SAS and Transparency are not pre-requisites to ad tech survival

If you spend enough time talking to CEOs and investors and luminaries in the ad tech world today you will hear two themes — SAS and transparency — that are often presented as requirements for growth stage businesses looking for investment and survival moving forward. This is a quick note on SAS and transparency where I want to dispel a few myths that seem to be circling the industry.

First, to get funded today, you must operate a self-service tool set that has software as a service (SAS) recurring revenue streams. The story goes that transactional business models based on media flow — by definition, the way in which most ad tech companies get paid — are highly variable and therefore hard to value. Second, marketers are tiring of opaque fees where it’s hard to know who is making what $ from the transaction and that therefore clear visibility into all fees along the media path will be table stakes moving forward.

On the topic of SAS revenues, I have written about this subject before here. On the demand side, I remain convinced that true SAS revenues — guaranteed contracts where money is paid up front for 12 months of availability and is non-refundable — just don’t exist where tech vendors businesses are built around media flow (DSPs and ad networks for example) and are getting paid by agencies. Anyone claiming they are SAS in one breath and saying their primary business channel is through agencies in their next breath, should frankly be thrown out of your room pretty quickly. That is not to say that SAS type economics are not possible — they definitely are, where the marketer is paying for the technology and the offering is based more on higher order pursuits like analytics or intelligence (companies like Datorama and Appsflyer do this) that sit on top of the more commoditized buying and serving tools .

What has been eye opening to me is the lack of true SAS businesses on the publisher side too. Intuitively it seems as if yield optimization and SSP tech sold to publishers with their own direct sales teams should be sold on a guaranteed license basis. The reality I have found from numerous conversations is that very few publishers have the funds to pay for this technology and much prefer a business model where the technology vendor is paid for generating demand for the very inventory that is optimized by the vendors tech. That is why you see every SSP needing to staff their own demand side teams to drive media through their tech and get paid on a traditional % of media flow rather than SAS. So what you see on the pub side is more of a hybrid model where say 10 to 25% of the revenue comes from fixed fee licenses (although most of these are not upfront and not true SAS) and the rest comes from transactional revenues. It’s actually a great alignment of interest between pub and vendor — much more than a pure SAS model.

My point here is that I don’t think SAS is a pre-requisite to investment or survival. For publishers and agency focused businesses it just doesn’t make a lot of sense and won’t moving forward. And there are still a number of businesses such as the Trade Desk or Criteo that have built large and successful businesses without needing to be SAS at all. The worst thing you can do though is to kid yourself and potential investors that you are SAS or that you could glean guaranteed up front revenues in a market that much prefers a transactional or hybrid business model. So if VCs want SAS like metrics, look elsewhere, and work with investors who actually understand the market.

Now let’s turn to the other topic de jour, transparency. A report published last month by the Association of National Advertisers, a U.S. trade body that represents some of the biggest ad-spenders, found that only 40% of marketers it surveyed were comfortable with the level of transparency they receive about their programmatic investments. Concerns included opaque fees, too many intermediaries and a lack of visibility into where their ads end up running. There is no doubt that this is a serious issue that speaks to the credibility of the entire ad tech ecosystem — one that has been compounded by the pervasiveness of fraud and the dominance of the walled gardens.

For those ad tech vendors focused on the largest brand budgets and trying to compete with the Four Horsemen of the Apocalypse, I would agree that agencies and their vendors are going to need to offer very well-lit environments in which the cost of and margins made on the component parts — media and data and services being the three big ones — are well known to the customer. If nothing else it’s a way to differentiate. In this regard, my old employer Sizmek is getting out early in front of the issue with their announcement covered here https://www.wsj.com/articles/ad-tech-firm-sizmek-promises-marketers-total-transparency-with-digital-ad-buys-1514977200 that all customers will get total transparency on the costs. I expect some others to follow.

But I think it’s going too far to say that this is going to be a requirement for survival. And in saying so I think it perhaps speaks to the commoditization of huge swathes of the tech landscape, a lack of innovation and a misalignment of incentives. Or said the other way history has shown that companies that deliver innovation and ROI through something truly unique don’t need to be fully transparent on the componentry…at least not in the early stages as they ramp up. I give you two examples. Criteo gets paid when it delivers performance and takes all the risk away from the marketer — it buys media, aggregates and analyzes data, but doesn’t tell the marketer how much it costs. Asking it to do so would be like buying a baguette from Maison Kayser because it smells and tastes like heaven and then asking the chef to disclose the cost of the water, flour and yeast that went into it. For as long as their data and performance are unique and they deliver results their current model is defensible. My second example is TEADS. Through the innovation of a new format — Outstream — and business model — CPCV — and excellent packaging and relentless focus, TEADS built a successful ad network and brought in huge brand dollars in a time when everyone said you couldn’t arbitrage media.

My point is that when you have something unique — data, format, performance or business model, or a combination of the foregoing — there is a lot more flexibility and room to go to market with a less than transparent model and bundle it together as a service rather than a platform. I recently came across a business called Teemo offering a cost per visit model for retailers that is a great example of this. Companies like this aren’t setting out to be transparent platforms for either the pub or the demand side. They focus on packaging something so simple, so unique, so delightful that customers just say yes notwithstanding a lack of transparency.

In conclusion, for the biggest platforms in the world trying to unseat the four horsemen, transparency may be an angle as they pursue a winner takes all approach. But for the rest, companies that I like to describe as purposely operating in the middle — not solely focused on demand or pub, not fully self-serve, not fully transparent and certainly not SAS — don’t panic. I am sure that SAS and transparency are not prerequisites to funding nor survival. Focus instead on aligning your performance and the way you get paid directly with your customers goals through the use of unique and innovative data, formats or business models. History has shown that good things happen to those that do.