2014 Annual Outlook: What to Expect in Direct and Digital Marketing

Bruce Biegel Senior Managing Director

January 9, 2014

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2013 In Review

Forecast 2014

The Rise of Programmatic

10 for ‘14: Trends to Watch

2013 Was Not A Bad Advertising and Marketing Year – Just Started Slow

Sources: Business Insider, Bureau of Economic Analysis

• No Stimulus from Politics & Entertainment • GDP Growth Began Slowly (1.8% in Q1) but Increased Steadily

(to 2.5% in Q2 and 3.6% by Q3) • Where did I put my device?

GDP Growth Came Too Late To Drive Spend, Holidays Were Short, Print Decline Slows

2013 U.S. “Measured Media” Spending: $123.5BB

Newspapers: $18.7BB

3.0%

-5.1%

Television: $66.4BB

Magazines: $15.1BB

Outdoor: $7.0BB

Radio: $15.7BB

Cinema: $0.6BB

Source: Winterberry Group analysis of multiple sources Note: Arrows reflect percentage change in spend, by channel, from 2012 levels

4.5%

1.8% 0.0%

-0.6%

0.0%

2013 U.S. “Direct & Digital” Spending: $133.4BB

Source: Winterberry Group analysis of multiple sources Note: Arrows reflect percentage change in spend, by channel, from 2012 levels; Insert Media includes FSIs and statement inserts; Display and search reflect spending on desktop and mobile

Teleservices: $41.1BB

Direct Mail: $44.0BB

Search: $20.1BB 12.9%

3.2% Other: $3.2BB

7.2%

Digital Captured Most, But Not All, New Budget Money

1.0%

Insert Media: $0.8BB

Display: $17.6BB 35.4%

Other Digital: $6.6BB

22.2% -11.0%

(Includes Mobile & Desktop)

(Includes Mobile & Desktop) 1.2%

Targeted Display and Mobile Ads Drove Growth

50.0% Social Technology

and Services¹: $2.4BB

11.8% Lead Gen &

Affiliate Services:

$1.9BB

2013 U.S. Digital Advertising Spending: $44.4BB

Other Mobile2 : $.35BB

29.6%

Email: $2.0BB 11.1%

22.7%

Source: Winterberry Group analysis of multiple sources Note: Arrows reflect percentage change in spend, by channel, from 2012 levels ¹Excludes social display and social search spend 2Excludes mobile display and mobile search spend

Search: $20.1BB 12.9%

Display: $17.6BB 35.4%

(Includes Mobile & Desktop)

(Includes Mobile & Desktop)

2013 In Review

Forecast 2014

The Rise of Programmatic

10 for ‘14: Trends to Watch

=

Once Upon A Time, Buying and Placing “Media” Was a Manual, Negotiated Practice

+

And Then Came Search, Giving Us Auctions for Media Inventory and Audience Impressions

Workflow automation

Behavioral algorithms

+ =

Machine-driven bidding & price optimization

But When It Came to Display, The Proliferation of Formats Made Buying More Complex

Complexity that the Ad Tech Market Set Out to Solve

• Massive investments in the development of media and marketing automation followed

• Harnessing of “Big CRM” and online behavioral data would be deployed to identify and message unique individuals with relevant content and offers

• Decisioning engines and machine-driven analytics moved beyond “trigger” marketing and into biddable auctions and optimization models

And “Programmatic” Marketing Solutions Began to Emerge

Audience Insight/ Segmentation

Media Operations Execution

Content Optimization

Auction-Based Media Buying

Panelists: Has your organization pursued a

programmatic approach to media buying/selling? Are you

likely to do so within two years?

Programmatic Buying Approaches in Media Are Seeing Broad Adoption...

85%

72%

Adve

rtis

ers

Publ

ishe

rs

Today

91% 83%

Adve

rtis

ers

Publ

ishe

rs

In Two Years

0% 20% 40% 60%

What does “programmatic” mean to you?

Percent of panelists who mentioned each in their “top 3”

Auction-based approach to media buying

Machine-driven

automation

Real-time bidding (RTB)

And for Many Right Now, Programmatic is About “Automated Auctions”

Though Other Programmatic Methodologies are Quickly Gaining Traction

And, “Direct” Transactions Still Account for the Majority of Digital Display Spending

Direct transactions between advertiser and publisher

“Programmatic” transactions

Unreserved

Traditional “Direct”

60% of display spending

Prog

ram

mat

ic D

irect

Unr

eser

ved

Fixe

d Ra

te

Ope

n Au

ctio

n (R

TB)

Typical CPMs HIGH LOW

Invi

tatio

n-O

nly

Auct

ion

40% of display spending

Of the 40% of display spending transacted programmatically, the great majority is spent through “open” auctions (or “RTB”—real-time bidding)

Source: WG analysis of primary research sources

0% 20% 40% 60%

What objectives are driving your organization’s interest in programmatic approaches?

