State of the Advertising Landscape in 2012

Terence Kawaja, Founder and CEO of Luma Partners took to the stage Tuesday afternoon at ad:tech San Francisco to discuss the future of advertising. Kawaja is an esteemed adviser within the landscape, advising on over $300 billion worth of deals. In the energetic keynote, he discusses how the crazy industry is fragmenting, combining and growing faster than ever before.

Fragmentation a Big Issue

Kawaja notes fragmentation remains a big problem but it breeds a tremendous amount of innovation. There is a huge growth in the sophistication of display ad companies and display ad is growing faster than search, which is changing the way marketing spend is distributed.

While innovation drives opportunities and growth, the downside is that this isn’t a mature industry. There is a shift from contextually-sold media to audience-sold media. Fortunately, search isn’t going away anytime soon, but several players control a substantial portion of ad spend. Luckily, it’s a less fragmented industry compared to display ads.

Social

Facebook dominates social. On the bright side, Kawaja says it’s a budding industry and represents the potential. The social sphere is flooded with startups and is very fragmented. For new companies, there is an efficient VC system in place - if there is an opportunity, there is ample chance to go from ideation to production.

Video

When it comes to video, Kawaja bets the future on IP video, such as Netflix. While video is only a few million dollar industry, there is $70 billion invested in TV. He predicts everything will be IP-based in the near future. You will see online and offline video collide. Kawaja says full-motion video has the most potential for brand money.

Mobile

The world is increasingly moving toward mobile devices and slowly redefining what “mobile” means. Kawaja claims there is a lot of opportunity, but an equal amount of fragmentation. Investors are dying to participate in mobile because they think it is the future, resulting in duplicate companies providing the same solution.

Commerce

Commerce represents the “perfection of advertising,” according to Kawaja. Data is the most powerful weapon in e-commerce because it ties the purchase funnel together. There are many opportunities for data-driven companies who can turn potential customers into profitable, repeat visitors.

Real Time Bidding and Audience-Based Buying

Kawaja cited an IDC study that projects level of real-time bidding of inventory on exchanges. The results are alarming – in three short years we will see $5 billion in spend representing 25 percent of all display ads and two-thirds of indirect ad sales. These numbers have significant implications for other players.

One of the pitfalls of audience-based media buying is that it has not mastered the upper funnel of advertising. According to Kawaja, the upper funnel has tens of billions of dollars in spending potential, where brand advertisers haven’t made spending commitments. He notes 99 percent of ad:tech focuses on the bottom of the funnel because it’s easy money for marketers. He claims it's simple math - when you have a performance driven campaign that can guarantee ROI, it’s a safe bet. It’s a little fuzzier as you go up the sales funnel.

Industry Faces Daemons

Despite all the talk about fragmentation, Kawaja says it’s not the issue - duplication is. A flurry of tech companies are performing the same functionality or providing the same solution. Companies used to have endless rounds of financing: Series A to build the technology, Series B to build the business and Series C to build a sales force. When there is this much duplication, this isn’t sustainable.

Kawaja says confidently that not all companies will make it. Companies were in the mindset that if they run out of money, venture capitalists will chip in. Unfortunately – or fortunately – that has come to an end. Venture capital has dried up, sending the funding to high growth opportunities with market differentiation. The “Me too” crowd can’t survive.

Overall, Kawaja praises the tightening of the fist because it will ultimately strengthen the industry. He says 2012 is the year of capitulation. Duplicate companies will undoubtedly run out of money and merge with another company to survive.

This article is part of Allvoices’ series on ad:tech, the largest digital marketing and technology conferences and expositions. Check out allvoices.com/adtech for more of Allvoices’ ad:tech San Francisco event coverage. This series is supported by ad:tech.