The Music's Started: Better Be Ready to Grab a Chair

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Can you hear the music? It's the opening few bars from the Consolidation Waltz. They haven't reached the chorus yet, but it is definitely playing and it's getting louder. What am I talking about? I'm talking about the game of Musical Chairs that is underway on the buy-side of the online media food chain.

First, let me step back for a moment. In December I surveyed the investment market and the deal structure trends in 2010 for digital media, and a clear development for the New Year within the early stage investment community is that there's plenty of appetite to get digital media deals done - not to mention significant cash available to do so.

Now that we're a few of months into 2010, this trend is clearer than ever in the digital media space, and interestingly for us, especially so when it comes to M&A and consolidation on the buy-side of the online media food chain. A prediction -- audience data analytic companies will be receiving some serious interest from ad networks and exchanges in the coming year. I'm already hearing the music and my advice is to get ready to pounce on an open chair.

It's Getting Crowded
All developing markets need intermediaries to facilitate and speed the pace of transaction, and if a market is successful, and matures to one with many buyers and sellers, then naturally the number of intermediaries will also increase. This increase commonly leads to either consolidation to realize economies of scale, or, if this doesn't happen, then incremental layers of 'intermediaries to the intermediaries' appear as the buy or sell side 'consolidates' for them. This should sound familiar to anyone in the online ad network business.

On the sell-side, yield optimization platforms such as Rubicon Project and AdMeld are somewhat solving the 'one to many' issue that publishers were facing due to the great number of ad networks and exchanges. In their simplest form, they provide the ultimate arbitration for whether an ad is trafficked - which ad pays the most. Meanwhile, on the buy-side, a relatively new layer is appearing above the exchanges that will attempt to maximize the 'yield' for the buyers, commonly by looking for the biggest ROI lift at the lowest price. If you add in a fully integrated audience data to both buy and sell side 'optimizers,' things start to resemble a theoretical "perfect market," with many buyers and sellers, operating with perfect information to establish an equilibrium price for the inventory - and that could spell trouble for plain vanilla ad networks.

So, what's an ad network to do?
With the forecasted increase in use of bid (buy) and yield (sell) management platforms, ad networks run a small, but growing risk of commoditization and potentially its much bigger brother, circumvention, and all the more so if these platforms successfully incorporate best-of-breed audience analytics into their offering. However, as we all know, markets are anything but perfect; information is not ubiquitously available or utilized; ad networks are not going to sit idly by; and agency clients will always need some 'human' service and expertise.

Therefore, we expect that data will be the weapon that wins this war, and those intermediaries that offer (potentially exclusive) access to the best data will be able to establish, defend and protect their position - or chair - within the ecosystem. By doing so, they will create an imperfect, and therefore profitable market, by restricting access to the advantageous data. However, the smart ad exchanges also know this, and will be keen to incorporate data in to their offering, possibly on an exclusive basis by acquisition.

So, it's a good time to be a best-of-breed data and analytics company, as you're the holder of the competitive advantage, and more importantly, you provide a potential shield against industry developments that may prove some market participants obsolete. Let the music play.

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