The Influence of Emerging Markets on the AdTech Landscape
The digital video industry is undergoing rapid change as the companies that control the pipes are starting to buy up companies that control the content. The recent $56 billion deal between Charter Communications and Time Warner Cable, in addition to the $4.4 billion acquisition of AOL by Verizon, signal a future in which all content is streamed over the internet. As internet subscribers surpass TV subscribers, Verizon and Charter are making investments that will ultimately enable them to offer over-the-top (OTT) web and mobile content over multiple screens where the possibility to deliver highly data-driven, unicast, personalized advertising is tantalizing.
These significant deals also highlight the high growth industry of advertising technology, particularly around programmatic trading–the practice of fully automating the buying and selling of digital media. Both AOL and Time Warner have made significant investments in programmatic trading, and it’s now forecast to be a $53.3 billion industry by 2018 and account for 22 percent of total advertising spend. This is on top of the adtech investments we’ve seen from Yahoo (Brightroll), Facebook (Liverail), and RTL (SpotXchange), among many others. As the nascent adtech industry develops, digital advertising players are now thinking about how to better monetize their infrastructure, and maximize their publisher and brands customer base.
The greatest opportunity is proving to be in emerging “mobile-first” regions where households are more likely to have a cell phone than a computer. However, gaining a foothold in regions outside of the Western world is a complicated endeavor for adtech companies, due to speed and connectivity challenges in regions in which they don’t already have a physical presence. To capitalize on the yet-unexploited potential for user acquisition in developing nations, advertisers must consider connectivity solutions to service disparate customers in milliseconds through low latency solutions.
According to a report from research firm Informa Telecoms and Media, African telecom firms will generate $1.3 billion in advertising revenue by 2016 through ads in text messages, mobile apps, and downloads. As of June 2013, there were 778 million mobile subscribers on the continent.
Mobile adoption is also changing the media landscape in other emerging regions, including Eastern Europe, Asia Pacific, and the Middle East. All the major indicators—from market penetration to usage patterns—demonstrate the regions that are ripe for adtech disruption. For instance, 91.7 percent of internet users in Eastern Europe, including Russia and the Baltic states, will go online via mobile phones by 2017, up from 80.6 percent in 2015. IDC reports that the Middle East will see a similar growth pattern, where the smartphone penetration is set to reach 80 percent by the end of 2015—on par with the U.S., Russia, and China.
To convert these fast-growth internet economies into fast-growing ad spending, advertising technology providers must consider where to locate a Point of Presence (PoP), as well as how to manage connectivity.
To address a global market today, adtech companies typically have a data center presence in one European, one or two Asian, and two or three U.S. locations. Yet the shrewd adtech providers will soon look to positon themselves in gateway markets to capitalize on the emerging nations’ revenue opportunities, whilst maintaining the coverage and performance of where the majority of the revenue is today, without having to put infrastructure in multiple cities.
For instance, Stockholm is the connectivity node of the North and the best strategic location for reaching both Northern Europe and the rapidly growing internet economies of Russia and the Baltics. Vienna serves the western, central, and eastern European economies, and is the entry point to Turkey and the Middle East; Marseilles, with its submarine landing stations, is ideal for adtech firms looking to serve the Middle East, Northeast Africa, and Asia. Finally, there is Frankfurt, one of the most connectivity-rich cities on the planet, which can serve a wide variety of countries in Europe and Eastern Europe.
Already, these particular cities are attracting specialist communities of content delivery networks (CDNs), carriers, and gaming providers hosting PoPs there and serving the world’s more inaccessible audiences. The added benefit of these PoPs is that the latency to the rest of Europe is unparalleled; the latency of Marseilles to Paris, for instance, is 5 milliseconds. Once adtech players observe how they can maximize their return on infrastructure in gateway locations, it’s only a matter of time before adtech hubs, similar to today’s financial hubs, will emerge.
The Commercial Opportunity
Firms in digital advertising communities have always deployed their infrastructure in response to where the revenue opportunities lie. The digital advertising and automation opportunity started in the U.S., which is why most of the leading adtech firms come from the West Coast USA and New York. There were a plethora of digital publishers with inventory to sell, with brands and agencies willing to advertise on their platforms.
Firms deployed their infrastructure in the U.S. and served their limited European business from there. As the wave hit Europe and it became a larger part of the adtech business, latency performance issues and the risk of lost business caused the firms to deploy infrastructure in Western Europe as well.
Now the next wave is coming and moving to Central and Eastern Europe, Africa, Middle East and Turkey, begging the question: Will the adtech firms locate their infrastructure to pick up the revenue from this wave now or wait for it to pass?
We’re already seeing European specific adtech firms come out of countries like Russia to address those markets, and wondering if Western European and U.S. adtech firms will respond to this trend.
The key success factor for adtech companies will be adopting strategies to optimize their infrastructure investment. The development of financial trading hubs provides a lesson in what might come of the adtech landscape. Just as financial communities in New York City, London, and Vienna have been built up around financial exchanges and their matching engines to achieve ultra-low latency speeds from high frequency algorithmic trading so, too will communities be built up around ad trading. One of the key differences is that the adtech community will be far more complex, given the multipart value chain—the supply-side platforms for publishers; demand-side platforms, and trading desks for agencies and marketing departments; the DMPS, advertising networks, ad exchanges; and then the CDNs for content delivery.
However, in both industries, internet exchange PoPs housed within highly-connected facilities play a crucial role in helping traders deliver optimum network performance, minimize latency and minimize cost. As such, the strategically-situated data center will be the connectivity hub, enabling sub-or-millisecond connectivity to key customer venues.