internet advertising trends - 2013 internet advertising trends...headwaters spoke to over 150...

Internet Advertising Trends - 2013

Mark R. Langner"Managing Director – Industry Analysis

January 2013

Contents

1.  Summary

2.  Internet Industry Statistics – Internet Growth Shifting To Emerging Markets and Asia; Mobile Data Consumption Driving Importance of Mobile Strategies; Mobile is Growing at Expense of Desktop Usage in U.S. and Europe; Mobile’s Importance Grows as Users Sift from Desktop to Mobile; Social Media’s Importance for Internet Advertising is Established…; As Social Media Has Become Nearly 20% of Time Spent On-Line; Search is Changing – Becoming More Local and Mobile.

3.  Internet Advertising Market Figures – Internet Advertising Has Grown Rapidly…; And is Projected to Continue Growing Rapidly; Digital’s Share of Worldwide Ad Spend Will Rise; Mobile Advertising Market Needs to Catch Up to Usage; Which Means Expect Mobile’s Share of Spend to Grow Fast.

4.  Key Internet Advertising Industry Trends – Making Sense of the IA Landscape; Headwaters’ View of IA Landscape; The Basics (Search and Direct Response) – Still Lots of Opportunity; Search – Many Advertisers Still Struggle With The Basics; Direct Response Continues to Be Important – But Harder; Long-Term – Search and DR are Foundations for Success; Publishers – Tool Up, Adapt, or Die; More Analytics = Better Performance?; Importance of Attribution and Transparency; RTB is Growing Rapidly – Is this Good or Bad?; RTB – Our View and Outlook for the Future; What About the Long Tail?; Mobile – Convergence and Divergence; Will Brands Ever Go Digital?; Why Brand Dollars Will Eventually Move to Digital.

5.  Internet Advertising and the M&A Trends for 2013 – Internet Advertising M&A Volume Remains Steady; VC Investment in IA Declining Rapidly; The IA Landscape, Investment and Consolidation; Where Do We Expect Continued Investment?; Where Will Consolidation Come First?

SUMMARY"

Section 1

Summary

Headwaters spoke to over 150 Internet Advertising companies in preparation of this report. A summary of the trends we are seeing is as follows:

1.  Overall Internet Advertising growth remains strong as Internet Advertising takes share from traditional advertising

2.  Mobile is changing the landscape – yet is still, in many cases, separate from other web IA approaches and solutions.

3.  Social media's importance for Internet Advertising is established – how to effectively deal with it is still a question mark for most advertisers

4.  Search is becoming more local and mobile

5.  Current view of the Internet Advertising landscape is overly complicated - it's not that hard!

6.  Unless you offer neutral data and tools, you are not going to be able serve both publishers and advertisers effectively!

7.  We are still early in the maturation of the sector

8.  Customer sophistication is still early – even the most successful advertisers "get it less wrong!” to a degree

9.  Search and DR remain the foundations for successful internet advertising campaigns – but no longer stand alone

10.  Big data, social and mobile driving richer data sets enabling advanced analytics

11.  Attribution & Transparency will be hot in 2013 as customers drive for better ROI

12.  Publishers - Tool Up, Adapt or DIE

13.  RTB is hot now - but winners must evolve quickly as publishers and advertisers become more sophisticated

14.  Brand dollars still sitting on the sideline (mostly) but change is coming

15.  M&A remains steady but multiples likely pressured in 2013 due to scale and overfunding

INTERNET INDUSTRY STATISTICS""

Section 2

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Internet Growth Shifting To Emerging Markets And Asia •  2.26 B Internet Users •  72% Growth During Last 5 Years

•  Europe & U.S. Approaching Saturation •  Continued Strong Growth in Asia & Emerging Markets

