LUMA's Disruption by the Numbers

The growth of digital media has created tremendous opportunities for publishers to
reach and monetize audiences across the web. However, the industry's obsession with
scale has brought challenges, such as platform vulnerability and not knowing their
audience, leading publishers to rethink what it takes to thrive in an increasingly
competitive battle for consumer attention and marketer wallets. In "Disruption by the
Numbers", we dive deep into the challenges, opportunities, and trends impacting digital
publishers today.

When you pull back and look at Digital Media from a macro level, things are going
great! Consumer usage continues to shift towards digital channels, with nearly half of
all media consumption taking place online in 2017, and advertising spend continues to
grow.

However, once you dig in, you quickly run into the wide variety of challenges the digital
media ecosystem is facing.

While each of these challenges have their own nuances, the common issue between
them is the issue of trust. Mark Pritchard, CMO of Proctor & Gamble, has been on a
rampage over the last 18 months. He’s been on a tour for the last year talking about the
challenges in the digital advertising ecosystem and it all really boils down to the lack of
trust he has in this ecosystem.

One challenge that is particularly damaging for publishers is fraud, as it has real,
economic consequences.

As an example of just how destructive fraud can be, look no further than the Financial
Times. In 2017, they ran an investigation into domain spoofing and found that $1.3
million a month of fraudulent inventory was purporting to be FT.com, coming from over
300 accounts, on 10-15 different exchanges.

On a macro level, the ad fraud detection company, WhiteOps, discovered “Methbot”,
the most profitable hacking operating discovered to date, at the end of 2016. According
the WhiteOps, Methbot was siphoning off nearly $5MM in fraudulent revenue a day
from over 6000 domains.

This is a serious problem, as not only are publishers losing revenue from their domains
being spoofed, but now some marketers are limiting how much they are willing to
spend online and aren’t seeing any difference in their results. As an example, P&G saw
no impact to their revenue growth after cutting nearly $200MM in digital ad spend, as
most of the additional spend was ineffective.

In response to the many issues in digital media, we’ve seen a range of solutions
emerge, from both technology vendors and industry organizations. These solutions
have primarily focused on fixing fraud, viewability and verification issues, to ensure
marketers are getting what they paid for and re-establish trust in the ecosystem.

One of the latest and most exciting developments is Ads.txt, which came from the IAB
Tech Lab. Like many great solutions, its power lies in its simplicity, as all that is required
is a text file placed on a publisher’s site which allows marketers and ecosystem partners
to confirm the available inventory is from the actual publisher. Ads.txt has significant
implications for both publishers and marketers.

An early proponent of Ads.txt, Business Insider, ran a test in October 2017 to show just
how big of an impact Ads.txt has. Within a 15 minute time period, BI flagged between
10-30 million fraudulent impressions. For context, BI only sees about 10-25 million
impressions a day.

While Ads.txt is still early, we’ve seen adoption sky rocket over the last few months, as
not only publishers and marketers got on board, but also the large ad tech players.

Despite recent concerns around brand safety and data usage, the Digital Duopoly of
Facebook and Google continues to be the dominant force in digital advertising,
accounting for nearly two-thirds of all digital ad spend and taking nearly all the growth.

The Duopoly’s power stems from four key capabilities – the scale and persistence of
their users, their ability to collect and utilize first-party data, their programmatic
technologies, and the fact that they are generally viewed as safe, well-lit environments
for advertisers.

They also have one other key capability – Free Content! Unlike most other companies
that monetize users’ attention with advertising and subscriptions, Facebook and Google
have the unique advantage of generally not having to pay for the content their users
consume.

Over the last few years, we’ve seen a variety of “new” media companies rise up. These
companies were built on technology and have touted their ability to achieve scale
quickly.

As a result of their scale, these companies have been able to achieve massive
valuations, often at significant premiums to their legacy media counterparts.

However, many of these “Content 2.0” companies did not own their scale, but rather
achieved it through referrals (largely from Facebook and Google), which created false
positives. As a result, when Facebook and Google made changes to their algorithms, it
directly impacted many companies’ revenues and left them either cutting staff,
initiating a fire sale, or shutting down entirely.

