Ad Wreck

VC-backed ad tech firms have arguably inflicted one big mess on digital advertising


Blame Mary Meeker. Definitely blame Google. And most of all, perhaps, blame MySpace.

Whoever’s fault it was, somewhere around the mid-2000s many people got the idea there was an enormous gap between time spent and dollars spent on the Internet—and that gap needed to get filled in somehow. They likely got the idea from Meeker, a well-known venture capitalist in Silicon Valley known for her much-anticipated Internet Trends presentation each year. Then Google set the expectation that ad-supported Internet businesses can have hockey-stick growth. And thanks to MySpace, the idea emerged that every single page view rendered can and should have an ad—or lots of ads—attached to it.

Given those conditions, the venture capital community couldn’t help itself. The ad tech gold rush was on, unleashing a wave of ambitious promises. You could buy real people not websites, the argument went. You could optimize everything. Exchanges would make the Web just like Wall Street. Machines would buy your ads in real time with absolutely zero waste. Just write “algorithm” in your business plan, come up with a three-letter acronym, and millions will follow.

Meanwhile, look where the online ad industry finds itself today. Trade organizations and industry leaders are practically crying out for brands to reconsider the Web. (“Where are all my TV dollars?”) Giants like Facebook and Google decry the click as the industry’s original sin. (“We need to think like TV!”) Meanwhile, the money keeps flowing in. The infamous Luma Partners PowerPoint slide, which tracks the glut of ad tech firms, can barely fit all the company logos.

Yet most brand advertisers continue to sit on the sidelines, not to mention premium publishers who are more than a little disappointed in this mess—a confusing, overloaded mess, in the estimation of many in the digital world.

It sounds counterintuitive that loads of cash threatens to harm an industry, but a growing chorus complains that VC dollars have, in fact, done more harm than good to online advertising. Consider the numbers. According to the Interactive Advertising Bureau, 67 percent of online spending during the first half of this year went to performance ads as opposed to branding ads, up from 65 percent in 2011 and 62 percent in 2012. Clearly, direct response dominates.

Then there is the issue of real-time bidding, which has enabled audience-based buying to take hold. The result is a massive 40 percent pricing contraction over the last year, according to Mark Zgutowicz, senior research analyst at Piper Jaffray. Speaking at an online marketing conference last month, Jaffray said that premium CPMs had slipped from an average of $7 or $8 to $4 or $5. Not only has there been 100 percent growth in supply, he pointed out, but also the net effect of RTB has been lower prices. Jaffray predicts that next year, CPMs will decline just 10 to 15 percent.

One would be hard-pressed to find the premium Web publisher getting rich from ad tech. But what about the advertisers and their agencies that have the upper hand in all this? “I’ve been arguing for some time that fragmentation or disruption is not good for this industry,” says Will Margiloff, CEO at IgnitionOne. “Marketers want simple; they don’t want more layers. And there is more money going into this space than there is in the actual space.”

“All this investment is predicated toward the lower funnel,” adds Adam Kleinberg, CEO of Traction. “It just feeds into this perception that it’s not for brands. Very few companies are adding value to the space. They are offering just different flavors of very similar solutions. The ‘Lumascape’ has become a meme because it is nonsense.”

Mike Cassidy, CEO of Undertone Networks, says, “If you ask a marketer, click-throughs are lower than they’ve ever been. All this audience targeting, retargeting, etc., maybe makes things a little better, but overall it’s been pretty, pretty miserable.”

Even investors are crying foul. “CPM-based advertising is broken,” says Daniel Klaus, CEO of K2 Media Labs. “There has been so much money wasted, and it continues to be wasted in this space. When it comes to ad tech, there are very few signs that it is really working.”

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