Market Share

Worldwide Digital Advertising Software Market Shares, 2017: Despite Intense M&A Activity, Still a Fragmented Market

Karsten Weide

EXECUTIVE SUMMARY

The most interesting finding that has come out of this study, considering the ongoing intense merger
and acquisition activity in the digital advertising software segment, is how fragmented it still is. Even
the top 15 vendors represent not even 40% of the market, with a multitude of small, specialized
vendors with limited revenue making up the rest.

The two top vendor categories are demand-side platforms (DSPs) or DSP-like offers — Criteo,
MediaMath, AppNexus, AdRoll, The Trade Desk, dataxu, and Centro — and one-stop shops — Google,
Adobe, and Oath (AOL and Yahoo!). These are followed by supply-side platforms (SSPs) — OpenX,
Rubicon Project, and PubMatic — with revenue volumes about half the size of that of the DSPs.

The overall market for advertising software grew at 38% year on year, from $9.2 billion in 2016 to
$12.7 billion in 2017. At these spending levels, advertising technology sales stood for 4.7% of total ad
sales (2017), up from 4.0% (2016). We expect this share to grow to 7.8% by 2022 as the industry's
push for advertising automation continues and the overall volume of spending on advertising
continues. The transition from traditional TV advertising to digital video advertising, specifically
connected TV advertising, will be the one major driver of future growth. The other characteristic of the
market is the ongoing intense merger and acquisition activity, which will, however, not lead to major
consolidation in the ad tech sector yet — as opposed to publishers and the media segment.

"The ad tech segment is still very fragmented," said Karsten Weide, VP of Media and Entertainment,
IDC. "This means there is a lot of opportunity for acquisitions, but also for growth."

ADVICE FOR TECHNOLOGY SUPPLIERS

• Buyers will continue to shift media purchases from traditional channels into ones optimized by

• A primary driver is the adoption of programmatic platforms (demand-side platforms, supply side platforms, data management platforms, ad exchanges, and dynamic creative
  optimization), which will see the fastest growth at a CAGR of around 26%. Social media
  advertising will grow as fast. Ad servers and search engine marketing (SEM) platforms, being
  fairly mature, will see the slowest growth (in the low-double-digit CAGRs). Attribution, because
  of the difficulty of implementing it, will also see slower growth.

• Most of these platforms are fueled by data. Expect more difficulty using data due to increasing
  privacy protection initiatives. This in turn could decrease advertising ROI, which could
  translate into a minor slowdown in ad tech sales.

• The application of artificial intelligence and machine learning may, however, easily more than
  make up for that decline in ROI.

• One major driver of change is the transition from traditional (linear) TV to digital video. Users
  are continuing to shift their video consumption from traditional TV to digital alternatives. While
  this shift has been steady but slow in the past, there are signs for an acceleration of that trend.

• The Google and Facebook duopoly will continue its reign. Buyers are growing increasingly
  wary of the growing might of the duopoly. For that reason, some of them have begun to shift
  budgets into Amazon. However, Amazon's ad sales are probably still only 1/20 of the size of
  Google. This means that, even if sales develop in the most favorable way for Amazon, it would
  still need four to five years to catch up to Google and Facebook.

• The growth of Google and Facebook — but also of tier 2 players such as Amazon, Verizon's
  Oath (the combination of AOL and Yahoo!), AT&T, Comcast, and Adobe — means that we will
  see a phase of continuing mergers and acquisitions, reducing the number of smaller
  independent vendors. Even Adobe may eventually be acquired (e.g., by Microsoft) or perhaps
  Facebook.

• The duopoly and the consolidation of the independent ecosystem mar independent vendors'
  growth prospects. They can still expect growth but perhaps at lower-than-segment rates.
  Slower growth and the reduction in the number of independent vendors, more integration
  between platforms, and buyers pushing for more market transparency will all increase
  competition for them.

MARKET SHARE

The most interesting finding that has come out of this study, considering the ongoing intense merger
and acquisition activity in the digital advertising software segment, is how fragmented it still is. Even
the top 15 vendors represent not even 40%, with a multitude of small, specialized vendors with limited
revenue making up the rest. And even the biggest vendor does not crack the 10%-of-market threshold.
Figure 2 and Table 1 outline these top vendors.

FIGURE 2

Worldwide Digital Advertising Software Revenue Share by Top 15 Vendors, 2017
!

Note: This data excludes data vendors.

TABLE 1

Worldwide Digital Advertising Software Revenue by Top 15 Vendors, 2016
and 2017

Note: This data excludes data vendors.

The two top vendor categories are demand-side platforms or DSP-like offers — Criteo, MediaMath,
AppNexus, AdRoll, The Trade Desk, dataxu, and Centro — and one-stop shops — Google, Adobe, and
Oath (AOL and Yahoo!). These are followed by supply-side platforms — OpenX, Rubicon Project, and
PubMatic — with revenue volumes about half the size of that of the DSPs.

Criteo is the top vendor, followed by Google, and each has market shares above 5%. A little farther
behind is MediaMath, with an almost 4% share, after which — still a little more removed — begins the
long tail with Adobe.