Asia

Asia

Europe

U.S. & Canada

Mid-‐East

Africa

La9n America

Oceania

Rapid Growth/Low Penetra9on

Slower Growth/Approaching Satura9on

1.0B Internet Users -‐ 2011 99% Growth 2007-‐2011 27% Internet Penetra9on

139mm Internet Users -‐2011 215% Growth 2007-‐2011 13% Internet Penetra9on

501mm Internet Users -‐ 2011 25% Growth 2007-‐2011 68% Internet Penetra9on 273mm Internet Users -‐ 2011 15% Growth 2007-‐2011 79% Internet Penetra9on

Source: ITU, United Na3ons, US Census Bureau, GfK, and www.internetworldstats.com

Mobile Data Consumption Driving Importance Of Mobile Strategies

Mobile Internet Usage Exploding; e.g., AT&T Mobile Data Usage Up 8,000% in Four Years

2007 2008 2009 2010

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10B

15B PB

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th

Source: AT&T

Mobile Is Growing At Expense Of Desktop Usage In U.S. And Europe

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Internet Traffic

North Am

erica Internet Users (in millions)

3% CAGR

In Established Markets Mobile/Internet Shift is Net Sum Game; U.S. User Growth at 3% CAGR; Mobile Share of Overall Internet Traffic Growing at 88% CAGR

Source: ITU, United Na3ons, US Census Bureau, GfK, www.internetworldstats.com; StatsCounter Global Stats

Mobile’s Importance Grows As Users Shift From Desktop To Mobile

Internet Use Shifting from Desktop to Mobile; Mobile Now 10.3% of Worldwide Internet Traffic

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Social Media’s Importance For Internet Advertising Is Established…

Unsurprisingly, Adoption of Social Media is Huge; Facebook Dominates

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Facebook User Growth

Mon

thly Ac9ve Users (in millions)

Other Social Networking Monthly Ac9ve Users*

TwiYer 465mm LinkedIn 161mm** Instagram 40mm Pinterest 14mm***

Source: Facebook, TwiLer, LinkedIn, TechCrunch, AppData, comScore

* As of 5/31/12 ** As of 3/30/12 *** Includes only “Facebook Connected Users”

Facebook Reaches 83% of American Internet Users

… As Social Media Has Become Nearly 20% Of Time Spent On-line

Social’s Share of On-Line Time Continues to Grow; Now Estimated as high as 25% of Time Spent On-Line

6% in 2007

19% in October 2011

Search Is Changing – Becoming More Local And Mobile

Local Search is Growing; Mobile is Key Driver and Poised to Overtake Desktop for Local Searches

Source comScore, BIA Kelsey

INTERNET ADVERTISING MARKET FIGURES

Section 3

Internet Advertising Has Grown Rapidly…

Internet Advertising Market Growth Has Been Robust; 20.3% CAGR

Source: IAB

… And Is Projected To Continue Growing Rapidly

Spending on Internet Advertising is Expected to Nearly Double in Next Three Years

Source: Through 2011 (IAB / PwC), 2012 data thereaZer (eMarketer, September 2012) Figures include adver3sing formats on desktop, laptop, mobile phones and tablet pla\orms

Digital’s Share Of Worldwide Ad Spend Will Rise

Growing from 20% to 25% Over Next Four Years

Source: eMarketer

Mobile Advertising Market Needs To Catch Up To Usage…

There is Material Upside Opportunity for Mobile Ad Spend vs. Current Levels of Mobile Usage

Source: KPCB, eMarketer (1)  IAB (2011) (2)  Assuming Internet and mobile ad spending share equivalent to respec3ve 3me spent share

…Which Means Expect Mobile’s Share Of Spend To Grow Fast

Mobile Advertising is Expected to Grow at Much Faster Rate than Other Formats

Source: Comscore, BIA Kelsey

KEY INTERNET ADVERTISING INDUSTRY TRENDS

Section 4

Making Sense Of The IA Landscape

This is NOT a Sustainable View of the Market!

Making Sense Of The IA Landscape (Cont.)

