Ad Tech Layoffs

Rubicon Project recently laid off roughly 20% of its workforce. This comes on the heels of AppNexus laying off 13% and Pubmatic a similar amount. Each of these companies makes most of their money on the supply side. What's the take home here?

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First, each company has a public-facing rationale. These are enhanced with PR spin, but they're interesting to explore nonetheless.
- Rubicon stated that it missed the header bidding wave, and that header bidding in turn will cause certain headwinds for the organization. Further, the buyer and seller clouds will be unified. Also, noteworthy, it is expecting a negative year-over-year growth for Q4.
- Pubmatic saw a small number of clients driving most of their revenue, allowing them to lay off the people that serviced the less profitable client - and thus be more profitable by focusing on their areas of profitability
- AppNexus cited the company merging its buy- and sell-side businesses into a single organization.

Themes include re-consolidating a supply / demand dichotomy that had previously existed in the organization, increasing profitability, and - implicitly - increasing profits per employee. Of the three, Rubicon is the only public company. Its revenue and profitability have been relatively stagnant and its share price has gone from 19 at its IPO, to under 6.5. AppNexus is likely planning to IPO next year, and Pubmatic's future is unknown.

The public markets have not been terribly kind to ad tech companies, but The Trade Desk and Criteo have been notable exceptions. Criteo has a unique value proposition and should be considered separately. The Trade Desk has incredibly high profits per employee, a pattern of regular growth, and consistent profitability. It appears that each of the above three moves - at least to some degree - is focused on increasing the profitability of the company in question.

Public market companies trade based on a number of factors, but one of the most important is the P/E ratio. This is price / earnings. The higher the P/E, loosely speaking, the more investors believe in the future growth of the company. Different industry sectors, to some degree, will have different ranges of eligible P/E ratios applied to them based on investor sentiments about that industry. Companies within that industry will be found variously across that range based on their profitability and the characteristics of that company. For example, mining companies may be between 3 and 5 P/E, with those having the best management, the best mines, etc, trading closer to 5.

Real-time bidding was brand new a decade ago and represented the future of the digital ad ecosystem. Indeed, that's where spend went. Companies grew aggressively and spent heavily on marketing and personnel - largely to grab marketshare. But the second derivative of the growth in RTB generally is negative. This means companies are starting to pull back from the drive for market share at all costs - to a drive for for profitability. Each of the moves above, their publicly stated reasons notwithstanding, are a direct move to enhance their profitability and thus improve their market cap.

This can also be seen as an admission that we are at a new point in the lifecycle of RTB. It is no longer brand new. Simply being a standard-bearer for RTB alone does not bring sufficient growth to be considered "high growth" and thus justify irresponsible spending. Companies must either be breaking new ground and actually growing very quickly (e.g. native!) or focusing on steady, predictable growth with respectable profit margins.

Industry Update

In the last several months, we've seen a number of important structural changes at prominent ad tech companies. This includes significant layoffs at Turn, Pubmatic and more, acquisitions, major agency changes, etc. Here are my thoughts on some of the more significant events.

1) Yahoo spinoff - Yahoo's stock is valued around $35B, with it's stake in Alibaba currently worth around $31B. They have a significant gain in their Alibaba stock, so if they were to sell it outright, they would incur the tax of their gain (many billions). They tried to do a tax-free spinoff of the Alibaba assets and some relatively similar, minor assets, but the IRS chose not to give them pre-clearance. This meant there was a significant risk to Yahoo of having to incur the massive tax penalty for the gain if it did the spinoff. The value of Yahoo as an operating entity (portal, tumblr, mail, ads, etc) is less valuable than not recognizing the gain on the Yahoo stock. So that's why they're exploring a sale of the operating assets. Of course, Yahoo has failed to turn the company's fortune's around - but this is all about tax. If they had turned the company around, the conversation might be different. TBD whether someone will actually buy this.

2) Pubmatic layoffs - Pubmatic claims that this was to focus on their premier customers. They said a relatively small percent of their customers drove 90% of their business, so they didn't need all the engineering and support staff for the peripheral customer base. But they also failed to gain traction in key markets, which they shut down entirely, and there have also been a fair number of publisher defections. It appears that, in many instances, Rubicon, Google, etc. are winning head-to-head, but it's hard to know for sure from the outside.

3) Turn layoffs - Success in the DSP business seems to be determined by the strategic bets made by the customers. The Trade Desk bet on agency trade desks, and agencies themselves, retaining the programmatic media buying business. At least at the moment, this was the right bet. Turn, on the other hand, made a play for client direct - which generally annoyed agencies and turned out to be wrong. They also tried to charge on a subscription basis, rather than percent media. Customers didn't want to pay like that. So they went elsewhere. DBM, The Trade Desk, MediaMath, AppNexus and others appear to have been the beneficiaries.

4) Collective layoffs - Collective made a bet going direct to agencies based on a data-focused programmatic buying platform. This competes with the agency trade desks. Agency holding companies generally have internal mandates of some sort to use the internal trade desk instead of an outside company like Collective, so they got squeezed out of this business and left with the more niche secondary markets.

5) Agency reviews - there have been a ton of agency reviews by brands this year, covering many billions of dollars of media spend. It's hard to know exactly why, but there's some guess that brands are using reviews to try to get greater transparency on the agencies fees and pricing, as well as to drive them down. Carat has been a big beneficiary, perhaps because they have some of the lowest fees in the business. There's also a rumor that the reviews are motivated, at least in part, but brands wanting to understand the double fee structure of the agency trading desks.

6) Business Insider / Axel Springer - I've talked to a lot of people in the industry who are struggling here. The consensus is that BI is a fantastic "new media" player, and that Axel Springer is less savvy in new media. They paid a hefty premium, perhaps because BI can help make Axel Springer's portfolio more relevant in the digital world, where it's largely been less successful.