The overall market grew at 38% year on year, from $9.2 billion in 2016 to $12.7 billion in 2017. Top
vendors' growth rates tend to be smaller due to their greater size and maturity. At these spending
levels, advertising technology sales stood for 4.7% of total ad sales (2017) and 4.0% (2016). We
expect this share to grow to 7.8% by 2022 as the industry's push for advertising automation continues.

Almost all vendors grew at or around market growth rates. Rubicon Project is the only vendor that lost
revenue, and significantly so, because the company was slow to adapt to two key trends — the shift
from desktop to mobile advertising (in particular to mobile app-based advertising) and the introduction
of header bidding.

The consolidation of media spending (not ad tech spending) on the walled gardens — Google,
Facebook, Oath, and Twitter — has two consequences. One, it increases competitive pressure on
independent ad tech vendor as this diverts spending on tech in the independent ecosystem. And two,
overall spending on ad tech — on independent vendors and walled garden offers — decreases because
much ad technology that comes to bear in the walled gardens is not sold as standalone offers but is
priced into the media purchase.

WHO SHAPED THE YEAR

This Excerpt was prepared for Criteo but also included the following vendors: MediaMath, Adobe,
AppNexus, The Trade Desk and others.

Companies that were some of the top movers in the advertising technology segment last year are
discussed in the sections that follow.

Criteo remained the leading ad tech provider worldwide with a 7.4% market share in 2017. It is
interesting that Criteo's mindshare in the industry does not match its size, especially in the United
States. The company continued to grow significantly last year; but the impact of increased privacy
constraints in Apple's Safari browser — affecting the company's ability to target the delivery of ads via
its core retargeting product — only hit the company very late in the year. More than 90% of the
company's total business still depends on its retargeting product, and in 2017, about 17% of the total
was Safari-based retargeting business. This explains why — given the previously mentioned greater
privacy protections in Safari — the company had originally estimated 2018 annual growth to be 3–8%
(down from 28% in 2017). But it lowered that forecast to between -1% and 1% in its 2Q18 earnings
call, owed to the introduction of a subscription-based pricing model, which leads to a temporary
revenue shortfall (as has been the case for other transitioning companies). It presumably introduced
the subscription-based model precisely to dampen the impact of short-term events such as Apple's
privacy move last year, but the price it has to pay is transitional pain.

Looking forward, Criteo has proven remarkably resilient. The European Union's General Data Protection
Regulation (GDPR), which came into effect in May 2018 and was seen as potentially further affecting
Criteo's retargeting business, has had no significant impact on them so far (September 2018). Criteo's
future will depend on its ability to address the issues potentially affecting retargeting as well as its ability
to continue to grow its business beyond retargeting.

MARKET CONTEXT

Significant Market Developments

Overall, the digital advertising software segment was shaped by six trends in 2017:

• Worldwide spending on digital advertising (e.g., media purchases) continued to rapidly grow
  by 19% from $228.4 billion in 2016 to $272.5 billion in 2017, increasing the volume of
  advertising that needs to be transacted and thereby growing spending on advertising
  technology.

• Intense efforts on advertising automation continue, benefiting programmatic advertising
  technology vendors.

• Greater awareness for the need of privacy protection began to dampen programmatic growth
  but has in most cases had no material impact on business. (But note the impact of Apple's
  privacy protection measures in Safari introduced last year on Criteo, as mentioned
  previously.).

• As most new digital advertising spending went to Google and Facebook, most of whose ad
  technology is priced into media purchases (e.g., is "free"), ad tech grew slower than it would
  otherwise have. This has led to a more difficult business climate for independent vendors and
  increasing competitive pressure among them.

• Intense merger and acquisition activity continued.

• The shift of advertising budgets from traditional TV into video accelerated creating opportunity
  — especially in connected TV — for those that provide relevant technology and threats for those
  that don't.

All vendor numbers are based on vendor revenue estimates from Worldwide Advertising Software
Forecast, 2018–2022 (IDC #US43940218, June 2018). All vendor numbers are net revenue, excluding
media sales and professional services. Estimated numbers are based on public filings, public company
statements on revenue, acquisition valuations, and other considerations. This vendor market share
document does not take into account data vendors as they are not technology vendors in the strict
sense of the word, even if they were part of the underlying ad technology software forecast. It should
be noted that a lot of advertising technology that comes to bear in transacting digital advertising is not
payed for, but is priced into media sales, and is therefore not represented either in the advertising
software forecast nor in this document.

IDC defines advertising software as any software program or platform that enables the business of
advertising — specifically, media or advertising campaign planning, buying and selling advertising inventory, and ad operations (e.g., trafficking or physically inserting an ad into media, targeting an ad at
specific demographics or individual users, automatically modifying an ad creative for better impact, and
tracking or measuring and reporting on an advertising campaign). Ad software includes ad servers, ad
exchanges, ad verification, attribution, data management platforms (DMPs), demand-side platforms
(DSPs), dynamic creative optimization (DCO), search engine marketing (SEM), and social advertising
and supply-side platforms (SSPs). Data vendors, while part of the advertising software taxonomy and the
related forecast, are not included in this document since they do not offer advertising software in the strict
sense of the word. Advertising software is typically a web-based, software-as-a-service (SaaS) platform
but may also be a software locally installed on-premises.