Current View of the Landscape is Overly Complex •  Talk to enough of these companies (100+ in our research) and what they do starts to bleed together

Complex Industry View Requires Unnecessary Differentiation •  Venture capital has overfunded the sector, requiring companies to slice the pie ever thinner to differentiate •  Given that this is an industry of “Marketers,” tendency to creatively create distinctions where none are required

•  When you speak to customers at the industry trade shows, they are confused by the attempted differentiations

Ultimately Many of these “Companies” are Actually Products or Point Solutions •  Not enough market demand in many of these sectors to support 8-10 companies •  Expect continued consolidation as leaders assemble more complete solutions

“Any fool can make something complex. It is hard to keep things simple.” – Sir Richard Branson

Or if you prefer old-‐school:

“Any intelligent fool can make things bigger and more complex… It takes a touch of genius – and a lot of courage to move in the opposite direc3on.” – Albert Einstein

Headwaters’ View Of IA Landscape

Market is Coalescing Around 5 Key Functions •  First is a split between buy-side and sell-side, with companies serving the unique needs of publishers and advertisers

•  Second is split between enabling technologies (analytics, management and decision tools) & efficiency technologies (exchanges and transaction management) focused on the needs of either advertisers or publishers (but not both!)

•  Last is a set of neutral data sources and data management tools that can serve both sides of the market

A More Simplified View of the IA Landscape:

Analytics, Management and Decision

Tools

Exchanges and

Transaction Management

Exchanges and



Tools

Neutral Data and Tools

Buyside -‐ Adver9sers Sellside – Content Publishers

The Basics (Search And Direct Response) – Still Lots Of Opportunity

“The reality is that we are s3ll at the top of the third inning when it comes to the development of AdTech companies” – John Batdorf, Managing Director and Head of Internet Adver3sing Banking, Headwaters MB

“At this point, the smartest and most successful adver3sers are crea3ng tremendous value for themselves by preLy much gehng it ‘less wrong’ than their compe3tors” – AdTech Industry Guru

We are at the Hihng the Side of a Barn Stage

Search - Many Advertisers Still Struggle With The Basics

Partially Because the Concept of “Basic” has Become More Sophisticated •  It is no longer okay to just be in the digital arena

•  Competition for digital real estate has squeezed out the “easy” gains •  Simple approaches that may have worked two years ago are no longer

sufficient

Successful Search Strategies Must Encompass Both Organic and Paid Search Strategies •  This highlights the growing importance of SEM/SEO tools and effective

strategies for deploying search dollars •  According to one CEO, roughly 50% of their search customers have

significant room for improvement over their current strategies •  Organic search is still critical – especially as the costs for paid search

have risen •  Quality of data – and ability to combine public and private data – will

be important going forward

Direct Response Continues To Be Important – But Harder

DR has Become More Complex •  Tools to understand attribution that drive ROI are key

•  More sophisticated advertisers are working to integrate DR with on-line branding efforts

Social, Mobile and Video Pose Challenges to Managing DR Campaigns •  Still on the learning curve - applying traditional web metrics to these

different formats has proven ineffective •  Growing complexity of user behavior in the digital environment has

brought similar complexity to what constitutes an effective campaign

More Complexity = More Tools = More Need for Resource for Advertisers •  Challenge for SMB to keep pace

Long-term – Search And DR Are Foundations For Success

In Future, Search and DR Will Be Cornerstones of More Complex Multi-Channel Strategies

Various “Silos” Of Internet Advertising Solutions Need to Breakdown Eventually •  In future the sophisticated will evaluate ROI across various digital opportunities •  Data from successful search and DR campaigns will inform other complementary efforts, e.g., mobile, local, social, digital branding, etc.

