Courtesy of LUMA Partners

Waiting for Godot: Are MarTech & AdTech Converging?

By David Yuan

Brian Andersen is a good friend who has been immersed in marketing tech for well over a decade. We recently revisited the premise that advertising and marketing technologies are converging. It’s a topic I’ve been following for quite some time in my role as an investor and General Partner at Technology Crossover Ventures (TCV) and an area of interest that LUMA Partners has been covering for the past few years and discussed in their State of Digital Marketing and State of Digital Media reports.

Brian: Well, you have had quite a year! Sitecore acquired by EQT, LinkedIn acquired by Microsoft, and Merkle acquired by Dentsu. Ready to coast for the rest of the year, or are there more deals up your sleeve?

Dave: For better or worse, this is a “what have you done for me lately” business, so I’m definitely still hustling this year. It’s a shame we never got a chance to work together at Interwoven. I still think the marketing tech roll-up on top of CMS was a killer idea.

Brian: It would have been great to partner with TCV on the roll-up strategy at Interwoven as we had planned, but at least I have been able to see my former colleagues at Omniture/Adobe executing to create a terrific martech business. One development we are still waiting on is to have the marketing clouds extend into advertising in a big way. You have a unique position since you are involved with companies that include adtech (like AppNexus), martech (such as Act-On and Sitecore) and consumer-facing companies (like Facebook, Rover, and Pinterest). I would love to hear your perspective on whether or not adtech-martech convergence is happening.

Dave: As always, LUMA has been very much ahead of the curve. You’ve talked about this for a very long time. It really should come together. Convergence makes a ton of sense for the marketers. It’s also an enormous opportunity for forward thinking vendors. Adtech and martech business models can be attractive on their own, but in combination they can be even more powerful. There are obviously some challenges though, which have slowed this convergence.

Brian: OK. So let’s break this down. Why is this an opportunity for marketers, and what do you see as impediments?

Dave: The opportunities for marketers are scale, workflow and data. When you’re running marketing tech, your channels are organic, which are high value but harder to scale. As an example, an email campaign is limited to your house file and a certain frequency. Extending that campaign into adtech with retargeting and look-alike modeling across programmatic display and social can dramatically increase the scale of your campaign. You not only increase reach, but with integrated campaign technology, you can start really orchestrating creative, frequency and campaigns in a true omnichannel way, rather than blasting uncoordinated messages across siloed channels.

The data point is a bit more esoteric. Adtech is largely about third-party and light first-party data, such as retargeting cookies. Marketing tech tends to be more focused on deep first-party data, such as CRM, PII, and transactional data. Bringing both together can dramatically increase targeting effectiveness. It’s true not only in targeting, but also in personalization. Think about the current state of marketing tech personalization — you customize your web experience based on what an individual might do on a marketer’s site. Even for the biggest retailers or publishers, a user spends only a small fraction of his or her time on a marketer’s site. Consider the opportunity of “web-scale” personalization that incorporates third-party web behavior (adtech data). That could be a step function improvement in the power and efficacy of personalization.

Brian: You are preaching to the choir on that point. At both Interwoven and Omniture, we started offering products for A/B testing and basic personalization almost a decade ago, and our customers saw really nice ROI. Add the fact that there are now newer AI-based personalization technologies that are even more effective and I see huge promise in incorporating third-party web behavior into personalization. Do you see this happening? Are there any examples you can tell us about?

Dave: To be honest, this isn’t mainstream yet. Organizational structure is a challenge to this integrated approach. There’s usually an email or CRM person and a display person, and each owns a bespoke budget. So in large organizations, they are unlikely to work together.

However, we are starting to see some momentum around people-based marketing. We got really excited about Facebook’s monetization opportunity when we got a sense of its identity asset that in many ways allowed marketers to integrate first-party marketer data with first-party publisher data with various third-party segments. Facebook’s Custom Audiences obviously has been an enormous hit. Merkle is another example where the company builds the marketing tech infrastructure that enables this first-party data to be utilized in digital media channels. Also, we’re starting to see it in the mid-market. There’s still an email person and a display person, but in a mid-market organization, they are more likely to sit in adjoining offices or be the same person.

Brian: What about the vendor landscape? Have you seen this come together through organic product build or M&A?

Dave: I’ll turn the tables on you, Brian. You and Terry are in board rooms every week from large incumbents to innovative startups. Why hasn’t this happened?

Brian: I think it is happening, but it is really early. We’re seeing some innovative start-ups tackle the omnichannel personalization opportunity now. These are companies I put in the Predictive Marketing Platform category on our Marketing Technology LUMAscape. Their vision is to unite data sets — the data sets you just spoke about — and enable personalization at scale across email, website, display ads and even in-store. They typically go after mid-market prospects for the reason you discussed, which is because these companies are generally easier to navigate from an organizational perspective. So there are definitely companies, especially mid-market e-commerce companies, that are realizing the benefits of uniting adtech and martech channels.

For large enterprises, I see two main impediments — neither one of which is technology. The biggest issue is within the marketing departments of the large enterprises and is exactly what you already pointed out: the email person and display person dynamic. Large marketing departments are still organized by channel, and each team is measured on different metrics specific to their channel. I hear some large marketers are creating roles such as Chief Experience Officer to try to coordinate the marketing channels and therefore improve the customer experience, but this is early.

