There was a flurry of adtech IPOs in 2013 and early 2014, as private
companies took advantage of investor appetite for the fast-growing
adtech sector.
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While they were represented as being Software-as-a-Service (SaaS)
businesses, their revenue models were actually transactional and tied to
media spend. This doesn’t have the stickiness and revenue visibility of
SaaS. A re-rating of the sector was inevitable as companies missed
growth targets and investors became better versed in how the market
actually operates.
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One of the unique features of the adtech market is the sheer number of
companies for whom advertising technology is strategically relevant.
Not many businesses across the breadth of the (cash rich) technology,
media, and telecom universe can ignore the disruption that’s occurring
in advertising and marketing. For some, such as the enterprise software
vendors, it presents an opportunity to integrate additional revenue
streams. Conversely for traditional media players, notably publishers
and broadcasters, it offers a defensive mechanism to protect those
revenues. Other interested parties include telcos, traditional data
groups, social networks, and other diversified Internet groups, and
consultants, not to mention the pure-play adtech and martech
consolidators themselves. An increasingly competitive market coupled
with a frenetic rate of innovation suggests adtech M&A will remain
buoyant.
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The other critical factor in the ongoing strategic interest in this sector is the shift in momentum from adtech to martech.
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The public markets now make a clear distinction between each segment.
While definitions vary, the market generally thinks of adtech as
technology designed to streamline the buying and selling of digital ad
inventory, where the revenue model is tied to media spend or other
performance-based metrics. By contrast, martech is software sold on a
subscription basis to facilitate and optimise the broader marketing
function. For investors, the subscription-based revenue model is
generally most attractive because it provides greater revenue visibility
and (potentially) stickiness. In reality the picture is more blurred,
but this shift has also become apparent in the private market, and many
of the very high multiple deals in 2015 were in the martech segment.
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In reality the sectors are (slowly) converging.
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