COVID-19 pressures adtech: Who prevails and who falls prey?

Tech suppliers, including adtech companies, are grappling with issues such as extended payment terms and sequential liability risks as brands and agencies review finances in hopes of seeing their way through the COVID-19 pandemic.

Those suppliers that do not fall within the 'core' adtech supply chain, and those that have weak balance sheets, are already being forced to take drastic cost-cutting measures, with COVID-19 expected to accelerate consolidation.

But at the same time, more money is being invested in digital advertising as a way to reach prospective customers, as mediums such as out-of-home have been effectively turned off.

Campaign Asia-Pacific spoke with six industry executives to understand the changes that are taking place in the adtech industry due to the pandemic, and how it will fare in the future.

Several executives working in the industry believe this quarter (Q2) will deal the heaviest blow to the entire advertising industry, with agencies in Asia-Pacific bracing for a 20% to 30% drop in adspend.

"Everyone is hoping Q2 is going to be the darkest," says PubMatic's APAC chief revenue officer, Jason Barnes. "This is when everything is going to really come slamming to a standstill, and then hopefully by Q3 we'll start seeing a bit more sunlight."

Demand for programmatic is increasing

Yet as consumer habits during COVID-19 have swung dramatically towards digital consumption—across ecommerce and entertainment—some adtech companies report seeing an increase in inbound enquiries. 

"The shift in digital spends due to sudden consumer consumption changes presents an opportunity for growth in areas of adtech," says Annie Chan, GroupM's director of tech partnerships. "Strong adtech platforms can provide better campaign extraction and activation, coupled with an abundance of data touchpoints, which is amassed through people being online more often and accessing content through different screens while in isolation."

PubMatic has "doubled to tripled" the number of conversations it is having with new and existing clients, Barnes reports.

But more enquiries doesn't necessarily mean more spending: the majority of customers are pressing pause on Q2, or at least reducing spend. A smaller proportion are increasing spend: that includes government agencies, and both direct-to-consumer and digital-first brands.

Paul Frampton Calero, the president for Europe at marketing services business Control v Exposed, explains: "Some clients see this as an opportunity. Those that sell products almost exclusively online are seeing a rise in demand, and as they see a drop in the CPMs as there is less competition, there's a bit of price elasticity which means that some have increased budgets in certain areas."

Other brands are using advertising to communicate their support for the community, or to send re-assurance messages, Frampton Calero says. For the most part, long-term KPIs have gone out the window in favour of short-term performance. 

"Everyone in the advertising market is looking short-term at the moment," Barnes agrees. "They want to drum up sales because sales have gone through the floor."

When it comes to media type, five out of six executives interviewed for this piece report seeing a significant spike in interest in connected TV as a medium that combines the premium nature of TV with the targeting of digital.

"With a huge percentage of the global population at home and online, advertisers understandably have moved a lot of adspend online, to places like CTV and mobile platforms," says Tony Marlow, CMO at Integral Ad Science.

Advertising becoming more targeted

Those brands that haven't completely paused spend this quarter are thinking more strategically about how they reach prospective customers, leading to a big uptick in audience targeting.

"When spends are diminished, brands want to be more effective with the advertising that they have, so they want to have higher surety around who the person is that they're targeting," explains Barnes.

The digital ad industry was in the midst of significant change already, kicked off by Google's January announcement that it would kill the third-party cookie—a once common ad targeting tool—within Chrome in two years. The arrival of the COVID-19 pandemic has "accelerated" some of these shifts.

Among the biggest changes the two forces have triggered this year is an increase in audience-based, contextual targeting.

"Contextual is having a bit of a renaissance," explains Frampton Calero. "At a time where one in four web pages contains a mention of coronavirus, this is a good way for brands to find the right type of content they want to appear next to, because there’s a difference between a page that’s talking about death tolls and ones talking about what activities to do with your kids, and you can only find that difference through technology."

Integral Ad Science has seen a "notable increase" in uptake of its contextual targeting tools.

"We provide advertisers with the ability to block based on the sentiment of page content," says IAS' Marlow. "For example, if a given marketer only wants ads adjacent to positive content associated with the current pandemic. This opens up more scale for publishers compared to standard keywords and still delivers to marketers the protection they want."

Contextual targeting is not only helpful in safeguarding brand safety, but also in identifying new audiences and trends as publishers, experiencing surges in traffic, invest in new types of content during COVID-19, Frampton Calero adds. But he advises that publishers will have to invest in proving the quality of their audience segments, or risk losing out to Facebook and Google, which have a treasure trove of customer data.

"The unfortunate reality of uncertainty is the tendency to revert back to the status quo," adds SpotX Asia managing director Gavin Buxton. "Walled gardens will naturally benefit in this scenario as brands seek a ‘safe bet’ when marketing budgets are rationalised. However, it’s important for brands to hold their nerve and adhere to previously devised media strategies which remain relevant."

The giants will be affected too

The tech giants are exposed to the impact of COVID-19, too. They count small-to-medium sized businesses as a large proportion of their advertisers, and these businesses are the ones suffering most during the pandemic.

"We are expecting Google and Facebook to be hit hardest out of almost all the digital players," says Barnes. Amazon, meanwhile, is expected to see a big boost as it onboards more customers and in turn accumulates more data to power its ad business.

Extended payment terms and cutting ties

With less money coming in, and little clarity on when the pandemic will ease, extended payment terms are beginnng to creep into the downstream of the supply chain—SSPs and publishers.