Top responses among panelist groups

Advertisers /Agencies

Programmatic Adoption is Being Driven By Two Discreet Objectives

Publishers Improve

operational efficiency

More effectively target consumers

across digital properties

Actionable Insight Development

63%

88%

Toda

y

In tw

o ye

ars

Audience Segmentation

79% 91%

Toda

y

In tw

o ye

ars

Has your organization pursued a programmatic approach to the following use cases? Are you likely to do so within two years?

Effectiveness Will Drive Programmatic Use Cases To Shift from Auction to Audience

With Significant Enhancement to Creative and Content Solutions

Content Optimization

Has your organization pursued a programmatic approach to the following use

case? Are you likely to do so within two years?

47%

69%

“Dynamic creative and message matching is

growing… and that’s something that’s

good for the consumer and for

the advertiser” — Sr. Marketing

Executive Panelist Toda

y

In tw

o ye

ars

And A Continued Expansion of Programmatic Across Digital and Direct Channels

Today Next 3-5 Years

Search

Display

Digital / Variable data direct mail

and e-mail

TV

Radio

Print

Direct mail

What Is Required for Continued Programmatic Evolution?

Audience recognition

“Omnichannel” addressability

Data governance practices/platforms

Internal and external process

optimization

Continued technology evolution

“Cookie-less,” Cross-Device Audience Recognition

How?

• Unique device identifiers (UDIDs)

• Cross-device insight and attribution

• “Lookalike” modeling

“Omnichannel” Addressability—Spanning Paid, Owned and Earned Channels

How?

• Actionable audience data

• Cross-device data management solutions

• Seamless program execution across channels

• Cooperation between internal stakeholders

Executive-Level Data Governance and Management Practices (and Platforms)

How?

• Inclusion of all stakeholders

• Maintenance of a customer information “map”

• Development of a unified data strategy

•Infrastructure to support data use

Organizational Process Optimization to Support Programmatic Execution

How?

• Breaking down functional silos

•Auditing existing processes and partners

• Restructuring compensation and incentives (internal/external)

• Merging complementary automation initiatives

Continued Evolution of Marketing and Ad Tech “Stacks” Supporting Enterprise & SMB Needs

How?

• Consolidation of smaller vendors that improve point solutions

• Strategic acquisitions to create “stacks”

• Continued role of financial investors to drive transformative innovation

Though Adoption is Accelerating, Challenges Remain

Risk Management & Brand Safety

Issues

Fragmentation of Planning/Buying and Measuring

Marketing (Internal and

External)

Long Term Funding of Marketing

Initiatives

2013 In Review

Forecast 2014

The Rise of Programmatic

10 for ‘14: Trends to Watch

The Improving Economy, Politics and Entertainment Will Drive Growth in 2014

• The U.S. economy is expected to

expand in 2014, and as unemployment drops U.S. GDP growth is estimated to rise (forecasted at 2.8%)

• Election cycle to be fought on the issues

• Olympics return

• Regulatory threats in data “brokerage” and privacy continue

Source: JPMorgan GDP growth estimates, December 2013

Not Enough Gas To Drive Accelerated Growth in Traditional Channels

2014E U.S. “Measured Media” Spending: $124.6BB

Newspapers: $17.1BB

3.2%

-8.6%

Television: $68.5BB

Magazines: $15.1BB

Outdoor: $7.2BB

Radio: $16.1BB

Cinema: $0.6BB

Source: Winterberry Group analysis of multiple sources Note: Arrows reflect expected percentage change in spend, by channel, from 2013 levels

2.9%

0.9%

2.6%

0.0%

0.0%

2014E U.S. “Direct & Digital” Spending: $140.7BB

Source: Winterberry Group analysis of multiple sources Note: Arrows reflect percentage change in spend, by channel, from 2013 levels; Insert Media includes FSIs and statement inserts; Display and search reflect spending on desktop and mobile

Teleservices: $41.5BB

Direct Mail: $44.5BB

Search: $22.6BB 12.4%

6.3% Other: $3.4BB

5.5%

Data-Driven Marketing’s Growth Accelerates

1.0%

Insert Media: $0.8BB

Display: $20.6BB 17.1%

Other Digital: $7.3BB

10.6%

(Includes Mobile & Desktop)

(Includes Mobile & Desktop) 1.1%

0.0%

And Digital Spend Gains on Digital Adoption

20.8% Social Technology

and Services¹: $2.9BB

10.5% Lead Gen &

Affiliate Services:

$2.1BB

2014E U.S. Digital Advertising Spending: $50.6BB

Other Mobile2 : $.44BB

25.7%

Email: $2.0BB

14.0%

Source: Winterberry Group analysis of multiple sources Note: Arrows reflect expected percentage change in spend, by channel, from 2013 levels ¹Excludes social display and social search spend 2Excludes mobile display and mobile search spend

