Operative Blog

On Monday, November 7, I was fortunate enough to introduce a panel discussion at the IAB Ad Ops Summit on the topic of Consolidation and Operational Efficiency.  The audience consisted of Ad Operations leaders from a variety of different companies – large and small – and as a speaker, I was asked to provide content that would enable attendees to better, and more effectively, lead their organizations.

The panel was asked to address the following question:  Does the consolidation of the industry’s operating systems mean less complexity and more efficiency – or less choice, less competition, less innovation?

For me, there are three questions at the core of this topic:

1. Is consolidation really happening?
2. Should publishers have to choose between efficiency and innovation?
3. What is an operating system?

Is there Consolidation?

There certainly have been a good number of acquisitions in our industry, but innovation is also happening at a rapid pace.

Just look at the data…

For example, the number of IAB vendor members continues to increase.  Whereas there were 25 members in 2005, the number has climbed to 140 in 2011.  And the 2011 number is still higher than the 2010 number which cited 125 members.  Just last week, Brian Morrissey of Digiday mentioned in his “What if the Music stops in ad tech” article, that there are over 200 vendors listed on the LUMA Partners slide, and that’s just the display slide!  Here at Operative, the number of requests to integrate with our platform is three times what they were just two years ago.  These numbers and the activity in the space indicate to me, that consolidation is not happening.  The reality is that for every company that is bought, two to three are being created, and driving the need for solutions that solve very big problems.

So consolidation is just not happening, nor will it in the next five years, which means publishers cannot and should not rely on it to achieve operational efficiency.  In fact, M&A activity within the ad tech market is just getting warmed up.  While many people refer to the proliferation of solutions as fragmentation, a word with negative connotations, what they are really talking about is specialization.  In an industry that is changing as quickly as ours, a lot of individual innovators are required to help address the change.  We just need a way to manage it all, which brings me to my next question.

Everybody calls this Fragmentation. I call it Specialization.

Do YOU Have to Choose Between Innovation and Effectiveness?

The answer is quite simply NO.   You HAVE to do both.  You can NOT choose.

You must be able to run the car and change the engine at the same time if you want to survive in an industry going through this much disruption.  Our industry is complex but it’s not THAT complex relative to other industries.  The question should be how to balance innovation with operational effectiveness?

This may seem impossible to imagine today, but there was a time thirty years ago, when other industries were experiencing major challenges and pains managing their complex supply chains, demand channels and changing market dynamics.  But they overcame those challenges and pains, and they did it with business management software, or what we call them in this space, operating systems or platforms, that integrate with all suppliers, buyers and innovators.  These systems enabled these industries to effectively balance innovation with operational efficiency.

What is an Operating System?

Why do we even have to definite what an operating system is?  It’s because everyone calls themselves an operating system nowadays, which is creating more chaos and confusion.  We need to get beyond the hype and understand what it truelly means to have an operating system.

So how do we, in this industry, define what an operating system is?  By technical definition, an operating system:

• Is a program that manages other applications
• Is a Hub
• Integrates with other technologies
• Uses a common language

 

For a company, an operating system is a business tool or central hub that brings it all together.  It allows the company to grow and innovate, while being more efficient.  Our industry still operates in production systems and in order to become more efficient, to embrace innovation and effectively compete in this dynamic market space, we must begin operating in Operating Systems.

Imagine if when you bought a car from a dealer, they had to input the order into each and every robot on the manufacturing line.  That’s inefficient – HIGHLY inefficient, but that’s what we do in this industry, day in and day out, with our excel files and outlook databases.  We need to work differently, and simplify, in order to embrace change.

When I think about the state of our industry and I hear the pains and challenges customers are experiencing, I am reminded of the following quote:

“Nearly all men die of their remedies, not of their illnesses.”

- Jean Baptiste Moliére

This quote reminds me that solutions chosen out of expediency, out of desire to solve just the immediate problem, will quite often lead to longer term problems and pains.  It’s a good reminder to all of us in this industry that we need to think more broadly, and long-term, about how we solve or pains and problems.

