Respected analyst firm IDC has released its report IDC Worldwide Digital Advertising Software Market Shares, 2017: Despite Intense M&A Activity, Still a Fragmented Market (September 2018), and for the first time, it quantifies the advertising software market at USD 12.7 billion, growing 38% year on year.
This first-ever advertising software industry report offers several insights, including an analysis of market fragmentation and growth projections, along with trends and learnings for the technology service providers. Here are some from the IDC report:
Fragmented segment: The digital advertising software segment is very fragmented. Even the top 15 vendors represent not even 40% of the market, with a multitude of small, specialized vendors with limited revenue making up the rest.
Top Vendor Categories: The two top vendor categories are demand-side platforms (DSPs) or DSP-like offers — Criteo, MediaMath, AppNexus, AdRoll, The Trade Desk, dataxu, and Centro — and one-stop shops — Google, Adobe, and Oath (AOL and Yahoo!).
These are followed by supply-side platforms (SSPs) — OpenX, Rubicon Project, and PubMatic — with revenue volumes about half the size of that of the DSPs.
Criteo top vendor, beats Google: Criteo is the top vendor, followed by Google; each has market shares above 5%. A little farther behind is MediaMath, with an almost 4% share, after which — still a little more removed — begins the long tail with Adobe at 3%.
The overall market for advertising software grew at 38% year on year, from $9.2 billion in 2016 to $12.7 billion in 2017
Ad automation sales to grow from 4% to 7.8% in 5 years: At these spending levels, advertising technology sales stood for 4.7% of total ad sales (2017), up from 4.0% (2016). IDC expects this share to grow to 7.8% by 2022 as the industry’s push for advertising automation continues and the overall volume of spending on advertising continues.
The transition from traditional TV advertising to digital video advertising, specifically connected TV advertising, will be the one major driver of future growth.
The other characteristic of the market is the ongoing intense merger and acquisition activity, which will, however, not lead to major consolidation in the ad tech sector yet — as opposed to publishers and the media segment.
This IDC study provides worldwide market share data for the digital advertising software market for 2017.
“The ad tech segment is still very fragmented,” said Karsten Weide, VP of Media and Entertainment, IDC. “This means there is a lot of opportunity for acquisitions, but also for growth.”
What TECHNOLOGY SUPPLIERS MUST CONSIDER
Advertising software vendors should consider the following:
- Buyers will continue to shift media purchases from traditional channels into ones optimized by automation via the use of advertising software. Advertising software will therefore continue to see steady growth with a CAGR of around 24% for the next five years, twice that of the growth of overall digital advertising.
- A primary driver is the adoption of programmatic platforms (demand-side platforms, supplyside platforms, data management platforms, ad exchanges, and dynamic creative optimization), which will see the fastest growth at a CAGR of around 26%. Social media advertising will grow as fast. Ad servers and search engine marketing (SEM) platforms, being fairly mature, will see the slowest growth (in the low-double-digit CAGRs). Attribution, because of the difficulty of implementing it, will also see slower growth.
- Most of these platforms are fueled by data. Expect more difficulty using data due to increasing privacy protection initiatives. This in turn could decrease advertising ROI, which could translate into a minor slowdown in ad tech sales.
- The application of artificial intelligence and machine learning may, however, easily more than make up for that decline in ROI.
- One major driver of change is the transition from traditional (linear) TV to digital video. Users are continuing to shift their video consumption from traditional TV to digital alternatives. While this shift has been steady but slow in the past, there are signs for an acceleration of that trend.
- The Google and Facebook duopoly will continue its reign. Buyers are growing increasingly wary of the growing might of the duopoly. For that reason, some of them have begun to shift budgets into Amazon. However, Amazon’s ad sales are probably still only 1/20 of the size of Google. This means that, even if sales develop in the most favorable way for Amazon, it would still need four to five years to catch up to Google and Facebook.
- A phase of continued mergers and acquisitoins: The growth of Google and Facebook — but also of tier 2 players such as Amazon, Verizon’s Oath (the combination of AOL and Yahoo!), AT&T, Comcast, and Adobe — means that we will see a phase of continuing mergers and acquisitions, reducing the number of smaller independent vendors. Even Adobe may eventually be acquired (e.g., by Microsoft) or perhaps Facebook.
- The duopoly and the consolidation of the independent ecosystem mar independent vendors’ growth prospects. They can still expect growth but perhaps at lower-than-segment rates. Slower growth and the reduction in the number of independent vendors, more integration between platforms, and buyers pushing for more market transparency will all increase competition for them.
The most interesting finding that has come out of this study, considering the ongoing intense merger and acquisition activity in the digital advertising software segment, is how fragmented it still is. Even the top 15 vendors represent not even 40%, with a multitude of small, specialized vendors with limited revenue making up the rest. And even the biggest vendor does not crack the 10%-of-market threshold.
MARKET CONTEXT: Significant Market Developments
Overall, the digital advertising software segment was shaped by six trends in 2017:
- Worldwide spending on digital advertising (e.g., media purchases) continued to rapidly grow by 19% from $228.4 billion in 2016 to $272.5 billion in 2017, increasing the volume of advertising that needs to be transacted and thereby growing spending on advertising technology.
- Intense efforts on advertising automation continue, benefiting programmatic advertising technology vendors.
- Greater awareness for the need of privacy protection began to dampen programmatic growth but has in most cases had no material impact on business. (But note the impact of Apple’s privacy protection measures in Safari introduced last year on Criteo, as mentioned previously.)
- As most new digital advertising spending went to Google and Facebook, most of whose ad technology is priced into media purchases (e.g., is “free”), ad tech grew slower than it would otherwise have. This has led to a more difficult business climate for independent vendors and increasing competitive pressure among them.
- Intense merger and acquisition activity continued.
- The shift of advertising budgets from traditional TV into video accelerated creating opportunity — especially in connected TV — for those that provide relevant technology and threats for those that don’t.
As Criteo observes, the advertising and marketing technology markets can be very confusing indeed for buyers; for instance, ChiefMartec lists nearly 7000 MarTech vendors. Some vendors or research firms resort to categories to make sense of it all, but the pace of innovation in AdTech quickly renders their taxonomies inefficient. For instance, Criteo offer advertising technology solutions combining both the supply and demand sides across the open web today, yet can’t easily be portrayed as an SSP or a DSP.
This is one of the first attempts by industry analysts to quantify the AdTech market, and in a fragmented market consolidated and dominated by the Google/Facebook duopoly and with Amazon ramping up, Criteo emerges as the #1 player in the “advertising software market.”
IDC’s definition of the advertising software market
IDC defines advertising software as any software program or platform that enables the business of advertising — specifically, media or advertising campaign planning, buying and selling advertising inventory, and ad operations (e.g., trafficking or physically inserting an ad into media, targeting an ad at specific demographics or individual users, automatically modifying an ad creative for better impact, and tracking or measuring and reporting on an advertising campaign). Ad software includes ad servers, ad exchanges, ad verification, attribution, data management platforms (DMPs), demand-side platforms (DSPs), dynamic creative optimization (DCO), search engine marketing (SEM), and social advertising and supply-side platforms (SSPs). Data vendors, while part of the advertising software taxonomy and the related forecast, are not included in the IDC report since they do not offer advertising software in the strict sense of the word.
Advertising software is typically a web-based, software-as-a-service (SaaS) platform but may also be a software locally installed on-premises.