Algorithm changes are nothing new for the Duopoly. Over the last three years, they’ve
collectively made over 10 changes that impacted publishers. While some of these
changes actually benefited publishers, the most recent ones from Facebook were
particularly damning. Either way, it’s clear that publishers are not a primary concern, as
the platforms are first and foremost focused on pleasing consumers and marketers.

What this all boils down to is the fact that most digital publishers have a first-party
data problem. They know how many impressions they have and may know how many
unique visitors, but rarely can these digital publishers tie an impression to an individual.
As a result, they aren’t able to optimize the consumer experience or the monetization.

Publishers’ incentive to focus on scale for higher valuations only compounded the issue
of not knowing their users. Resources were allocated to achieve the next million users,
rather than building a relationship with the users they already had. Once launched, this
can be a tough ship to turn around, as it entails taking a hit to revenue in the near-term,
with the hope of gaining control for the future.

Ultimately, publishers need to own the relationship with their customer, creating a
symbiotic relationship where they provide value in the form of content and receive data,
as well as monetization opportunities in return.

One of the biggest problems publishers have with building a relationship to their
consumers is that they often can’t identify one user from another (besides cookies,
which aren’t effective for true identification). In general, publishers can only truly
identify their most loyal users who may log in to their site, although this figure is
typically below 5% of traffic. Therefore, they must treat all users effectively the same,
providing the same user experience and monetizing them in similar ways.

This lack of identification comes with significant opportunity cost. With better identity,
publishers can provide far more effective advertising and command higher CPMs.
Additionally, if subscriptions are part of the business, publishers can optimize the
customer experience based on who to target for subscriptions and who to show ads to.

In the last 18 months, the “CDP” category, which stands for “Customer Data Platforms”,
has emerged and become a major buzzword in the marketing industry. So much so, that
we revised our Marketing Technology LUMAscape last fall to reflect the category. But
what does a CDP actually do?

In general, the CDP has three main functions. First, it collects, normalizes and unifies
data from a variety of systems such as email platforms, websites, mobile apps, call
center logs, e-commerce systems, etc. Second, it applies intelligence to this data to
segment users and determine the next best action, such as a product recommendation
or offer. Finally, it syndicates the next action back to the execution platforms to enable
the interaction with the consumer across touchpoints.

Therefore, for marketers a full-featured CDP pulls together the key capabilities that we
feel are critical for marketing – “data”, “orchestration”, and “identity”.

While most of the buzz about CDPs has been on the marketer side, we would contend,
that these same capabilities are critical to solving publishers’ problems. Publishers could
use the CDP functionality to ingest data, identify and segment users on their site, and
determine the best action for that user, such as serving tailored content, targeting them
with specific types of ads, or pushing for a subscription.

In the last few years, the term “pivot to video” has become a running joke in digital
media. What started as a transition towards higher quality and higher value inventory,
has become a desperate attempt to make up lost revenue from a shrinking user base.
That being said, there is still a massive opportunity in premium video.

The convergence of TV and digital video has become inevitable as these worlds continue
to collide. Premium content is already pervasive across both worlds and is now
indistinguishable in quality, leading consumers to interchange between them and
marketers to begin spending heavily across both. While programmatic tech and
integrated workflows have lagged, we expect these to continue to converge in the
future.

When thinking about convergent TV, it’s important to recognize how it will impact
power dynamics in a totally addressable world. As we stated earlier, Facebook and
Google are clearly dominating the $83 billion digital ecosystem, leaving the rest of the
LUMAscape to fight over the remaining 37%. Yet they play a relatively small role in the
$76 billion TV advertising ecosystem, even if you included YouTube’s presence in OTT.

Therefore, when you consider these two worlds combining into a $155 billion
addressable ecosystem, the power shifts away from Facebook and Google. While they
would still be prominent players, they would no longer own over half the market,
opening up opportunities for others to grab significant stakes.