Criteria for Choosing an Operating System

So how do we go about selecting an operating system and move beyond the hype?  Well for starters, you don’t want it to compete with you.  The system needs to be agnostic.  Can you imagine entering your business data into Windows, and Microsoft turning around and using it to create a competing business?

In selecting an operating system, be sure to ask yourself:

• Does the vendor compete with me?
• Do they want to replace me?
• Do they want to commoditize me?

The operating system must also be enterprise-wide, so that the entire organization is utilizing it.  This will create efficiencies and enable you to manage the entire yield curve.  And lastly, it must have scale so that it can integrate with other applications.

Operating Systems in Media

So if this is the criteria for selecting an operating system, then who are we left with in our industry?   We do not lack people and innovation to drive operational efficiency and innovation, but there is a lack of companies whose business models provide the infrastructure that enable YOUR efficiency and innovation, and prioritize driving YOUR company’s value above driving their own.   I believe we are left with only a handful of players – Operative, Media Ocean, Oracle and SAP among them.  While there are others on the image below, we do question their scale and ability to support you in the way a true operating system should, as defined above.

We believe the future consists of two main operating systems:  one on the buy-side and one on the sell-side.  And this is one reason we were excited about the MediaOcean announcement a few weeks back.

So how do Ad Ops Professionals Lead the Charge? 

The job of today’s Ad Ops professionals should be to take a step back and ask, what is my approach to building an efficient company that continually innovates?   And the answer to this question is how you lead and become the change your organization needs in order to effectively balance innovation and efficiency, or, to have your cake and eat it too.

The deal between Donovan and MediaBank is great news and much needed. Our industry is blessed with a tremendous amount of innovation.  Unfortunately, many innovators in our space have lacked the foresight to adopt a long term approach to enabling successful, profitable relationships between buyers and sellers. As a result, these middlemen that disintermediate between buyers and sellers have fostered an unsustainable ecosystem that robs each side of the value they create. The merger is a welcome landmark step in filling a gaping hole in our space today—THE Operating System on the buy side.

Dealing With The Devil

As an industry, we have made a deal with the devil. Indirect sales channels burst onto the scene promising more revenue with less effort. Easy money, however, comes at a high price.  Traditional technology infrastructure claims only 2-5% of revenue, while these so-called revenue-boosting partners unabashedly take a hefty 30-70% ransom after all is said and done.

Buyers and sellers depend on these players to run their advertising business. But business infrastructure has been usurped by a myriad of brokers, each taking a cut along the way. First came the ad networks. Then came audience extension platforms and ad exchanges. Re-branded efforts produced yield optimizers and then RTBs.  As everyone knows, if you take a look at the business model, they’re still all networks who are paid at exorbitant rates.

Everyone argues about whether it’s the buyer or seller who holds the position of power, when in reality, these intermediaries hold both of them hostage. Not only are their margins at stake, but their ability to compete against traditional mediums are hindered. Where is the capital to invest in better content? Where is the capital to invest in better creative? It certainly feels like it’s going to the VCs, rather than to advertisers and publishers.

How is this sustainable? Buyers and sellers have known for years that they have been losing a disproportionate amount of revenue to indirect and remained concerned that their partners are commoditizing their data, audience, and inventory. In the end, they ask, “Are my partners intent on competing with me?”

Even the titans in our industry are banding together to fight against the middlemen—just look at the recent AOL, Yahoo, Microsoft announcement.

Change Is In the Air

Both buyers and sellers are fed up. The leakage from the spread between the buyer and seller has become large enough. It has come to the point where they are realizing they are mortgaging their future by not partnering with people that allow them to build value on their own. As Michael Donovan noted to partners yesterday, the deal is addressing their clients’ outcry for “a single, neutral and universal operating system for advertising technology”. Over the past several years, we’ve seen no different on the sell side—publishers are demanding an operating system that enables them to work more easily and directly with buyers while increasing their margins. It is high time that buyers and sellers repatriate their assets and capture revenue for the value they deliver. The key to doing so is to work with partners whose business model is to provide infrastructure, not to compete.

