Progress Partners 2019 Market Perspectives
Progress Partners is a boutique investment bank focused on technology. As we approach a successful end to Q2, we are sharing an outlook on digital media market for the remaining 2019 as relevant to our specialties in technology, media, and communications. The comments below can be categorized in MarTech (data, automation, and attribution), Media Tech, Managed Services, CRM software, as well as Retail.
General M&A Landscape and the Economy
In general, volatility will remain in the market for most of 2019, adjusting to slower global growth and late stages of a 10-year growth cycle. Regarding the M&A landscape, since most macro views predict a recession in early 2020, cash balances amongst strategic and financial buyers will keep demand and currency intact to maintain healthy deal activity for the remainder of 2019 and beyond.
A rise in deal-count in 2019 is a common view among corporate strategists of large technology companies. However, amid this positive view, there are headwinds including concerns over global market volatility, potential delays in key business-related legislation, regulatory and geopolitical uncertainty derived from trade disputes. For instance, while private equity firms have increased their role in M&A transactions in the past year, their deals are particular to companies with highly-predictable, recurring revenue models to protect against the risk of an economic downturn.
Current Digital Economy
On the other hand, the digital economy remains strong and largely unaffected. In fact, the market for TMT (technology, media, and telecommunications) has almost doubled in size since 2008, as a result of macroeconomic conditions, and more importantly, the high rate of growth in the broad adoption of technology across most verticals. We expect 2019 to present a number of opportunities to drive significant evolution and value creation in the TMT space. Increased adoption and innovation in payment technology for financial technology (fintech), programmatic automation for advertising technology, and artificial intelligence in knowledge management, offer attractive opportunities for consolidation. Each sub-sector of the TMC market represents a shift away from hardware driven technologies and toward a model leveraging software as a service (Saas). There is a push toward increased productivity to drive development in automation, manifested in a growing number of sectors such as direct marketing, digital video, as well as retail logistics.
An opportunity specific to the media industry is derived from changes in the regulatory and legal pressures of GDPR and privacy laws. The U.S. market will begin to mimic the EU’s approach for personal privacy and data sharing - a change led by GOP and Congress. As a result, major players like Facebook will be forced to make changes to its terms of service, which will give Adtech and Martech companies an opening to thrive in the areas where Facebook has dominated previously.
Marketing Tech: Data, Automation, and Attribution
The data sector is very active due to forthcoming regulatory headwinds, and as GOP and Congress keep pushing the market, the implication is equal parts pressure on the 3rd Party Cookies and 1st Party Data. As a result, we will see the value of Customer Data Platforms (CDP) rise as Marketing Clouds seek opportunities to merge or sell in a broader consolidation, or to add functionality to their offering. Already, there have been several transactions involving the acquisition of CDPs by cloud marketing software providers (think SessionM going to Salesforce). For instance, traditional data platforms like TransUnion and Acxiom have made acquisitions (e.g. TruSignal and LiveRamp, respectively) and large holding companies like Dentsu Aegis Network and Publicis acquiring direct marketing platforms (e.g. Merkle and Epsilon).
As the thin line between AdTech and MarTech continues to blur, attribution proof points are driving adoption. Tighter integration with consumer purchasing data and probabilistic data sources is anticipated, as giants like Amazon push the market to adapt.
Media Tech: TV/OTT
Inevitably, the leaders in Over-the-top (OTT) and Connected TV (CTV) are taking over and disrupting the traditional TV model. However, it is important to note that the change will not happen in a matter of months or even years. It’s estimated to be 4-7 years away, and with that length of time, the incumbents in the linear space have time to catch up. While not all multichannel video programming distributors (MVPD) and telecommunications will survive the linear TV race, the amount of market share they could lose serves as a great motivator to try their best to reinvent and adjust. We expect to see several familiar names successfully transition to join a smaller number of new entrance as the dominant paradigm.
The change from Traditional TV to OTT & CTV can be illustrated as a shift in demand (Consumers) and supply (MVPD) curves in a basic economics graph. Many say that consumers migration to OTT will cause an immediate shift of the demand curve, but since the demand is composed of money, time, and behaviors, it could take a long time to change.
Unlike the way iPhone disrupted mobile, current TV players like Apple TV, Roku, Vizio, and Amazon Prime are not yet capable of drastically changing consumer behavior in the space. The $10-$30 price cut every month off consumer monthly bills (which is less than what a typical American spends on coffee) is not going to cause a massive behavioral change. There is a generational gap at play, as many children may never grow up to have a “cable bill,” but on the flip side, elderlies are least likely to adopt an Apple TV or Roku.
