The No. 1 Reason Why Companies Fail
When a company goes out of business or sells at a discount to its last round of funding, spectators ask the obvious question: What happened?
There are typically three possible explanations: wrong team, wrong market, or insufficient funding. While these are the most discussed causes, the list does not include the most common reason why companies fail, especially in digital advertising (a market that’s growing like crazy): they do not sufficiently align their incentives with the incentives of their clients.
Digital advertising has become increasingly more complex, esoteric, and competitive. I’ve even asserted that digital advertising is becoming (if it isn’t already there) the most efficient scaled advertising in the history of the world.
Throughout the short but rapid history of online advertising, we’ve been constantly iterating with business models. Take the ad network, for example. The earliest ad networks were really created as a means to create liquidity, but came with a cost. To get higher volumes and aggregate a bunch of publishers, you paid a higher CPM.
In 2013, the premium that the market charges for liquidity began shrinking. Compared to the old network models, exchanges and SSPs offer massive scale and charge lower margins to the publishers. And of course, some ad networks are still thriving, and that’s because they have evolved and are better aligning their interests with their clients.
The biggest flaw of the old ad network model was an inherent conflict of interest. A network would sell to an advertiser and promise a CPM as low as possible. But then someone on the other side of their office was on the phone with a publisher – also a client – saying they would try to deliver the highest CPM possible. As middlemen, ad networks have historically operated on pretty big margins by making money on both ends of the ecosystem. That kind of markup is only sustainable if the network adds a lot value. The best and brightest networks today are shifting their business model and finding ways – whether through technology, service or performance – to justify their margins.
Even newer companies in the RTB space have reduced their chances of success by trying to do too much. They are trying to be sell-side, exchange-side, and buy-side all at the same time. A business model that broad makes it impossible to create strong partnerships and lasting client relationships. With a charter that wide, a company has to be all RTB things to all RTB people, very similar to the old ad network model. In the meantime, pure-play companies on the buy-side or sell-side are fiercely competing with these companies, regardless of how much money they have. The pure plays are focused on one thing while these companies are focused on many.
This is why businesses should focus on being a pure play. And it’s why some ad networks have made the transition and others have not. Those best positioned for the future understand that in the end we’re all extensions of one of three constituent: the advertiser, the publisher, or the market.
Agencies, some networks, DSPs, and agency trading desks are advocating for the buy side. They are here for the long term. SSPs, some networks, and sale houses are focused on publishers, and publishers trust them as a result. They’re here for the long term, too. Publishers know that they’re representing them as best as they possibly can.
But there remain many companies, many very large and influential, that want to represent all sides, and they have a massive conflict of interest. Long term, unless these companies figure out where they stand, their ability to do well in this space is going to be in jeopardy.
And here’s something else that may be more significant than anything else: as consolidation in this space begins to occur, pure play companies will remain independent. And independence will become more and more valuable as time goes on. For instance, if Google or Microsoft ever gets to the point where they don’t allow each other to buy each other’s traffic, the only way to buy traffic from both exchanges is to use an independent partner.
Bottom line, we’ve turned a particular corner of efficiency. Going forward, the companies most likely to succeed are pure plays.