With so much at stake, it’s no surprise that there is an intense battle for the future of
TV. The new entrants, i.e. the digital giants, are taking an offensive approach to steal
market share, leveraging content investments and better product experiences to fight
their way in. Meanwhile, the incumbents, i.e. cable companies and MVPDs, are taking
a defensive approach, relying on regulation to secure their footing in the marketplace
and M&A to acquire the scale and capabilities necessary to play in this future.

On the content investment front, Amazon and Netflix are leading the charge,
outspending traditional TV networks in original content last year. We expect these
digital powerhouses to continue to invest heavily in content as they have generated
huge returns from these efforts and are producing high quality programming that is
being recognized by viewers and industry watchers.

Despite being on the defense, linear distribution has been actively pursuing the
“verticalization” of media, where distribution firms are acquiring content and
monetization technology to control the entire business. Comcast, Verizon and AT&T
have been the most active with this strategy as they try to capitalize on the large
opportunity in front of them. While they have not been sitting on their hands, we
suggest that they lack sufficient digital monetization, which should lead to more M&A.
(pending)

While it’s uncertain how the future of TV will play out, one thing that is clear – it’s not a
fair fight. Most of the the digital giants have more than double the market cap of the
largest TV incumbent, allowing them to make significantly more and larger bets to
ensure their position for the future.

One of the most interesting, recent stories in digital media is the renewed success and
momentum of The New York Times. For the first time in over a decade, The Gray Lady
has posted significant revenue growth and nearly all of it was driven by digital.

The New York Times has done something few have achieved, transforming itself from a
predominantly advertising based-business to a predominantly subscription-based
business. While there was certainly a lot of pain (and declining revenues) in the interim,
the NYT is now back into growth mode.

They were able to achieve this by rebalancing their priorities between brand and scale.
With the advent of the internet, the NYT’s circulation no longer commanded the
advertising power it once did. However, their readership remained loyal. With this in
mind, the NYT started enforcing stronger and stronger paywalls over the last few years,
leveraging the power of their brand to push consumers to subscribe if they wanted NYT
content.

The strategy has paid off and The New York Times has not only started to grow revenue
again, but has also reversed a ten-year valuation trough. Interestingly, in regaining
their aggregate valuation, the NYT has also achieved much higher valuation multiples.
Compared to 2008, The New York Times is trading at nearly double the valuation
multiples, highlighting investors preference for sustainable and predictable business
models.

That’s not to suggest that building a brand as strong as The New York Times is easy. It’s
not. The most recognized and iconic media brands were built from a unique voice,
history, and many other intangibles.

Yet having a strong brand is a very powerful asset, and one that should not be
underestimated in digital media. A strong brand is less vulnerable to ecosystem
changes. Whether there are algorithm updates by the major distribution platforms or
shifts in the programmatic ecosystem, strong brands are able to direct their own
course.

Furthermore, as publishers build a loyal following and direct relationships with their
audiences, they will have a wide variety of monetization opportunities beyond
advertising at their disposal…

…as well as distribution opportunities, as they can leverage their brand to launch new
forms of content and engage with their audience in different ways.

We envision the publisher value matrix through “Want-to-Know” and “Need-to-Know”
properties. While there are large publishers of general interest or “Want-to-Know”
content, there are others with scale and “Need-to-Know” content that have a material
advantage. Even small publishers with a niche focus like B2B travel media company
Skift, can build loyal, lucrative audiences and by effect, a strong defensible position. But
if small publishers don’t deliver quality content, they will face a challenging future.

We are witnessing some interesting developments unfold, such as BuzzFeed, which is
finding success with its new standalone food brand Tasty and is building a blueprint to
start more vertical properties. Vox Media has long pursued this strategy, having built
and acquired a family of verticals to address all types of contents and engaged
audiences.

Ultimately, we believe we’re heading back to the future for Content 3.0. While the
future digital media leaders will certainly need to leverage technology, they will use
technology to achieve traditional business use cases – building a brand, investing in
content, and owning the customer relationship.

LUMA's Disruption by the Numbers

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LUMA's Disruption by the Numbers