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.”

Tolman Geffs, co-president of media investment banking firm JEGI, is even less forgiving in his assessment of the multitude of SSPs, DSPs, DMPs (supply-side platforms, demand-side platforms, data-management platforms), attribution firms and targeting companies: “These companies don’t make any money, and as a whole the industry doesn’t make money. You have to ask, ‘Why isn’t this industry running on its own fuel?’ I tell my kids, just because you can do something doesn’t mean you should. VCs are funding these companies, and the jury’s out if their products even work.” To test that out, Geffs recently checked his own profile using a product of one of the top Web ad-targeting companies and found himself listed as a 20- to 29-year-old woman. (For the record, he isn’t.)

The bigger problem, Geffs argues, is that most of the companies in the ad tech space are valued like software companies, which can be licensed to multiple businesses and quickly scale. Rather, most ad tech firms operate like marketing services firms, which require bodies and manual labor.

As one VC describes the landscape: “One company is making 20 million and losing 10. Another is making 40 and losing 15, another making 80, losing 20. The list goes on and on. They are not profitable unless they drive an enormous number of transactions. But that only works for the biggest companies with economies of scale—like, say, Google. But these companies get valued on dollars handled, not revenue.”

Ralph Terkowitz, general partner at ABS Capital Partners, says Web publishers should ask themselves: “Can you make me some new money, or are you just a new tax?” In too many cases, publishers feel shaken-down rather than enhanced. “If I’m a publisher, I have to be less than impressed with the value created,” says Troy McConnell, AudienceFuel CEO.

One veteran investor admits, “When we were raising money in ad tech, I knew we were making it worse for publishers.”

And it’s not getting any better. “With all the non-working media costs, $1 earned can easily become $3 in costs,” says Joe Apprendi, CEO of Collective. As Doug Weaver of digital sales consultancy Upstream puts it, “The page view/ad impression economy is in full retreat, if not freefall.”

For an explanation of how, exactly, that happened, consider SSPs. Most major Web publishers have tested SSPs, which promise to improve their secondary ad sales, and many have been dissatisfied. “We kind of invented the SSP,” says AppNexus CEO Brian O’Kelley, who co-founded Right Media in 2003. “It had a lot of unintended consequences.”

According to a recent Forrester study examining the impact on pricing for publishers employing the SSP PubMatic, those publishers’ CPMs climbed from 60 cents to 81 cents. While 35 percent growth would seem impressive, the fact is that for most struggling Web publishers, it’s hardly reason for a parade, particularly considering that most vendors in the space take cuts of 15 percent.

“You see these companies making money off of other people’s value,” says Mike Leo, CEO of Operative. By his estimates, $561 million has been pumped into SSPs and ad networks alone, with just $93 million being invested in creative services. Little wonder, then, that DR rules.

Publishers are reluctant to talk about their ad tech experiences on the record, but many privately describe having dramatically cut their lists of third-party partners. As New York Times Co. CFO James Follo said during an earnings call a few weeks ago, “Standard Web-based digital display advertising has been experiencing challenges, including a glut of available ad inventory and the resulting downward price pressure, as well as a shift toward ad exchanges, real-time bidding and all the programmatic buying channels that allow advertisers to buy audiences at scale, including through platforms owned or operated by Google and Yahoo.”

Churn is rampant among publishers using tech vendors like Rubicon, Quantcast and others (update: Quantcast claims its churn rate is less than 1 percent). “We use them, but not much,” says Jim Spanfeller, CEO of Spanfeller Media Group. “We test them all against one another,” adds Mike Fogarty, svp, global group publisher of BabyCenter. “We’ve tried Rubicon, PubMatic, Admeld—they didn’t make us a dime more,” Fogarty says. “We’ve been hard-pressed to find a third party that can bring me more value than working directly with brands.”