This is not a 2013 Market – Though May Influence Some 2013 Acquisition Activity As Companies Position Themselves for this Market in 2014-2015

Established Search and DR Players With Their Vast Data Experience and History Will Be Central to Breaking Down the Silos •  Data ownership or ability to enable customers to harness proprietary data will be a differentiator

Publishers - Tool Up, Adapt Or Die

Publishers Continue to Lag in Adtech “Arms Race”

Publishers Continue to Get Short End of Stick in Market •  Few have power of large advertisers •  Adtech business models such as “neutral exchanges” or RTB players that sit

between advertisers and publishers have been been able to exploit publishers

Publisher Control Over Inventory Limited at Best •  Symptomatic of market where value of content is generally unknown

•  Makes getting proper value for content difficult •  Purchasing tools in this environment difficult but necessary

Publisher Business Models Need to Change In Order to Best Take Advantage of the Potential •  Print-oriented business and sales model ineffective in digital marketplace •  Potential of digital formats not fully exploited in content creation

•  Using adtech tools to understand value and ROI of content in discrete units (e.g., pages, stories, clips) will become a critical survival skill

•  Understanding and delivering highest value audiences to advertisers within the framework of an editorial “voice” will be hallmark of top publishers

•  Glut of content will begin to become rationalized, discrete and fluid – true high value content will be quantified and increase in value as a rare commodity

•  Low value content will go wanting for revenues

More Analytics = Better Performance?

Big Data, Social Media, Mobile Use – All Are Driving Bigger and Richer Data Sets

Tools and Capabilities Built Upon These Data Sets Are Getting More Sophisticated •  Quality of data is becoming paramount •  Data management is becoming paramount – not just plumbing •  Cross channel and cross format analysis raises the bar further

The Implication of More Advanced Analytics is the Attendant Complexity They Bring •  How this plays out is still undetermined •  This could create limits to growth - do tools built on these analytics need to become more programmatic to be more “accessible”? •  Do advertisers need to change the way (and personnel) they use to maximize digital marketing and advertising opportunity?

Importance Of Attribution And Transparency

Attribution and Inventory Transparency Will Be Very Hot Topics for 2013

Attribution and Viewability are Big Issues for Advertisers •  As much as 3/4ths of inventory may not be viewable •  Even in search “last click” is quickly becoming seen as

inadequate for properly determining advertising effectiveness

•  Attribution issues become even more complex as brand is integrated with search and DR

Lack of Transparency in the Digital Exchange/RTB Environment is an Issue •  Inability of publishers and advertisers to discern between

content means artificially low prices for quality content and artificially high prices for content of little or no value

•  Pressure on exchanges to provide more transparency will pressure the arbitrage opportunity between ad buyers and sellers

Image Source: GanneL

RTB Is Growing Rapidly – Is This Good Or Bad?

Advertisers, Publishers and IA Companies Will Not be Able to Ignore Impact of RTB. •  RTB Continues to Grow in Importance to the Overall Display Market – Projected to be Nearly 1/3rd of Display Advertising by 2016

Note: includes all display formats served to all devices Source: eMarketer, Nov 2012

RTB: Our View And Outlook For Future

Easy Answer: Good for Advertisers, Bad for Publishers

Real Answer – WAY More Complex

RTB is Riding High •  Fast Growth •  Solid Margins

•  More Inventory Moving into RTB Markets

RTB Risks •  Increased Competition Driving Potential Margin Compression •  Emergence of Private Exchanges to Siphon Off Easy to Mark-Up Quality Content

•  Increased Scrutiny of RTB Inventory by Advertisers

Expect the RTB Market Begin to Change in Next 18-24 Months

RTB is on a Roll – How Long Until All The Easy Money is Made? •  A Tougher Market Will Separate Winners and Also-Rans

We Think Winners Will Need Good Analytics AND Scale •  Presages Potential Market Consolidation •  Scale = Information… Information = Competitive Advantage in a Fast Moving Market

Days of RTB Players Serving Both Publishers and Buyers Are Limited •  Inherent Conflict of Interest is Not Sustainable – Advocates of Both Sides of the Transaction Will Emerge to Balance Market

What About The Long Tail?

