Adtech investment is down - but what does that really mean?

A recent report from Results International shows that funding activity for adtech startups has fallen to its lowest point in five years, while M&A activity in the martech space has grown considerably over the same period.  

This investment slowdown comes against a backdrop of increasing discontent around ad fraud from some of the world’s biggest players. In a recent talk - described by Marketing Week as “The biggest marketing speech in 20 years” - Procter & Gamble’s Chief Brand Officer Marc Pritchard called the world of programmatic advertising, “murky at best, fraudulent at worst”.

Across the board, ad fraud is being exposed as a huge problem, while reports of flaws in reporting methods from the industry have also come to the fore.

On the surface, it might look as though adtech is an industry in crisis. In reality, it’s an industry in flux, with plenty of challenges ahead for startups, agencies, publishers and advertisers alike.

Industry dominance

On the face of it, last year was a positive one for adtech funding. In Q3 alone, US advertisers spent $17.6bn on digital advertising, making it the highest performing quarter on record.

What these figures don’t show, however, is that the two main players - Facebook and Google - effectively hold an adspend duopoly. Between them, the two platforms accounted for three-quarters of all new online advertising spending in 2016.

"Smaller companies will continue to operate in the shadows of the industry’s two dominant players", said Pivotal Research analyst Brian Wieser. Suranga Chandratillake, partner at VC firm Balderton Capital, agrees: "Adtech's struggle as a sector is absolutely to do with the dominance of Facebook and Google."

Performance pressures

While Facebook and Google continue to take the lion’s share of online ad revenue, both firms are on the back foot. Google continues to struggle with increasing numbers of fake ads and misleading publishers and, in the latest exposé by The Times, funding terrorism.

Facebook, meanwhile, has disclosed metric reporting errors more than once. To date, Facebook has avoided independent auditing of their reporting - although it has recently pledged to undergo audits by the Media Rating Council - the media industry’s measurement watchdog. The pressure from both the big players like P&G, and, increasingly, smaller businesses, meant they had no choice.

However, until the results of that investigation are revealed, there remains a huge neon question mark over both performance and measurements.

Clients now have a far better understanding of how the adtech arena operates, and are subsequently asking more of adtech firms - some, in fact, are even hiring their own in-house programmatic analysts. The pressure is on.

Doing things better - or differently

For startups, there’s an opportunity to make a real impact on the adtech industry. If they can focus on efficacy, a quality offering and differentiation, they could well capitalise on the tough questions the big players have yet to answer.

Before Christmas, we spoke of two alternatives to the current models: results-based reporting, which places purchase activity rather than brand awareness at its centre; and cost-per-second, which charges advertisers only while people are watching the ad.

Open machine learning systems are being touted as a potential way to compete successfully with the walled gardens of Facebook and Google. Publishers such as Twitter and Snapchat already have a different offering to these two major players: can brand new publishers offer something different to advertisers again?

The key with any solution is differentiation and simplicity.

Adtech is rife with jargon and obscure claims that customers can't immediately make sense of. In the absence of clarity, publishers and advertisers often default to known providers, leaving less room for newcomers to break in. New adtech challengers need to offer demonstrable benefits in plain English. Do that, and investment will not be far behind.

Going nowhere

Investment in adtech is not dead by any means. But the investment slowdown reflects the uncertainty of an industry that simply wants one thing: accountability. And those fearful of accountability are likely fearful with good reason.

If startups can innovate to provide solutions to existing market pain points, however, this perhaps presents the best opportunity to make a dent in the market for some years. Facebook and Google will undoubtedly react and rise to the challenge, refining their products and using their swathes of data to make a difference. But for businesses who can act quickly and decisively, this is an exciting time.

Remember, it was only in 2007 that 12% of all web time was spent on Yahoo-owned sites, under 4% on Google and under 2% on Facebook. They were once the young upstarts themselves. Who’s next?