BabyCenter may be unique in that the site isn’t swimming in inventory like, say, a portal would be. In many cases, 50-cent CPMs may be better than nothing. But that certainly wasn’t the idea when all these companies arrived on the scene.  When it launched, the SSP The Rubicon Project (with $42 million in funding) published a manifesto heralding a revolution. “If we can return the power to the publishers, content will flourish,” it proclaimed.

Rubicon’s founder and CEO Frank Addante defends his company’s impact, arguing that most sites have been able to hold their pricing levels during a period in which supply was ballooning. “We’ve seen this industry head toward becoming a $50 billion ad market in part because of ad tech,” he contends.

These days, Rubicon likens itself to Sabre, the transactional software employed by the airline industry. Its focus is efficiency, not yield improvement—which hardly feels revolutionary. But at the same time, Rubicon boasts that its “network” is larger than Google—even though Rubicon is not a network.

Many ad tech companies do the business-model shuffle. Data exchanges like BlueKai ($35 million in funding), once believed to be revenue rocket ships, have morphed into data-management platforms, adding to what IAB CEO Randall Rothenberg has coined the industry’s “technical gobbledygook.”

DSPs buy up DSPs, then disavow being DSPs. What does this morphing do? For one thing, it breeds much distrust. When a company like Quantcast (over $50 million in funding) arrives on the scene, touting itself as a better comScore, it suddenly becomes an ad sales player itself, and many publishers feel double-crossed. “Obviously we’re not doing a good enough job communicating what we are,” admits Quantcast’s CEO Konrad Feldman. “We are an ad measurement company and an ad seller.”

Regardless, there’s been a backlash against the promise of online targeting, which boasts of scientific precision and perfect lookalikes. Andy Atherton, svp, strategic accounts, AppNexus (and co-founder of the former branding-oriented network argued that a slew of advanced targeting firms have become experts at packaging solutions that don’t actually address real problems. But busy 24-year-old media planners are susceptible to their simplicity. He used the example of an ad tech firm promising a peanut butter advertiser the ability to reach millions of customers who only use peanut butter for recipes, rather than sandwiches. This projection, according to Atherton, was based on a very small data sample. “Why not just target women?” Atherton asked. “This is all about a tech push rather than a customer pull.”

It seems nowhere is the disappointment and distrust more acute that in the ad exchange space. According to Piper Jaffrey, 70 to 80 percent of ads sold in exchanges such as Google’s AdEx are not even viewable because they are delivered below the fold, meaning they don’t actually appear on a user’s screen. (Some claim the figure is closer to 90 percent). Then, comScore recently reported that non-human traffic on the Web jumped from 6 percent to 36 percent this year. Surely the bots have found a way to exploit the ad exchanges. According to buyers, companies such as AlphaBird create bogus content sites like, or other fraudsters build sites like, then flood the SSPs and exchanges with millions of robot-generated impressions over short bursts of time. Yet neither the exchanges nor VC-backed verification companies like DoubleVerify ($46.5 million in funding), are able to detect the bogus activity.

Google, which labels its exchange as “premium,” has introduced its own verification tools. The company has also become very active in pushing the viewable impression cause, working closely with groups like the Association of National Advertisers the IAB and the American Association of Advertising Agencies the Making Measurement Make Sense initiative) to promote a new Active View standard—all part of the industry’s Making Measurement Make Sense initiative.

Says a Google spokesperson: “We've been fighting this fight since we acquired DoubleClick in 2007 and have invested a significant amount of time and money to do so. The truth is that the exchange industry has made huge leaps forward over the past couple of years both in terms of what is possible and how well it performs for buyers and sellers. It works as a model, this is why we've seen the huge shift –both by publishers and marketers — towards programmatic buying. Through our platforms alone, the DoubleClick Ad Exchange and DoubleClick Bid Manager (formerly Invite Media), we've seen the number of impressions double over the past year."

