A few days ago I hosted the meeting of our Internet Advisory Board. Preparing for that meeting led me to jot down my thoughts regarding the sector’s monetization opportunity.
I remain bullish on the transformative potential of the Internet in the enterprise that we view as the channel for achieving scale inexpensively and transforming every industry. Three drivers feed our bullishness:
- The US-based Millennials (the most Internet-savvy consumers) are entering their prime buying and influence period. But they carry a heavy debt load leading them to use services and share rather than own giving rise to the subscription and sharing (and here) economies.
- High-speed mobile access combined with improved smart devices (smartphones, tablets, embeddable devices) further accelerates Internet usage. The mobile device opportunity is having a far greater disruptive impact than anticipated
- Low penetration of the Internet channel in most industries. In a recent survey conducted by Booz executives from 350 companies reported that they spend 8.1 percent of their R&D budgets on Internet-related tools.
The Internet offers a great opportunity, but also a great challenge for marketers seeking to engage consumers at a time when publishers and platforms are ceding control to users. We see this impacting two areas of focus for Trident: online advertising and marketing applications and services.
Internet advertising has arrived at an important junction that will fuel the next leg of sustained growth. Over the past 10 years we have seen the sector change dramatically. The first wave of Internet advertising growth was driven by direct-response marketing budgets particularly from industries such as auto, travel, tech, telecom, retail, and financial services.
Several structural and technology improvements particularly to display advertising are attracting additional industries but also causing untapped brand budgets sitting inside leader categories to shift. They include:
- Programmatic execution combined with advances in media analytics and optimization.
- A shift toward integrated data. Data, as well as tools to leverage this data, are now viewed as key component of this new adtech because they are improving targeting and conversions.
- Improvements to messaging capabilities through scaled multi-format reach, (though creative still needs to catch up particularly to RTB).
- Improved quality metrics on ads.
- Brand-safe advertising environments, because brands realize that it is easier to lose control of their brand on the Internet.
- Scalable, cloud-based software platforms coupled with a combination of subscription and usage pricing (not unlike what utilities do for their customers) that enable the delivery of this capability as a service.
Taken together, these structural developments will lead to a rising level of confidence among brand-oriented advertisers that will increasingly view online display (in its various forms) as a more desirable complement to, and replacement for, fragmented mass media channels. Brands are allocating an increasing mix of their ad spend to online video. The budget is coming from TV broadcast and print advertising. We see industries such as CPG starting to aggressively allocate budgets to display advertising. While they spend nearly $200 billion globally offline, such advertisers continue to under-invest online.
We are particularly encouraged by projections calling for the share of agency media budgets spent through programmatic channels to increase from 15-20% today to 40-50% by 2015. Some surveys project that between 2012 and 2017 RTB-based spending in the U.S. will grow at a 56% CAGR. Mobile will be a significant driver of overall RTB growth (IDC expects mobile RTB spend in the US will reach $1B by 2015 and $3B by 2017, representing 21% of the total RTB spending).
The accelerating move of consumers and businesses to Internet, as well as the rise of the subscription economy, namely the move to sell products as services sold on a subscription basis, are causing a re-examination of the marketing applications stack. Customers have more knowledge and control over how, when, and why they engage brands. They increasingly expect a unified experience that is consistent across all of their business interactions. Consumers in particular are increasingly empowered to avoid unwanted or undesired marketing. The line between offline and online continues to disappear, and as it does, the line between product and service is also becoming blurred.
As a result of these trends and the associated data explosion traditional marketing approaches are no longer working causing CMOs to reexamine their established practices and assumptions about advertising, demand generation, retention, and loyalty. In the process of this re-examination they are starting to adopt a new class of applications that power awareness, attention, affinity, action, loyalty and optimization. While the space of these new applications today remains extremely fragmented with hundreds of startups having been funded already, large vendors have started to aggressively build, partner with or acquire the technology enabling them to create a new marketing applications stack. To the traditional infrastructure vendors, like IBM, SAP, and Oracle new cloud-based application vendors like SFDC and Adobe have been added, as well as Internet pureplays such as Google, Facebook, Twitter, Linkedin.
The combination of these factors lead us to three observations:
- Engagement applications entering the marketing stack. Business applications are becoming critical tools to engage with customers. Engagement applications enable companies to empower interactions with customers across a variety of channels. We have invested in ThisMoment, Extole and 8thbridge under this thesis.
- Advertising and marketing are being re-imagined becoming more of a science than an art as earned media become a bigger part of the paid and owned equation and as more data is collected from each customer interaction, integrated and analyzed. Portfolio companies like Exelate, Turn, Jiwire, Brightroll, and Sojern are leading examples of how analytics changes the game in online advertising and marketing.
- Subscriptions to software (SaaS) and services will replace existing manual processes and traditional on-premise applications. All of our portfolio companies in this space deliver SaaS applications or provide their service using subscription billing.