For Ad Tech, A Funny Thing Happened on the Way to The Recession

The doom and gloom around advertising has been widespread for over a year – certainly pre-dating Russia’s invasion of Ukraine, as many observers and participants in the industry presumed that economic decline would necessary follow as a consequence of efforts to reduce inflation that was already at high levels before-hand.  While I wasn’t blind to such a possibility, it never seemed to me as a foregone conclusion relative to consensus views because the unique circumstances around the post-pandemic recovery should always have meant that economic models relying on pre-pandemic historical data were going to be limited in their utility.

Nonetheless, the advertising market did manage to effectively talk itself into a weak outcome for the year, which probably shouldn’t have happened considering the relatively healthy economy in inflation-adjusted terms: indeed, the most recent IMF world economic forecast estimates that global GDP grew by 3.4% in 2022, roughly matching growth rates we saw during each year between 2012 and 2018 (and well above what we saw in 2019).

Negativity was exacerbated by what were considered by many to be disappointing growth rates for digital advertising.  Of course, my view was always that when deceleration occurred it would not necessarily be due to economic conditions.  As I wrote regularly in the period preceding the pandemic (as I did here in 2019), the fact that digital advertising accounted for the majority of all advertising meant that this form of media must necessarily decelerate at some point in time.  It couldn’t keep outperforming the industry in which it operated forever.  The pandemic created some unusual circumstances which contributed to massive growth in 2021, but few appreciated how much of an anomaly at was.  Economic concerns aside, 2022 should have looked more like a normal year, albeit one which benefitted from inflation-driven spending (as most advertisers manage their budgets on a percentage-of-revenue basis, meaning higher inflation should have led to more spending, all else equal).

Digital Advertising Likely Grew 6% in 4Q22 Globally Ex-China

For a sense of how it played out, looking at the top five sellers of digital advertising outside of China (Alphabet, Meta, Amazon, Microsoft and Bytedance’s TikTok, which on a gross basis probably account for around 80% of broadly-defined digital advertising), I can calculate that approximately 13% growth for digital advertising occurred during 2022, including 6% growth in the fourth quarter of the year.   Coincidentally, these full year results roughly match figures which my former colleagues at GroupM estimated would occur.   In context of an industry which probably grew by high single digits for al of 2022 and which was probably flat in its final quarter, this still represented share gains for digital advertising.

But Public Ad Tech Companies Grew 15% Organically in 4Q22, With All Ad Tech Likely Up Low ‘Teens

With this context, I thought it would be useful to look at what happened to ad tech during 2022, solely focusing on those companies which do not rely (much, if at all) on sales of media inventory.   To do this I wanted to assess a group of public companies that includes The Trade Desk, LiveRamp, Magnite, DoubleVerify, IAS, Pubmatic, Innovid and Viant, which collectively generated $4 billion in revenue last year.  From the results posted by this group (and excluding my estimates for acquisitions) we can see approximately 22% growth during the full year 2022 and 14% during its fourth quarter.  None of these companies regularly disclose the impact of currency changes, although as approximately 15% of revenue from the group occurred outside of the US, it probably represented a drag of 1-2%.  On that basis I can estimate that in organic terms the group grew 23% during the year and 15% during the fourth quarter.

This outcome reflected significant outperformance for ad tech vs. digital advertising.  But was it simply a form selection bias because the companies which are publicly listed are most likely to outperform?   

To make this assessment I wanted to look at trends for a group of similarly non-ad-sales-focused ad tech companies, using data tracked by Linkedin.  I have found their data tracking claimed employment to be a relatively reliable basis for analysis in the past as most companies in ad tech only add to headcount above a certain threshold when they have revenue to support it.  For reference, the group of eight public companies, including recent acquisitions, had 9,500 people citing these companies as employers at the end of 2022, up 17% from the end of 2021.   Data from their 10-Ks shows approximately 8,700 employees at the end of 2022, up 19% from the end of 2021.

The group of companies I focused on each had to have more than 300 employees (which means they probably have more than $100 million in net revenue) and which so far as I am aware, similarly do not primarily sell media to generate revenue.  From here I identified a group of 12 which I think of as ad tech, including MediaOcean, StackAdapt, Adform, Index Exchange, Equativ, Simpli.fi, VideoAmp, iSpot, Human, MediaMath, VidMob and OpenX.   Among this group I can identify approximately 7,600 people with claimed employment, up by 14% over 2021 levels on a pro forma basis, including all transactions I can identify.    This level of growth represents a 3% underperformance relative to the public companies listed above, but still clearly reflects double digit gains.

Combined it’s probably safe to say that independent ad tech grew their revenues by high teens levels during 2022 including more than 10% growth in the fourth quarter.    Of course, this is not the same as saying that all of ad tech grew by these levels, as we can’t know how fast Google’s ad tech businesses grew, let alone those owned by Yahoo, Microsoft, Comcast or others where ad tech are relatively small subsidiaries.  Still, it seems reasonable to assume that the overall sector was healthy last year, and grew at a faster rate than digital advertising from a media owner’s perspective.

Non-Working Media - Including Ad Tech - Can Keep Working For Years To Come

This last point is potentially quite important.  As I noted when I recently wrote about growth trends for agencies, whose businesses also performed strongly last year, it is clear that newer data-driven activities are key areas of focus for the marketers they work with.   Despite efforts from some marketers to cut costs which are unrelated to spending with media owners (so-called “working spend”), growth in ad tech and agency activity may convey that marketers implicitly recognize that incremental spending on so-called “non-working” spending can actually make the “working” spend and overall marketing activities significantly more efficient.

Overall, the latest data from ad tech companies represents a positive trend for the so-called intermediaries of the industry. Given their modest size in aggregate (probably only representing a single digit percentage of total digital advertising at present), I can argue that there remains significant room for continuing outperformance for the sector, even if digital media owners continue to decelerate as they mature.