanding stock of Google (if you didn’t have to pay a premium By the way, for the same amount of money you could buy ALL the stock at market prices of: News Corp. + CBS + Time Warner + The NY Times + Gannet + Washington Post and several other newspaper companies. Which is why we are all in the digital sector! I don’t know about you but with the possible exception of the Google stock, I’d rather spend the money in interactive advertising.
  • In case you are not familiar, GCA Savvian is a leading investment banking firm with deep knowledge of the digital media sector. We are a global firm that has advised on over $60 billion in transactions in the last four years and our digital media practice includes clients both old and new. In a world of transaction-oriented bankers, we try to differentiate by thinking like a principal and acting as a trusted advisor to our clients.
  • Commentary on 2009 IAB-PwC Internet Advertising Revenue Report

    1. 1. 2009 Internet Advertising Revenue Report Rethinking the Market Opportunity April 7, 2010 Terence Kawaja GCA Savvian Advisors
    2. 2. CAGR = 12% Notes: Source: IAB / PricewaterhouseCoopers internet advertising revenue reports. Interactive Advertising is on a Long Term Growth Path…
    3. 3. Media Consumption vs. Ad Spend, 2009 Notes: Source: Wall Street research, 2010. (1) As a percentage of ad spending on the media channels indicated above only: TV, Newspaper, Radio, Magazines and Online. … But Has Much More Upside Potential
    4. 4. The Crowded Display Ad Tech Landscape
    5. 5. Deals are Back and Consolidation is Coming Recent Digital Media Acquisitions: Global Tech Transactions $10MM - $1.0Bn (1) Notes: (1) Source: FactSet as of 2/28/10; Includes global announced acquisitions in the specified range of transaction sizes; excludes minority investments, JVs etc.; includes all transactions with target in Electronic Technology, Technology Services, and Communications sectors as defined by FactSet. Transaction Volume ($Bn) Number of Transactions
    6. 6. Convergence in the Purchase Funnel Purchase Funnel Metric Example Companies CPM CPC CPL CPA Transaction Customer Search Lead Impression Sale Data
    7. 7. Going After the Elephant in the Room: TV <ul><li>Online video is currently a fraction of total TV and online spending </li></ul><ul><li>The holy grail is achieved when digital video is part of the television budget </li></ul><ul><li>Much of the media optimization techniques honed in online can be applied to TV audiences </li></ul><ul><li>Shift in agency dynamic and marketer mindset is key </li></ul>Notes: Source: VSS Communications, August 2009; eMarketer, December 2009. US Video & Display Advertising, 2009 ($MM)
    8. 8. Achieving the Holy Grail: Solving for Attribution <ul><li>Several links in the attribution chain are missing: </li></ul><ul><ul><li>Online to online (the last click phenomenon) </li></ul></ul><ul><ul><li>Online to offline </li></ul></ul><ul><ul><li>Offline to online </li></ul></ul><ul><li>Technology is improving data collection and analysis which will allow for the discovery of “digital footprints” </li></ul><ul><li>Once attribution is achieved, there is no reason all media cannot be optimized </li></ul><ul><li>Already, several interesting technologies have been deployed: </li></ul><ul><ul><li>TV set top box measurement </li></ul></ul><ul><ul><li>Mobile location-based services </li></ul></ul>TELEVISION DIGITAL RETAIL
    9. 9. Rethinking the Market Opportunity <ul><li>Forecasts show the interactive channel growing to $50+ billion in 5 years </li></ul><ul><ul><li>Represents an linear, evolutionary approach </li></ul></ul><ul><ul><li>The challenge is to think revolution, not evolution </li></ul></ul><ul><ul><li>How does interactive get to a $100 billion marketplace? </li></ul></ul><ul><ul><li>Think new definition for “interactive” to go beyond online </li></ul></ul><ul><ul><ul><li>Digitally-addressable video (aka TV) </li></ul></ul></ul><ul><ul><ul><li>Offline commerce enablement </li></ul></ul></ul><ul><ul><ul><li>Mobile </li></ul></ul></ul><ul><li>Several reasons for a revolution </li></ul><ul><ul><li>Innovation (eg. media optimization, real time phenomenon) </li></ul></ul><ul><ul><li>Simplification (less point solutions) </li></ul></ul><ul><ul><li>Consolidation (entry of larger players) </li></ul></ul><ul><ul><li>Attribution (eg. TV, offline retail) </li></ul></ul>
    10. 10. Putting $100 Billion in Perspective <ul><li>Healthcare reform for one year </li></ul><ul><li>War in Iraq and Afghanistan for a year </li></ul><ul><li>Cost of recent bank failures to the FDIC </li></ul><ul><li>A controlling stake in Google (at market) </li></ul>
    11. 11. GCA Savvian’s Digital Media Advisory Business <ul><li>Leading investment banking firm with over 200 professionals worldwide </li></ul><ul><li>Services include advice on mergers and acquisitions, private capital finance and restructurings </li></ul><ul><li>Advised on over $60 billion in transactions since 2006 </li></ul><ul><li>Advisor to media companies new and old </li></ul>TOKYO • SAN FRANCISCO • CHICAGO • NEW YORK • LONDON Terence Kawaja Managing Director +1 212.999.7082 [email_address] John Lambros Managing Director +1 212.999.7083 [email_address] Steven Fletcher Managing Director +1 415.318.3661 [email_address]