Verification at the crossroads

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This isn’t a stock picking newsletter, but it is notable that 2024 has been a tough year for shareholders in the ad verification* stalwarts, Integral Ad Science and DoubleVerify . Their stocks are down roughly 33 and 48 percent, respectively, and even worse, have been criticized in this newsletter and podcast by your sharp-witted author. I want to take a moment to meditate on what’s ailing these companies, along with some prescriptions for growth.

* I’m using the shorthand “verification” even though these companies offer multiple services such as viewability, fraud, etc.

The bull case: Insurance on digital advertising

First, let’s be clear that these companies are pretty healthy. They are profitable and growing, and a big part of their stock malaise can be attributed to overly optimistic valuations.

The bull case is pretty easy to make and goes something like this: The verification category has become a form of insurance on digital advertising, and agencies and brands have accepted the need for this product, and essentially mandate usage on most or all of their spend. In the same way Nielsen became a tax on TV advertising, verification should similarly grow linearly with digital.

The bear case: Slowing organic growth, and limited TAM

As we’ve discussed in this newsletter, open web advertising is in decline. Verification companies make most of their money here, and certainly their margins are lower in walled gardens. As also described in this newsletter, there is questionable effectiveness of the technology within sites like X, Meta, etc, and those platforms have a strong interest in building their own pre-bid and safety tools ultimately squeezing growth and margins.

The bear case is:

• Most open web advertisers already have a preferred vendor
• Organic open web is slowing
• Walled gardens are a lower margin opportunity

The innovation challenge

If you’re confronted with a flattening market and high penetration you have three strategic options: 1) diversify into new markets; 2) cut costs and squeeze profits; 3) get current customers to buy more from you.

IAS chose diversification, with its acquisition of Publica by IAS . CEO Lisa Utzschneider defended this acquisition on the podcast last Summer, but I remain unconvinced that a video ad monetization platform has anything in common with the core verification business. DV bought Scibids - acquired by DoubleVerify to expand into optimization, which you could argue it is a natural extension of pre-bid targeting, but I think is a fairly separate market.

Let’s put aside cost squeezing given these are still “growth” stocks with healthy PE ratios.

That leaves new products and services as the growth strategy, and I contend that both companies are seriously missing the ball on core innovation.

Lessons from Nielsen: The 4 R’s

I spent an unhappy 8 months as an executive at 尼尔森 . And while I will only share my memories of that time with my therapist, I will share with you a useful framework. I’m not sure who deserves credit for this, but I present to you the “Four Rs” of measurement:

• Reach: Who potentially saw the ad?
• Receptivity: Was the ad viewable?
• Recall: Does the consumer remember seeing the ad?
• Reaction: Did the ad cause the consumer to buy something?

The strategic insight is that different advertisers may wish to measure different combinations of these “R”s in different ways, but if you have a tag in the creative you have the potetntial opportunity to provide any combination of these. If you believe this framework holds some value, then it immediately becomes kind of shocking that the verification companies have limited their purview to just R-number-2, receptivity, while huge amounts of value accrue to companies pursuing the remaining Rs.

Missed opportunities

Whether through organic building or M&A, I see a number of product areas where neither of the major verifiers currently play, but where there is clear opportunity to grow and innovate.

Reach: We are in the middle innings of the great shift in TV currency from Nielsen to…someone else. Nielsen was able to extract about 9% of the total value of the linear television market and the disruption of this monopoly is one of the most interesting business stories of the past twenty years. Where are DV and IAS?

Reach: CMOs are facing a hugely fragmented media environment, making media mix modeling ever more complex and important. If only they had a trusted partner to help.

Receptivity: Brand safety prediction is a staple of the open web, but when buying on YouTube or CTV marketers often rely on other companies or crude contextual clues. A clear area for innovation and growth.

Receptivity: Someone told me there are 25 different companies measuring “attention” metrics. Seems like a slam dunk to set the standard and execute.

Recall: Brand impact surveys are a staple of open web advertising, but a largely fragmented business.

Reaction: Why shouldn’t the company verifying the quality of the media also help correlate that data with outcomes? A number of companies specializing in CTV attribution have been gobbled up over the past years, but none to the verifiers.

And one bonus option: carbon. If you believe that marketers are going to want carbon measurement on every impression, it’s yet another opportunity to expand your revenue footprint. And if you don’t do it first, someone else might get into the verification game.

One last thing

Up until this point I have actually not been very critical of these companies. I’m trying to be helpful. But I will take a small opportunity to be critical now.

Measurement in inherently fraught. Different parties may disagree on the truth, and will almost certainly disagree on the measurement of the truth.

If you hold yourself out as the standard for measuring something as difficult as brand safety, you need to stand behind your numbers and be accountable. As someone who has been in this business for a long time, I don’t feel that either IAS or DV has put enough effort into documenting, defending, clarifying, and coordinating their decisions about key metrics with the larger ecosystem, including publishers and advertisers. Too often there is finger pointing and corporate speak instead of transparency. This is eminently fixable.

This article was published in the weekly Marketecture Newsletter. If you like content like this please subscribe for free.