"The immediate issue is liquidity in the supply chain," SpotX's Buxton explains. "Net 30 or 60 days payment terms are common in the industry, and many will be negotiating hard with vendors to extend these as far as possible—to 90 days or more. For those without strong balance sheets, they will quickly face cashflow issues which will be very challenging to manage."

Frampton Calero believes this could be fatal for some SSPs, because they are operating in a competitive space with thin margins. "I think we’ll see consolidation of SSPs by the end of this," he predicts.

Then there's the issue of sequential liability. Clauses written into many adtech contracts specify that if one partner doesn't pay the other (if an advertiser doesn't pay the agency, for example, of it the agency doesn't pay the DSP, or the DSP doesn't pay the SSP) those parties can refuse to pay the publisher for that inventory.

But this becomes extremely problematic when one partner in the adtech supply chain goes down. This was best exemplified when DSP Sizmek filed for bankruptcy in 2019, owing money to between 1,000 and 5,000 total creditors, including millions in outstanding debts to other adtech firms such as Index Exchange, PubMatic, OpenX and AppNexus.

Since this incident, many in the ecosystem have already taken measures to limit risk exposure through contract updates or insurance provisions. PubMatic, for example, has introduced a payment protection plan in which it charges a monthly fee to take on the sequential liability risk for its publishers in the case of a default.

COVID-19 has accelerated these efforts, with partners reviewing their existing relationships and pausing any they think are a risk. Buxton says: "Companies will continue to review partner contracts to ensure they have mitigated risk and monitor lines of credit, ready to react with immediate actions to any red flags. The industry has seen a continued evolution, so one upside is that many of the weaker companies have already been weeded out of the ecosystem."

PubMatic's Barnes believes COVID-19 will trigger greater industry collaboration around issues such as payment cycles. "Our CFO is having a lot of discussion with DSP CFOs to understand where are their potential default risks so that we can try and manage that and manage all of our clients," he reveals.

Tipping point for transparency

A surge in website traffic and a fall in CPMs during the COVID-19 pandemic has created the perfect environment for fraudsters. 

Cyber security company Clean.io reported that it had seen a surge in 'malvertising' in March, with its “global threat level” 50 times higher at the end of March than the beginning of the month.

There is a risk that a rise in new-to-digital brands will sideline hygiene factors like brand safety and fraud. But in the wake of ISBA and PwC's groudbreaking report on programmatic supply chain, which found that only 12% of ad impressions delivered via programmatic can be accounted for, many executives believe this could be a tipping point for brand safety and transparency.

"This is quite an interesting period for brands that may be going quiet in certain ways to actually review how much of that money is going to working media," says Frampton Calero. "We see as much as 25% to 30% can be re-invested into working media when we take over activity from some agencies, and that is in a normal period. That could creep even higher in this time.

"Brands will start to dig a bit deeper in a period where efficiency and effectiveness are key. I think this could be a fundamental tipping point for some of the transparency issues that have been floating around for a while."

GroupM's Chan comments: "Large global brands have always looked for greater transparency, particularly around cost and efficiencies with the technology they use. We see better interoperability between platforms such as the rise of CDPs [customer data platforms], repositioned DMPs [data management platforms] and enterprise tech solutions to address a lot of system compatibility nuisances. The challenges around third-party restrictions have also led to the industry exploring alternative solutions such as enhanced contextual targeting solutions, incubated solutions such as IAB Tech Lab’s Project Rearc, publisher consortiums and many other industry body initiatives."

Crises a catalyst for innovation

One thing the pandemic has not dampened is the industry's appetite for innovation, according to the executives, with projects such as a unified ID solution and privacy framework still ongoing.

"Crises are a catalyst for innovation," says SpotX's Buxton. "One thing the current crisis has created is the bandwidth to focus on existing strategic initiatives. You’ll see many firms emerge more advanced in their preparedness for the cookie-less world for instance, having had the time to focus on it."

"The key evolutionary milestones that lay ahead of us in the adtech industry still apply irrespective of the virus," he adds. Google said in April it had no plans to delay the blocking of third-party cookies, despite concerns from a group of key adtech companies.

VC-funded and niche players at risk

Some players are being hit harder than others. Over the past month, we've seen firms including Integral Ad Science, MediaMath, GumGum, Quantcast and OpenX lay off between 5% and 15% of their workforces in order to offset declines in income.

Those firms that have grown via excessive rounds of venture capital and private equity funding and have not focused on profitability—as is the case for many tech firms—may be forced to shutter.

"Between 2008 and now, there's been a bunch of companies that are just burning through money," says Barnes. "It's when these sort of crunches happen that those companies are going to really struggle, and we're going to, unfortunately, see a couple of liquidations happen, a few defaults." 

Elsewhere, smaller firms that are focused on key verticals that are currently under pressure—such as travel—will be feeling the heat. Travel adtech firm Sojern cut around half of its global workforce in April after being "hit hard" by the impact of COVID-19 on the travel industry.

Consolidation will ultimately be "positive" for the industry, Barnes adds, since it will leave a higher proportion of sustainable, strong, well-run businesses that are looking at profitability and not "growth at all costs".

Will Doherty, the EVP of global marketplace development at Index Exchange, agrees. "The companies that are going to survive need to have better service, a compelling offering, and tight and fast infrastructure," he says. "Strong companies will emerge from this and will be able to capture market share and drive value."