DIGITAL MARKETING HUB v2.0 - AdExchanger

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Digital Marketing Hub <strong>v2.0</strong> BMO Capital Markets dia access control (MAC) address and obfuscates or “hashes” the number to ensure anonymity. Other potential solutions are also being attempted by start-ups such as Mobile Future Group’s AD-X or MobileAppTracking, which use proprietary technology to primarily help provide app download attribution. Mobile attribution plays a highly important role in cross-channel attribution. Because it’s the fastest growing category of IP devices, mobile is a vital piece of the holistic view of consumers. Over time we expect more integration between mobile attribution solutions and other cross-channel initiatives like Nielsen’s Cross-Platform Campaign Ratings, which aims to bring common measurement to television and online video. Watch Your Wall Street Analogies As programmatic buying has come to advertising, many in the industry are looking to Wall Street for a template; however the comparisons have their limits. With the industries largely based in the same metropolitan hubs – starting with New York and London – and many similarities in their marketplaces, the association is fair. For example, both industries saw the rise of scalable, self-service business models early in the internet era. While Google’s AdWords also created an entirely new type of advertising, like E*Trade, it aimed from the outset to be easy-to-learn, and improved over time as power users developed. Furthermore, investment banks and agencies play similar roles. Both offer scaled business services to augment their clients’ in-house staff. Both traditionally make most of their fees from Fortune 1000 companies, giving advice on capital allocation, design of financial products/advertising creative, and execution of transactions. In part because of the investment banking business’ shift to trading-driven business models, many in the advertising industry are talking about ideas like proprietary trading. Seeing as they are the most visible, stock markets are often where comparisons are drawn; commodity futures are a better fit, but still not great. Both stock and commodity futures markets are much, much larger than the global advertising market and have significantly better transparency, with real-time pricing data a foundation of both today. Where commodity futures are more similar than stocks is that ~75% of transactions are entered by humans and then traded electronically, while stocks see ~70% of volume traded over highfrequency and algorithmic platforms. Exhibit 7. Characteristics of Advertising vs. Stocks vs. Commodity Futures Advertising Stocks Commodity Futures Total market size ($ in billions) 468 63,000 ~100,000 Market transparency Low High High Volume proportions Mostly primary market Mostly secondary market Mostly secondary market Perishable inventory Yes No Sort of….contracts normally rolled over each month Transaction style ($ volume) Mostly human Mostly programmatic Mostly human Source: BMO Capital Markets, GroupM, World Federation of Exchanges A member of BMO Financial Group 18 June 7, 2012
Digital Marketing Hub <strong>v2.0</strong> BMO Capital Markets Perhaps the advertising industry would be better served by looking to the travel and leisure industry. Marketplaces for hotel rooms and air travel may offer more similarities than financial markets. The industries are comparable in size to advertising, all around half a trillion globally. Inventory in all three marketplaces is perishable. Like advertising, hotels and air travel often incorporate annual periods when large blocks of inventory are pre-sold, such as the television upfronts or corporate travel booking negotiations. And travel and leisure has also seen the onset of easy-to-use self-service models, as the Internet age has created Priceline, Expedia, and Kayak. Where the travel industry does differ significantly however is in number of total units, especially as advertising impressions experience hockey-stick like growth as IP advertising expands, especially social display ads. Exhibit 8. Characteristics of Advertising vs. Hotels vs. Air Travel Advertising Hotels Airlines Total market size ($ in billions) 468 358 554 Market transparency Low Medium Medium Volume proportions Mostly primary market Mostly primary market Mostly primary market Perishable inventory Yes Yes Yes Transaction style ($ volume) Mostly human Mostly human Mostly human Source: BMO Capital Markets, GroupM, International Air Transport Association and Smith Travel Research Lingering Questions Below we offer three questions that we’ve pondered throughout the writing of this report. Put simply, we don’t have good answers for them. One has been bouncing around the industry lately – the potential conflicts of agency trading desks – while the other two are longterm ones that won’t be answered for many years as the advertising and marketing ecosystem continues to shift toward IP communication platforms. In speaking with industry executives over the past several months, we’ve heard compelling arguments for and against them. While we’re short on concrete answers, we thought they would be helpful to share as investors consider the future of this dynamic industry. 1. Is the price per paid impression (functionally advertising pricing) in long-term secular decline? The increasing use of IP communications and platforms like social networks is pushing the industry toward infinite ad inventory. This massive increase in supply is the underpinning of the notorious “analog dollars to digital dimes” expression. Add to this the growth of free owned (like branded mobile apps) and earned media (like branded social network presences) and marketers have the opportunity to put their brand in front of consumers for free like never before. 2. Does the percentage of time spent with a given medium versus that medium‘s percentage of total advertising spending even matter? The shift of ad dollars A member of BMO Financial Group 19 June 7, 2012
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