Search: $22.6BB 12.4%

Display: $20.6BB 17.1%

(Includes Mobile & Desktop)

(Includes Mobile & Desktop)

0.0%

2013 In Review

Forecast 2014

The Rise of Programmatic

10 for ‘14: Trends to Watch

60% of Corporations are doing content marketing—often through sponsorships and native ads—and this work will finally be defined in 2014

Mobile content marketing strategies will lead the way in-store

‘Director of Content’ becomes a corporate marketing job

1

10 for ‘14: Content Comes of Age

Content: Sponsorships Rise, Offering a Way to Offset Losses from Programmatic

Source: eMarketer, December 2013 (includes desktop, laptop, mobile phones and tablets)

$1.54 $1.90

$2.29 $2.62

$2.96 $3.20

2012 2013E 2014E 2015E 2016E 2017E

U.S. Digital Sponsorship Ad Spending (U.S. $BB)

Content: Growth Paced by the Rise of Native Ad Networks and Programmatic Native

Native Ad Networks • A set of early-stage companies are

attempting to bring scale to native—essentially becoming ad networks for sponsored content

• Will we see IAB-type standardization of content-based ad formats?

• Will we see ease of implementation across sites vs. one-off publisher negotiations or closed networks?

Programmatic Native • Others are attempting to bring scale to

native via programmatic models—using RTB and private exchanges to place content

• Can they solve for brand safety? • Can they solve for content sequencing? • Will they add to the data-driven

Omnichannel experience?

Recently approved 4.3% exigent postal rate increase—on top of the regular increase—is this temporary – or not?

Could turn growth forecasts for volume upside down—and accelerate the marketing spend shift to digital alternatives—even if the USPS revenue numbers look better in the short term

2

10 for ‘14: Postal Hikes Threaten Direct Mail; Will Marketers Turn to Digital Alternatives?

2013 - Programmatic RTB accounted for $3.56BB of marketing spend, 23% of all display ad spend

2014 - programmatic RTB is expected to reach $4.45BB of marketing spending, ~20%

2016 Forecast: 35% of all digital display ad spending will be RTB programmatic

3

10 for ‘14: Programmatic Continues To Expand

Source: eMarketer and Winterberry Group analysis

Measurement standards for digital display a top priority for marketers: Viewability metrics a likely outcome

- Quality of impressions increase and number of impressions decline

- CPMs Rise with reduced inventory

- Quality drives performance, ROI on unseen ads remains zero

4

10 for ‘14: Advances in Attribution and Measurement Drive More Digital Spend

Facebook releases custom audiences with data segments from preferred partners and a “BYO CRM” plan for look-a-like modeling

Twitter opens up advertising to CRM data with Tailored Audiences offering (and sells $47MM of data pre-IPO)

Agencies see significant performance lift from use—rivaling search

5

10 for ‘14: Social Targeting with CRM Data Goes Mainstream

A majority of marketers rely on data but 45% say they don’t have access to the data they need

Programmatic approaches, Omnichannel audience recognition, attribution, measurement

DMPs and tag management adoption play a more central role as they collect, segment and activate data online

6

10 for ‘14: Online and Offline Data Continues to Merge

Source: Neolane, DOMO (2013)

Traditional campaign management platforms go from mail and email to social, mobile and display

Media driven DSPs evolve to support marketing execution across media channels (display, social, search) and formats (mobile, video, native)

Following multiple acquisitions now comes the hard part: Integration

7

10 for ‘14: Campaign Management Platforms Evolve to Support Omnichannel Execution

“Second screen” tablet adoption combines with “smart” connected TVs and game consoles—fueling cross-platform video advertising

Viewing data linked to programmatic execution propels growth in this key channel for consumer engagement

“Connected” TVs are more important than “pixel counts”

8

10 for ‘14: TV and Video Platforms Evolve, Become Portable

Source: Digital TV Research

Major marketing organizations are restructuring or downsizing to support a unified global / multinational approach (Unilever, P&G, Colgate, Energizer)

Deeper reliance on analytics and metrics to justify channel spend, staffing investment

Programmatic execution approaches lead to reallocation of staff away from execution and towards strategy

9

10 for ‘14: Demand and Requirements for Marketing Talent Continues to Change

Source: Ad Age, December 2013

2013 saw lower deal volume (-16% YOY) but increased value (up 36%) led by a few blockbuster deals

Big Deals: Publicom, Adobe-Neolane, Sales Force-Exact Target, Oracle-Responsys, Accenture-Acuity

Who’s next - DSPs, Ad Networks, large agencies?

Valuation remains high driven by public prices, plenty of cash that needs to go to work

10

10 for ‘14: Consolidation, Significant IPOs and More Digital Stacks

Source: PPLLC data on enterprise software M&A transactions 2009-2013

Bruce A. Biegel Senior Managing Director bruce@winterberrygroup.com 212-842-6030

www.winterberrygroup.com @WinterberryGrp

Questions?