In Praise Of Fragmentation
Everyone knows that ad technology is a remarkably fragmented and complex industry. As the Lumascape shows, the ecosystem is filled with small companies focused on dominating niche categories and new business models. I consider myself an ad tech insider/geek, but I’m still impressed if I can understand what more than 50% of the companies covered in ad tech pubs and blogs do.
So conventional wisdom (and the prediction of every analyst) is that consolidation is coming soon. According to this viewpoint, consolidation will be good for marketers, who are looking for simplicity that rivals TV ads. And the consolidation will supposedly be good for publishers, who are frustrated by the number of middlemen in between their inventory and the marketer’s money.
Why Fragmentation Helps Marketers and Publishers
Despite this conventional wisdom, consolidation is neither inevitable nor desirable for the industry, for three main reasons.
First, consolidation reduces innovation. The fragmentation of recent years into hundreds of point solutions is actually a sign of progress; companies are building exciting new features that are improving digital marketing while responding to rapid shifts in technology and consumer behavior. Programmatic marketing, RTB, data management technology, retargeting, video advertising, mobile marketing, and other tools that have emerged in the past decade have dramatically improved the efficiency of online advertising. Intense competition exists among dozens of startups in every category to make these technologies more effective. It’s likely that a vertically integrated industry consisting only of giant companies would innovate less.
Second, consolidation not only kills competition on features, it also kills competition on price. Contrary to conventional wisdom, an ecosystem with fewer intermediaries between the marketer and the publisher would likely mean that middlemen would extract more of the value. In the enterprise software industry for example, once companies select a full-stack solution, they are strongly locked into particular vendors. Tech giants like Oracle or SAP thrive in large part because their customers can’t leave them, so they are able to price higher for every new feature. On the flipside, the intense competition happening in every sector of ad tech helps value flow to marketers and publishers.
Finally, conflicts of interest would exist in an integrated ad tech company. For example, the same company should not be engaged for both targeting and for measuring ROI; any attribution model is extremely sensitive to its underlying assumptions, and a company with a vested interest in strong performance is challenged to provide the same neutral measurement that an independent player would provide. For similar reasons, we see companies focused on either the supply-side or the demand-side, because top performance often demands cultural affinity to one side of the market.
The Rise of the Integration Layer
Of course, the fragmentation of the industry brings challenges.
First, there is the need for interoperability. It is difficult for marketers to unify their customer data and strategies across CRM, display advertising, search advertising, and email marketing. Additionally, if a marketer’s attribution platform says that performance is down, it is difficult to troubleshoot if that is the fault of the attribution platform, the DSP, the strategy, the inventory, the creative, or the quality of the data.
Secondly, fragmentation makes purchase decisions more difficult. A simple decision about which vendor to use for a particular problem requires a new RFP process, and requires deep familiarity with the competitive landscape of that particular feature.
MediaMath’s Kitchenscape, pictured here, does a brilliant job of making the point that every industry is complex. So how does the kitchenware industry solve this dilemma of a fragmented ecosystem?
The solution is the emergence of an integration layer that is focused on mitigating the problems of a fragmented marketplace. In kitchenware, that integration layer is Walmart and Williams Sonoma, who make it easy to navigate the complexity of the buying experience (the store aisle), and offer a single point of accountability for failures of individual products (the return process).
Ad tech has yet to develop a full integration layer that makes it easy for marketers to select and connect a best-of-breed bundle of technologies. An integration layer would guarantee interoperability between different ad tech solutions, and also help simplify purchase decisions for marketers. Several existing solutions are evolving to form the integration layer. DMPs, focusing on the data interoperability problem, are working to tackle this need. Agencies have always had an important function in helping marketers integrate suites of solutions, although ad tech demands a deep technology layer as well as knowledgeable consultation.
Instead of consolidation, the new integration layer will evolve to allow marketers and publishers to have the best of both worlds: seamless interoperability, and intense market competition bringing continued innovation and competitive pricing