Much of Power Offered by Internet Advertising Solutions is Utilized Primarily by Large Companies with Resources •  Scalable solutions that provide “actionable” solutions for small business – even mid-sized business are few at this point

•  In some cases, e.g., Paid search, things have gotten even more difficult as the “easy solutions” for small business have become more complex with competition for digital real estate

Many Players Have Either Pivoted Away from the Long Tail or Have “Future Plans” for a More Self-Serve, Scalable Solution •  Companies that we have spoken to have realized large companies are where the customers currently can be found •  This implies that the long tail is looking more 2014 than 2013

Local May Be the Exception - Ideally Suited to Many Small Business

Challenge Will Be Scalable Way to Sell Into This Group •  SMB solutions require low-touch on-line sales, easy install and “mass customization” to be effective

Mobile - Convergence And Divergence

Will 2013 Be The Year for a Mobile Advertising “Breakout”? – Probably Not

No Doubt that Mobile Is Becoming a Bigger Part of Overall Digital Advertising Market •  Eyeballs continue to move to mobile formats – both web and app –

dollars should follow •  Still there are significant challenges in finding effective mobile formats due

to screen limitations and different user behavior than web •  Role and function of mobile advertising in coordinated campaigns

Mobile Continues to Be a Unique Technology Requiring Unique Skillsets •  Traditional mobile/carrier expertise continues to be a valuable commodity

– particularly as the smartphone/web universe converges with the cellphone/SMS universe

The Concept of “Mobile” Continues to Evolve - Diverge •  Separation and segmentation between smartphone and tablet – some

solutions work for one but not other •  Voice and text are becoming adjuncts •  Role of local and location-based services important

Will Brands Ever Go Digital?

Conventional Wisdom is that Brand Dollars are Sitting on the Digital Side-Line – When Will They Get in the Game?

In the U.S. only an estimated $5-7 Billion Dollars are Spent on Digital Brand Advertising v. $100 Billion off-line

Brand is Less Than ¼ of the Overall Digital Advertising Spend •  Dollars are not yet following eyeballs

•  Brand dollars are looking for somewhere to go •  Just look ad rates and TV viewership - crashing but cpms exploding

2013 Will Still Be Early in Moving Brand Dollars to Digital – But There is Promise •  Mobile and video are more “brand friendly”

•  Brand advertisers are beginning to be more creative with digital to make it work for brand – it’s a more complex opportunity – shedding the TV/print media mindset will take time.

There are Still Challenges Though •  Attribution and ROI models for brand are nascent •  Scalability, reach and quality of digital inventory are all legitimate concerns

Why Brand Dollars Will Eventually Move To Digital

(1)

Television Viewership Is Down But CPMs Continue To Climb •  This represents the opportunity for brand dollars to follow eye-balls on-line

•  It also represents the challenge that digital advertising companies face in attracting brand dollars •  Conversations with advertisers and internet advertising companies point to us reaching a tipping point in the 2013-2014 time frame

INTERNET ADVERTISING M&A TRENDS FOR 2013"

Section 5

Internet Advertising M&A Volume Remains Steady

Source: 451 Group * 4Q 2012: through 12/6/2012 Number of deals includes deals with undisclosed transac3on values

VC Investment in IA Firms Declining Rapidly

Source: Capital IQ, PitchBook * 4Q 2012: through 12/6/2012 Number of deals includes deals with undisclosed transac3on values

The IA Landscape, Investment And Consolidation

Looking Toward 2013

Overall – Sector Has Been Well/Overfunded with Many at Lofty/Unsustainable Valuations •  Too many “me too” plays

•  Significant valuation gap in market overhangs M&A activity •  Lots of powder means many players will wait to exit

•  Sellers (and their investors) see themselves as “must have” and too often seek to “swing for fences”

On the Buyer Side – Some Issues with Size of Potential Acquisitions •  Traditional players looking for accretive acquisitions require scale that is

not available in most cases •  Buyers see most technologies in IA currently as too small or “nice to

have” with little motivation to act due out of competitive pressure

Expect Investors to Be More Conservative in 2013


Tools

Exchanges and


Exchanges and



Tools




Exchanges and



Tools

Buyside -‐ Adver9sers

More Investment


Tools

Exchanges and


Sellside – Content Publishers

Where Do We Expect Continued Investment?

