"We believe the next step for programmatic video advertising as an industry is to extend and standardize globally, make cross-device buying simple and measurable, and complement and integrate with TV."
- Tod Sacerdoti, BrightRoll CEO and Founder, discussing acquisition by Yahoo!
Yahoo! (YHOO) recently closed a $640 million cash acquisition of BrightRoll, the leading video advertising platform in the ad tech industry. The valuation, at 6.4x forward net revenues may appear full, but was consistent with the precedent set by Facebook (FB), which purchased the comparable LiveRail in the summer of 2014 for around $400-$500 million at an estimated multiple of just over 6x. A recent spate of consolidation at the larger end of the ad tech market comes in response to a number of issues raised in the ongoing evolution of the industry.
One such issue is the obvious fragmentation in the various forms (video, display, mobile) of online advertising. Advertisers seek the wherewithal to scale and thereby execute their buying decisions more efficiently through an aggregate of publishers. Platforms like BrightRoll and LiveRail make such scale readily available (indeed they often target larger publishers) and provide a ready-to-market avenue for the ambitions of acquisitive behemoths. Whereas smaller platform solutions (e.g. Adaptive Medias (OTC:ADTM)) are sustained organically, there exists a long precedent for the big tech giants to deploy capital from their M&A coffers once a threshold of critical mass draws their eye. There is usually observable synergy in that the buyer typically brings a stable of accessible publishers to immediately funnel into the acquired platform.
We have already explained here and here why video is the natural hub for consolidation. However, it is worth a refresh in the context of this discussion. The economics of video quite simply continue to outpace all other formats. Furthermore, 2015 promises to be a year where programmatic will feature more prominently. eMarketer estimates that video advertising will be worth $8 billion in 2015, with programmatic representing a discernible 28% or $2.1 billion. This expansion is partially attributable to direct forms of programmatic ad buying. A 'programmatic direct' strategy is more nuanced in that it preserves publisher margin at the higher costs of capital and content attributable to video. Prior reticence to use programmatic in a larger capacity is loosening as leading video platforms find ways to integrate and articulate support for premium content at acceptable economics. An example of such yield management is the revamp of the auction/bidding process to flatten out the hierarchical features that often left bargain hunters shopping programmatic offerings at the tail end of bids.
Successful video advertising platforms like BrightRoll not only defragment the industry landscape, they also leverage the device continuum through which online content is accessed. Cross-device capability has become so important to the advertising equation that Facebook saw fit to recently launch a service for its advertisers to measure cross-device conversion. The logic is that advertising audiences readily move among mobile, tablet and desktop/laptop in a manner that advertising conversions often lag initial impressions and show up on other device. Yahoo! made clear that such capability was absolutely necessary when it cut the BrightRoll deal. There is simply no getting around this essential feature in any viable video ad platform.
So what of the bells and whistles? If cross-device should be taken as a given, what accounts for the premium aspect of the multiple that Yahoo! paid? The truth is that the Yahoo! in-house publisher network has been somewhat flat in recent years, with video heretofore remaining a nominal component. A BrightRoll acquisition allows Yahoo! to breathe some life into its own ad network while layering in a scalable addition to its third-party ad business. The moral of the story is that the tech is not worth much without the presence of a buoyant network. Smaller operators like Adaptive Medias can resolve to ascend to the levels of a BrightRoll or LiveRail if they can sustain early platform adoption success (280% in Q3) to scale into a discernible network of significance in the broader market.
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Disclosure: The author is long ADTM. Business relationship disclosure: The article has been written by one of William Nichols & Associates’ investment associates. William Nichols & Associates is not receiving compensation for it. William Nichols & Associates has no business relationship with any company whose stock is mentioned in this article.