Now, we are one step closer to enabling our clients to succeed. The Donovan and MediaBank merger paves the runway to building tighter buyer-seller relationships by providing this much needed infrastructure on the buy side.

There is no doubt  MediaOcean still has challenges ahead—two different companies, two different cultures, a huge technology challenge to integrate multiple platforms. My hope is that this team knocks it out of the park. This is by far the healthiest thing in a long time that has happened in our ecosystem.

Do you depend on someone to run your business whose business goal is to eat your lunch?

Andrew Wallenstein of www.paidcontent.org just published a great article yesterday about Netflix’s recent 10-K filing in which they disclosed the risks associated with their Amazon partnership.

It is obvious that Netflix is facing serious competition from Amazon in their primary business.  But what was disclosed is an additional threat from Amazon, and risk to Netflix.  Amazon, according to the article, provides “mission-critical” web services that enable Netflix to remain in operation.  This same supposed “business partner” is about to become a major competitive threat to Netflix as it looks to offer an online streaming video service to customers that will compete directly with the Wall Street darling (NFLX).

Netflix depends on Amazon to allow their business to scale.  Netflix depends on Amazon to innovate their services so that they can better compete against Amazon.  If they don’t provide that innovation, Netflix will be at a disadvantage.  Is that a safe bet?

And what bets are you placing every day?

David B. Yoffie and Mary Kwak wrote, in their famous Harvard Business Review article entitled, With Friends like These: The Art of Managing Complementors, that “Executives often overestimate common interests with complementors and repeatedly under-estimate the potential for conflict.”

How often are we (the digital ad industry) depending on competitors to provide sufficient innovation to our mission-critical platforms, and protection of our data, in order to grow our businesses? Do the people that have access to your data want you to win?  Do the people that provide your business systems – from business intelligence and inventory optimization, to user data and customer data – really want you to win?  Or do they just want you to win long enough until they can commoditize your value?

Here are some questions you need to ask yourself to determine if you are putting your primary business assets at risk vis-à-vis a current or potential “partnership:”

-          What are my most critical assets?

-          Who has access to them?

-          Who do I depend on to monetize them?

-          Do they compete? Now? In the future?

-          Are my “frenemies” going to share their innovation, or keep it themselves?

-          What would happen to my business if they stopped serving my interest?

Once you have the answers to these questions, you will be better equipped to know a) whether or not there are risks you need to disclose to investors and/or b) whether or not you should continue to engage in those relationships at all.

Co-opetition is part of our life, it is here to stay.  But engaging with partners that compete or may potentially compete with your primary business and source of revenue is a significant risk that should be carefully evaluated.  Furthermore, you must have the foresight to know whether or not these “partners” have the potential to one day become a competitor, forcing you to predict the future market landscape by running if-then scenarios. Simply disclosing the risk to investors is not enough – and in fact, it’s probably too late.  Understanding the implications and risks before you even have to disclose should be the first step businesses take in evaluating their mission-critical business relationships.

So who’s guarding your henhouse and what will you have to disclose to investors in your next 10-K filing?

I would love to hear from you on related scenarios that may exist in our space where there is exposure of critical business assets and/or partnerships because one partner is preying on the other(s). Comments welcome here or via email.

http://paidcontent.org/article/419-what-worries-netflix-about-amazon-isnt-just-competition/

Manu is introducing OperativeOne, the working name for our new platform and the result of a year of some serious work. We will be releasing more products based on this platform in the next 9 months then we have released in the last 9 years. There is tons of Blue Ocean here. Lots of tough BUSINESS problems in the digital media space that need to be solved that are not being addressed. We will be addressing them. Some products…Partner360, Campaign360, AdIntel..more to come.
Lots of smiles here at the Operative client summit, both from clients and a very proud team.