• by Ashkan Karbasfrooshan , Op-Ed Contributor, July 15, 2013

In 2007, before the economic apocalypse stopped everything in its tracks, the ad tech industry witnessed a bevy of acquisitions in the broader display ecosystem: RightMedia, BlueLithium, Doubleclick, aQuantive all got acquired.  After we realized the world would not implode and corporate development activity resumed, there was an expectation that we would see a return of M&A among display ad networks -- but let's face it, that's simply not happened.

One reason for this was the emergence of video-centric companies like Tremor and YuMe that have grown over the past years to capitalize on the rise of online video advertising. Indeed, Tremor just went public, while YuMe plans to do so soon.  While going public was viewed as the crowning achievement of a venture-backed enterprise, not everybody is impressed: “People think ad tech is hot, but in reality, there’s been carnage in the market,” Sundeep Chanana, a digital media specialist with investment bank Waller Capital said in a recent article. “For every AppNexus, there are literally 35 or 40 unprofitable companies out there bleeding cash that just can’t raise more money or find a buyer. A lot of those guys will disappear, or you’ll see them gobbled up for prices far below expectations,” she continued.

However, while it's easy to knock these companies, I think they deserve some credit for two things: 1) cutting through the clutter, and 2) building a business outside of YouTube.   After all, these companies have managed to exit while many of their display brethren haven't. 

In any case, on the first problem: VCs funded (possibly over-funded) too many similar businesses, which led to an accelerated deterioration of profit margins and commoditization of services. 

Indeed, because all networks were vying for the same publishers in an effort to reach the same audiences (outside of YouTube), their P&Ls were increasingly challenged.  For example, YuMe booked $116.7 million in revenues last year, but it had to pay out $63 million for the inventory, as it doesn't own any properties.  When you lose over half of your revenue before taking into account any overhead expenses, it's hard to eke out a profit, let alone boost margins.   That's just one aspect of the challenges.  For a myriad of reasons that I've covered in this column for the past few years, these companies' life cycles have shrunk, moving from the growth stage to the mature stage rather quickly. 

On the second problem: Let's face it, from the time these networks launched to now, everything has changed due to YouTube.  Had publishers been able to grow the volume of true video ad inventory, then perhaps these companies would have stood a shot at building billion- dollar businesses (and again, nothing says they cannot in future through financial engineering or product development, both of which will be facilitated through the proceeds of the IPO). 

However, most publishers ended up offering in-banner inventory, which is about as valuable as a warm bucket spit (and even then, only when there's some transparency to the client).  Audiences essentially flocked to YouTube to watch videos.  Sure, the portals and the traditional media companies all have meaningful audiences to offer advertisers, but when it comes to size and importance, YouTube is the sun, and everybody else is a planet at best in this ecosystem. 

YouTube parent Google has made it nearly impossible for display or video ad networks to gain a foothold on YouTube, partly because Google acquired Doubleclick, propelling it atop the display ad market and giving it absolutely zero incentive to help either the display or video ad networks find an opening on YouTube.

So, while some of these video ad networks at one point considered getting into the content business in order to offer marketers' branded-content ad opportunities, it appears that the bigger reason for playing the content card was as a Trojan horse to enter the YouTube ecosystem. 

Despite what the haters will say, YouTube is the best canvas for advertising going forward (better than Facebook, Twitter, etc.), yet none of the ad networks have any hopes of penetrating the fortress as it stands.   For the record, I'm not saying that content is the solution for these firms, but the fact remains they need to look for solutions -- and without a YouTube strategy, they'll struggle.

Luma Partners’ Terry Kawaja put it best in that recent article: “We are long overdue for marginal companies in the advertising technology ecosystem to close. We simply didn’t need an eighth ad exchange."

Ya think?