Then there’s the recent dustup over Sambreel, a malware company that sneaks software onto user’s desktops, then places ads from the likes of Ashley’s Furniture and American Express on unwitting sites like and YouTube. Sambreel maintains over 20 corporate identities on the Web, including Blankbase and mySuperCheap, blasting 50 to 100 billion impressions into the ecosystem via ad tech firms PubMatic and Rubicon Project—as well as via Google’s own Invite Media platform (indirectly, as Invite doesn't work directly with publishers). Both Rubicon and PubMatic have cut Sambreel off, but only after buyers cried foul. What’s to stop this from happening on the exchanges? Well, according to a case study conducted with the firm Media6Degrees, Google has a handle on such issues. “Google actually has a very clean exchange,” says Andrew Pancer, COO, Media6Degrees. "But buyers need to be extremely diligent in the space.”

Sure, but the upshot is that all the ad tech safeguards in the world seem to be falling short. “This [incident with Sambreel] was obviously not a healthy thing for the ecosystem,” admits PubMatic’s CEO Rajeev Goel. “But we think this was a small, isolated thing. We only work with premium publishers.”

Not everyone would characterize the problem as small or isolated. “Digital marketing is really ripe with fraud, bad actors and other sorts of pestilence,” says Digilant CEO Ed Montes. “Big brands know this, as do publishers, and that is why the money isn’t matching the time spent on the medium. What happens if ad supported models can’t sustain real content producers?”

Naturally, others disagree with this point of view, and about the value of ad tech. Says Luma partners CEO Terence Kawaja, “Brand dollars might not be coming, but instead of aiming for that billion-dollar branding market, publishers can and should focus on the trillion-dollar commerce opportunity.”

Others think publishers should stop decrying ad tech and start embracing it. Mark Westlake, CEO of TechMediaNetwork, urged publishers to see exchanges as testing grounds.

“Publishers have to be more clever,” says David Kenny, CEO of The Weather Co., who points to a recent campaign for the retailer Burberry that delivered ads based on current weather conditions.

“There will be winners and losers in this space,” adds Ned Brody, CEO of AOL’s “But we absolutely have publishers in our company where the yield is going up from RTB.”

Vivek Shah, CEO of Ziff Davis, tends to agree with that Darwinian take. “This is an incredibly liquid market,” he says. “And not all content has marketing value.”

The fact is, some publishers are becoming more open to ad tech. For example, The Wall Street Journal Digital Network just launched a private exchange with Rubicon. “We’re dipping our toe,” says the Journal’s digital sales head Mark Fishkin. “More and more impressions are being sold this way, and we’re getting business form accounts that normally wouldn’t’ give us a look.”

And naturally, there are VCs who defend the investment wave, arguing that this is how it works: You make a lot of bets, and a few hit. Others pivot or perish.

“VC has a history of flooding areas that have value with a lot of money,” says Joe Medved, partner at Softbank Capital. “But if we didn’t see businesses growing, if brands didn’t see value, we wouldn’t see that in ad tech.” Medvev expects still more investment, as video and particularly mobile heat up.

Moving forward, one can expect the industry to continue to rally around the idea of selling only viewable impressions. Many believe that will reduce supply and make it tougher on all the cheaters. “If the market responds as it should and buys fewer shitty banners, publishers will get pressure from buyers to create more ad spaces that get seen for longer,” says Greg March, media director at Wieden + Kennedy. “Hopefully some will.”

What happens to the growing crop of ad tech firms? “The investment we saw in ad technology was critical over the last five years,” says Eric Picard, CEO of Rare Crowds. “But the pace was too fast, dumping massive amounts of money into too many companies in the space over too short of a timeframe. So we’ll see significant consolidation over the next few years of lookalike investments, probably not at great investor returns.”

Jeremy Hlavacek
, vp, strategy and business operations at Varick Media Management, concurs: “A lot of familiar names are going to reappear in this environment to make buys. Think Google, Yahoo, Microsoft and AOL.”

When the dust settles, one player looks to be the big winner in all this—the one company to which everybody in Web publishing balks at giving still more power. The VC-funded ad tech space will have been essentially free R&D for Google.

As Spanfeller sees it, “They probably win in the end.”