Online Video: Don’t Change the Channel
The digital ad tech ecosystem is flush with players of all shapes (verticals) and sizes. Profitable, trending business models have begun to skew further toward automation (real-time bidding), Big Data, and SaaS applications, but all strong (or surviving) companies must invariably be in the right content channels to execute their strategies. An operator can traverse some of the nodal path from advertiser to publisher through small dirt roads and city streets (display, mobile), but at some point, it will have to get on the behemoth highway that supports video traffic.
Video is already the dominant medium of global IP traffic; Cisco notes that 66 percent of all consumer Internet traffic was video in 2013, and forecasts 79 percent penetration by 2018. While there will certainly be more and more ‘vehicles’ on the highway in years to come, the order of magnitude effect of video penetration lies predominantly in size/quality. Data-intensive video formats have transformed streaming businesses like NetFlix (NFLX) into highly available and highly performing purveyors of superior substitutes to traditional TV. If we continue with the above analogy, then we can think of these businesses as the ‘souped-up’ sports cars and SUVs on the video highway, luxurious, but ‘bandwidth-guzzling’ commuters in the channel.
A quality vehicle is nothing but stationary metal without a quality engine, and for Internet video, that engine is the content delivery network (CDN), the system of servers that houses, encodes, and deploys the data throughout the Internet. Consider the below table with data volumes based on the Cisco IP report: CDN is enormous, and the market is already a multi-billion dollar opportunity set. In truth, it should be noted that the total addressable market estimates are likely conservative given the tiered pricing models disclosed by the likes of Microsoft (MSFT) Azure and Amazon (AMZN) AWS CloudPrint, and as evidenced in this Cisco white paper. Regardless, the larger point here is that CDNs are the most critical aspect of Internet video’s continued ascendancy.
Ad-tech businesses are finding that, in order to remain competitive, they need video platforms to efficiently source the critical inventory (content) necessary to place high-touch marketing units. That starts with the CDN, which by most counts, is considerably more efficient to build than buy (see Cisco white paper), but there is the obvious trade-off in time (value) to market. Incumbent businesses who have already articulated that base level are better positioned to layer on additional components to their tech stack.
The content management system (CMS) is the repository where content and advertising meet, where ad serving decisions are taken and require precise margins of execution. Google (GOOG) has taken its own interest in what it views as an opportunity for holistic yield management of capital-light publishers and ad tech companies, but any business that aspires to be an end-to-end solution needs a quality, proprietary CMS within its stack. The margin benefits lost by forgoing this component are just too high of an opportunity cost.
We introduced the running highway/vehicle analogy with the observation that surging video traffic is less about length/breadth and more about depth of data-intensive formats. As such, it stands to reason that small operators with a well-articulated stack can still carve out a viable niche in the specter of larger industry players. Consider Adaptive Medias (ADTMD) and its pending acquisition of video platform assets from MediaGraph.
The acquisition will cost roughly $13.75 million at today’s share price against 5 million newly-issued shares of Adaptive stock, which was subject to a 1-for-30 reverse split as of July 14. In return, Adaptive steps into the driver’s seat of an established video platform with the repository of over one million rights-cleared content units available for prompt syndication. The valuation is highly attractive based on target’s estimated $7-10 million in revenue for the current year. In truth, the pro forma deal is even more accretive considering the obvious synergies between Adaptive’s monetization/marketplace business and MediaGraph’s platform. It is a rare case in which ‘buy’ trumps ‘build’ on both economic and time value terms. Indeed, it is one that investors would be well-served to consider in lieu of the scramble to integrate point-to-point solutions among disparate ad tech providers.
The winning value proposition for ad tech appears to be that companies should seek to be technology businesses first and advertising businesses second. The victors must be positioned in the channels that matter (i.e. video) with a ‘Swiss army knife’ model (end-to-end platform) of digital infrastructure. Adaptive (plus MediaGraph) is a great precursor of how this process can be achieved at the lower end of the capitalization scale. Indeed, it may well be the best way to achieve the result given the greater ability to execute quickly and fly under the radar.
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