The second issue is on the vendor side. There are a ton of vendors, but most of them are point solutions focused on a single channel. This is confusing and overwhelming to the large enterprise marketers. As a result, they turn to the larger software vendors asking for a holistic, integrated solution. And while the marketing clouds have made terrific progress in starting to assemble and integrate some pieces, so far it has been focused on the martech solutions and has generally not extended to adtech. Adobe and Oracle do now offer data management platforms, which we view as a key linkage between marketing and advertising, but the marketing clouds generally have no, or minimal, advertising execution capabilities.

Dave: I agree on the obstacles, but it sounds like you believe this ought to converge over time. Where I think we’re starting to see some early traction is in data. Data appears to be the gateway to broader convergence. Oracle has done a really nice job of incorporating data assets — BlueKai and Datalogix — into their marketing tech stack. Adobe was early in the game by buying Demdex and will likely follow Oracle over time. The same goes for SAP/ Hybris, which has incredible e-commerce and SFA data in addition to product catalogs and SKUs.

I think Salesforce is in a really interesting situation. They have B2C data with ExactTarget, B2B data with their core SFA product, and hence, lots of opportunities to extend. There’s also a defensive element as well. With a rejuvenated competitor in MSFT/ LinkedIn, Salesforce is now competing with a rival that also has access to media dollars, which is potentially a far larger profit pool. Think back to your Omniture days. Marketers squawk over spending $10K a month on software to optimize $1M a day in Q4 search spend. Adtech/ media budgets potentially dwarf marketing tech software budgets. If MSFT/ LinkedIn can access adtech/ media budgets and Salesforce can’t, the competitive dynamic will likely shift over time.

But let’s now talk about business models. Martech generally has sticky business models and relatively high barriers to entry and therefore enterprise value. And while many (although we do not believe all) adtech businesses have models that are somewhat challenged — when properly run, adtech can have incredible flow-through revenues, cohort repeat rates, and — if truly a software business model — really high contribution margins. But there are very few adtech companies that are true software models.

Brian: Yes. The SaaS marketing business model is a beautiful thing: high operating leverage and predictable recurring revenues. I also agree that there are a lot of challenged business models in adtech, but also some terrific ones. Your portfolio company AppNexus is one example: a true software business based on flow-through revenues with incredible stickiness. But let’s look at another example: Criteo. I hear some people say it is just an ad network. Yes, it’s a managed service business, but what they did early on that was so innovative at that time was to go after search budgets and price on a CPC. This doesn’t sound like much, but how do marketers spend on search? Up to the efficient frontier. So how did they end up spending with Criteo? Also up to the efficient frontier. Instead of being a discretionary marketing expense — like much of display advertising — Criteo became always-on with customers because it drives revenue. This is a beautiful business model since it has terrific operating leverage and, while not quite as predictable as SaaS, is still highly predictable.

Dave: If there are beautiful adtech models, what’s holding back the marketing clouds? Over time, it wouldn’t surprise me to see all martech platforms buying adtech execution engines. Then it will really be game on!

Brian: Totally agree. But at this time they are not yet comfortable with the adtech business models. They are worried that adtech businesses are less predictable, have lower margins and less operating leverage.

Dave: But, at the end of the day, many martech offerings actually have volume-based revenue drivers, not unlike adtech. In fact, at ExactTarget, we specifically tracked the eCPM of our deals. Obviously, Salesforce got over it.

Brian: I do remember a meeting with a marketing cloud vendor a few years ago — before they had a marketing cloud — where we recommended they acquire an email target. At that time, they told us they would never acquire an email vendor for exactly the reason you just stated: they didn’t want a volume based revenue business. But they got over it and less than two years later acquired an ESP. I firmly believe they will also get comfortable with certain adtech models as well.

Dave: OK, we have talked about the marketing clouds a lot, but what about the other way? What about the advertising giants moving into martech? The question over the next 10 years is how far into the martech stack do the walled gardens of Google and Facebook push? The DNA gulf is even wider, but marketing tech workflows, plus first-party advertiser data, plus publisher first-party data, plus media could be transformative for marketers and the vendors that serve them. So how do the marketing clouds compete with that?

Brian: Google has done a very impressive job in enterprise software with Google Analytics. It’s getting better and better every year. And now with Google Analytics 360 Suite they seem to be going after Adobe. My view is that Google will be successful, but mostly with small- and mid-market businesses. The marketing cloud’s bread and butter is serving the large marketers, and I feel they will always offer more advanced tools specifically for sophisticated marketers. So, they will definitely battle Google at times in the mid-market, but generally, I don’t see them colliding too much. And Facebook doesn’t seem interested in moving into the enterprise marketing space at all. They seem to have even larger aspirations, like going after TV budgets! But that is a whole other discussion.

Dave: It’s funny how these markets move. We tend to overestimate what can happen in six months, but dramatically underestimate what can occur over the course of five years. I think this could and should happen over the long term given the fact that there is tremendous upside for marketers and dollars for vendors! Great to catch up Brian.

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The companies identified above are not necessarily representative of all TCV investments and no assumption should be made that the investments identified were or will be profitable. For a complete list of TCV investments, please visit www.tcv.com/portfolio-list. For additional important disclaimers regarding this post, please see “Informational Purposes Only” in the Terms of Use for TCV’s website, available at http://www.tcv.com/terms-of-use/.

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