Expect Publisher Side to Be More Active in Investments

While The Overall Trend Has Been Over Investment – Publisher-Side Still Lags •  Opportunities to develop and grow players in response to more developed buy-side •  Opportunities in both tools/analytics and transaction management portions of market

Expect More New Investments and Earlier Stage Investments


Tools

Exchanges and



Tools



Exchanges and


Early Consolida>on

Where Will Consolidation Come First?

Where We See/Believe There is a Need for Consolidation

Buy-Side Exchanges, RTB, Transaction Management Plays •  More established than sell-side, e.g., private exchanges •  Ultimately scale game – 2-3 big winners + niche verticals

Neutral Data Plays •  Scale and breadth of data key

•  Some room for niche verticals around highly specialized data – e.g., HIPPA compliant medical, etc.

Mark R. Langner"Managing Director – Industry Analysis""""Office: (415) 464-6322"Cell: (415) 994-0557"[email protected]"

Experience

Our bankers have deep personal experience completing transactions for companies in the technology, media and telecom space, including:

*Some transac3ons completed by Headwaters team members on prior pla\orms

Disclosure: This newsleLer is a periodic compila3on of certain economic and corporate informa3on, as well as completed and announced merger and acquisi3on ac3vity. Informa3on contained in this newsleLer should not be construed as a recommenda3on to sell or buy any security. Any reference to or omission of any reference to any company in this newsleLer should not be construed as a recommenda3on to buy, sell or take any other ac3on with respect to any security of any such company. We are not solici3ng any ac3on with respect to any security or company based on this newsleLer. The newsleLer is published solely for the general informa3on of clients and friends of Headwaters MB, LLC. It does not take into account the par3cular investment objec3ves, financial situa3on, or needs of individual recipients. Certain transac3ons, including those involving early stage companies, give rise to substan3al risk and are not suitable for all investors. This newsleLer is based upon informa3on that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Predic3on of future events is inherently subject to both known and unknown risks, and other factors that may cause actual results to vary materially. We are under no obliga3on to update the informa3on contained in this newsleLer. Opinions expressed are our present opinions only and are subject to change without no3ce. Addi3onal informa3on is available upon request. The companies men3oned in this newsleLer may be clients of Headwaters MB, LLC. The decisions to include any company in this newsleLer is unrelated in all respects to any service that Headwaters MB, LLC may provide to such company. This newsleLer may not be copied or reproduced in any form, or redistributed without the prior wriLen consent of Headwaters MB, LLC. The informa3on contained herein should not be construed as legal advice.

About Headwaters MB

Headwaters MB is an independently owned, growth investment bank and advisory firm. Headwaters MB has transacted over $7 billion of middle market deals and has over $225 billion of deal experience from its 65 full-time senior professionals. Headwaters has a national office footprint in the United States, headquartered in Denver, with additional offices in Boston, Chicago, New York, San Francisco & Washington D.C.

Headwaters MB has a significant international track record, providing our clients with a global reach. Our team has generated significant revenue from cross-border transactions, has local advisory partners covering 27 countries and the firm has won “Cross Border Deal of the Year” awards twice.

The firm has an established reputation as quality service provider and trusted long-term advisor to clients with a history of process and transaction excellence.

The Headwaters TMT Team

Gary Moon John Batdorf Sun Jen Yung Head of TMT Banking Managing Director Managing Director 415-766-3862 (office) (415) 926-7454 (office) 203-992-1667 (office) 650-515-8734 (mobile) (415) 847-8805 (mobile) 917-297-8716 (mobile) [email protected] [email protected] [email protected]

Mark R. Langner Managing Director 415-464-6322 (office) 415-994-0557 (mobile) [email protected]

internet advertising trends - 2013 internet advertising trends...headwaters spoke to over 150...

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