Additionally, the fact that carriage agreements are multi-year contracts, further supports that it will take a while to change the TV space. For instance, after the re-negotiation with carriage agreements, ESPN, owned by Disney, is no longer available on Verizon Cable. However, it is in both Disney and Verizon’s interest to find a way to capture the user as they shift from one format to another. This is especially true considering how important it is for Disney to distribute its 4M subscribers at once, thus it is likely that both parties agree upon a deal, and a secured contract will mean another 3-5 years until this becomes a problem again.
As OTT matures, we will continue to see capital flowing into ad-supported platforms (e.g. Netflix) as there is too much demand on the advertising side for them to remain solely subscriber-based. The trend mimics the way Hulu entered the ad market and how digital radio (e.g. Sirius) revolutionized the broadcast industry.
In-housing and Outsourcing: Changing the model
Managed service teams that have successes on the buy side, such as MightyHive, have sell-side companions now. Large corporations are working with partners like Unbound to build out their own marketing and advertising technology stack. Niche publishers are finding ad operations, content management, and programmatic stack management sales to be too expensive, and the Ad Network model is being reinvented around outsourcing all of that (e.g. companies like Work Reduce). Companies like AdThrive, Freestar.io, Maven, and Lola are seeing growth as a result of their practices: Offloading the overhead content creators they have and building their own stacks on the sell side to create large pools of inventory across centralized CMS platforms, capturing and leveraging data.
SaaS: CRM and the market
While managed services continue to see successes as companies leverage data to create larger pools of advertising and marketing inventory, CRM software has taken over database management systems to become the fastest growing software market. In fact, CRM is estimated to reach more than $80 billion in revenues by 2025 as companies demand better access to customer data in real-time, with mobile and cloud solutions leading the way. Leveraging customer data is more crucial than ever as companies are expected to connect platforms and technology with data to deliver a more personalized experience. However, surprisingly, CRM software remains an untapped market with 50% of companies not using CRM. It also represents a great opportunity for CRM companies with superior solutions as currently 42% of CRM software goes unused and 47% of CRM projects fail.
Retail: Transitioning the role of physical assets and technology
Meanwhile, data and technology have begun to take a different role in the retail industry. Curating a direct-to-consumer relationship and leveraging resources to create a personalized experience are emphasized to be the key to success in this sector. However, the previous business model of sole reliance on digital platforms has come to an end as digital acquisition costs rise, and as retailers find bricks-and-mortar stores to be a critical part in tailoring the overall consumer experience, from a better in-store experience to faster delivery.
Data has continued to be a buzz topic, but it is switching gears from securing privacy, to assisting retailers, to enhance customer loyalty. As retailers gain the ability to recognize customers’ profiles and preferences through technology, physical retail stores are increasingly valued due to its capability to offer a personalized service.
Moreover, the marriage of digital tools and physical assets are yielding a unique way for products to be interacted with. Retailers have become more creative in their supply chain management. Many are starting to see physical retail stores as micro-fulfillment centers that service both online and in-store purchases. In the traditional grocery industry, technology disruption is taking place, particularly in its logistics. Many digital startups are leveraging robotics solutions to fulfill online grocery orders, and some are delivering “on-the-way” services that connect dispatching items with drivers who are heading in the right direction.
Another consensus from the retail industry leaders is that while Amazon has singularly dominated the marketplace, there are more opportunities for logistics tech startups, which retailers can leverage to collaborate and compete with Amazon, given the e-commerce giant has not succeeded in every retail category.
Finally, not only has technology begun to collaborate with physical stores and broken into logistics, it is also revolutionizing online retail platforms such that it curates a lean-forward environment that proactively participates shoppers initial decision process. Companies, like Pinterest, with an ability to “inspire” and influence consumers at the decision phase grants unique advertising opportunity, and the industry’s consensus is to expect Pinterest to take a pioneering bite in the e-commerce experience.
The TMT market continues to see technology disruption across marketing, managed services, CRM, and retail. The industry’s dependence on data, automation, and attribution is evident as marketers, advertisers, and retailers expect to deliver enhanced, personalized services to clients. Various acquisitions have already occurred to expand companies’ capability with Cloud marketing software and direct marketing platforms. Emerging technology also assists companies to compete with giants. For instance, dominant companies like Salesforce and Amazon have not claimed all market share in untapped markets like CRM and digital disruption in grocery logistics, and thus it derives an opportunity for others to collaborate with emerging tech startups to compete. On the other hand, despite the proliferation of emerging tech startups in OTT/CTV, the market will take a while to fully transition as consumer behavior does not immediately adapt.