ARPU Kidding Me?

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The most common exit path for ad tech companies has historically been M&A. The business has a rich history of 8-, 9-, and 10-figure acquisitions, some of which, dear reader, have benefitted this author.

But there’s a dark side to M&A, as the 900 or so employees of Oracle Ads learned this week. BlueKai and Grapeshot join an exclusive club and will share some drinks with LiveRail (acquired by Facebook in 2014) , Wildfire, aQuantive , and countless others in the pantheon of failed acquisitions. Let’s dive in to see if we see some patterns to why some deals work and some don’t.

ARPU Imbalance

Telecoms have been among the most active equity destroyers in ad tech. From their perspective, advertising was seen as an easy way to increase Average Revenue per User (ARPU). Say you’re making $40 per month for each mobile subscriber (stats). If you throw advertising into the mix, using your amazing data, maybe you can make an additional $1 or $2 of high-margin revenue. This would then have a carry-on effect of freeing more money for user acquisition, which would win share against your less-ad tech friendly competitors.

Why didn’t this work? Or, to be more precise, why didn’t this work, over, and over, and over, and over again.

The ARPU mismatch is at the core of this. Using the back-of-the-envelope calculations above, the core telecom service might be worth 20x more than the advertising revenue. So if anything you do on the ad side jeopardizes the larger business, it just isn’t worth the risk.

But there are many cases where “add ons” work great. You can think of Commerce Media as an ARPU expansion for retailers and marketplaces. Many cable companies have successfully integrated digital advertising into their stacks. What’s the distinction?

The trick is whether the low ARPU add-on is complementary or conflicting with the combined value proposition. Commerce ads a shopping experience feel natural and arguably help the consumer with their decision. BNPL services at checkout give shoppers more financing options. Cable companies selling digital ads to the same local advertisers they sell linear makes sense to both.

Telecoms got into the ad game because they thought they could use the data to target ads. Then they realized this was a) not in the customers’ interest; b) not clearly legal; c) sold to a totally different ecosystem than their typical customers. The ARPU mismatch is paired with an inherent conflict of interest.

Observations from my time at Google

Google’s acquisition of DoubleClick and YouTube are both interesting case studies of this framework. Google search is one of the most profitable businesses in history, and it’s ARPU vastly outstrips what the company makes on AdSense, with or without the addition of DoubleClick and programmatic.

Every decision about more closely integrating search and display involves a risk calculation, fraught with internal politics. Should we use search data to inform display targeting? Should we drop the DoubleClick cookie on Google properties, like YouTube? Would these decisions put the search ARPU at risk?The synergies with DoubleClick were clear for advertisers, but questionable for consumers. Ten years later we’re still trying to pick apart some of this knotted mess.

YouTube, in contrast, had clear synergies with Search for both consumers and advertisers from the get-go. Consumers wanted to find videos through search. Advertisers wanted to extend their search dollars to video content. The questions on YouTube were ones of execution, not strategy.

First, kill all the lawyers

If there’s one thing Oracle is known for, it sure as hell isn’t relational databases. It is lawyers. Armies of them. If you haven’t seen it before, here’s the Oracle org chart:

But it isn’t just Oracle. When ad tech companies are acquired by large companies with conservative ideas of legal risk there’s often a huge conflict. And that conflict results in customer churn, slower sales, and most dangerously, reduced innovation.

Why does this hurt advertising acquisitions more than, say, SaaS acquisitions. Advertising is contractually extremely complex, maybe rivaling the finance world in its pitfalls. SaaS contracts don’t often deal with issues like:

• Sequential liability
• Privacy risk as a core part of the offerings
• Rapidly changing product lines
• Variable pricing
• “Seats” for billing that are different from operations
• Fraud
• Marketplace dynamics
• etc.

Next time you see a good ad tech lawyer, give them a pat on the back, and offer to throw their monthly Adderall tab on your expense account.

Investment and innovation

Corp VP: “Glad the deal is done, time to double sales and ramp up EBIDTA”

Acquired AdTech CEO: “Exactly, but first we need to double the size of the product team to deal with Sandbox, upgrade our data warehouse to Snowflake, rewrite our UI, and do all the stuff we promised our customers.”

I’m going to say something controversial. SaaS is fucking easy. Most SaaS software barely does anything. It’s a bunch of React code running on a SQL server. Ad tech is a nuclear power plant that’s being rebuilt while under attack by a separatist army. The corporate mind cannot comprehend this.

Um, didn’t you sell your last company to a telecom?

Technically it is a cable company. There is a history of greatly accretive M&A in ad tech. It requires real synergy for consumers and customers, along with a commitment from the acquiring team to do what it takes to succeed in this ever-changing, complicated, and competitive arena.

This is from my weekly newsletter. If you like it, please subscribe for free.