LUMApresentsourannualStateofDigitalMarketing,whichcoversourviewsonthemarket,industrytrends,andthefutureoftheecosystemwithaspecificfocusondigitalmarketing.Wehopeyouenjoyit.

Meet the Senior LUMA Team

Founder & CEO Partner Partner Partner CMO

Terry leads strategy,banking and content for LUMA.

He’s also head comedy writer and performer.

Brian is LUMA’s marketing technology guru.

He excels at coaching both little league and big clients.

Mark runs M&A strategy and execution for LUMA.

He’s never met a term sheet he couldn’t improve.

Dick leads LUMA’s mobile and gaming banking coverage.

You can find him holding court every February in Barcelona.

Gayle runs LUMA’s marketing, events, and partnerships.

She may be new, butshe’s alreadyformidable.

Terence Kawaja Brian Andersen Mark Greenbaum Dick Filippini Gayle Meyers

LUMA’ssingularindustryfocusisontheintersectionofMedia,Marketing,andTechnology;thesectorsofDigitalContent,AdTechandMarTechallseenthroughthelensofmobile.

Afterarockystarttotheyear,MarTech stockpriceshavestabilized.AdTechstocksshowstrongerperformancewhenincludingtheindustry’snewestentrant,TheTradeDesk,whichbegantradingpubliclyinSeptember.

Onan“apples-to-apples”basis,excludingthisyear’snewentrantTheTradeDesk,weseetheAdTechsectorinnegativeterritoryyear-over-year.

Beyondthestockprices,whenwedividebyrevenueandlookatmultiplesoverthesameperiod,wenotestablestockpricesbutgrowingrevenuesyielddecliningmultiplesforMarTech.

IncludingTheTradeDesk,whichiscurrentlytradingwellaboveitspeers,multiplesinAdTechappearunchanged.

ExcludingTheTradeDesk,AdTechmultiplesaredownalmost50%whilerevenuescontinuetogrowmeaningfullyforbothAdTechandMarTech.

RevenuegrowthremainstheprimarydriverofmultipleacrossbothAdTechandMarTech.

SinceourlastDMSWestayearago,weseenonlyoneIPOintheAdTechandMarTech spaces.TheTradeDeskpricedinSeptemberandisstillhoveringaroundits$1billionvaluation,ararebrightspotforpublicAdTechcompaniesandperhapsasignalofmoretocome.

LastyearwenotedapalpablechangeinsentimentinthefundingenvironmentandthischangeremainsevidentinthedatawithventurecapitalfundingdownsignificantlyinMarTech,andevenmoresoinAdTech.

Thatsaid,differentiatedcompaniesarestillfindingcapital.Infact,over30industryleadershaveeachraisedatleast$20millionsincethelastDMSWest.

Theonerealbrightspotinthemarket:M&A!We’veseenalmostascoreofscaledstrategicexitsinthelastyear.

Interestingly,valuationspaidforthesescaledstrategicexitshavebeenatameaningfulpremiumtocurrentpublicmarketvaluations.

Whatisdrivingthisactivity?Agrowingpoolofstrategicbuyers.WeseecontinuedactivityfromtheusualsuspectsliketheenterprisesoftwareandAdTech,butanumberofnewentrantsarealsomakinganactivepushintothisspace.

Telcoshavebeenveryactiveastheyaimtomonetizetheirlargecustomerbasesandenterthefastgrowingdigitaladvertisingmarket.Theyhavealreadymadeanumberofsignificanttransactionsjustthisyearalone.Weexpectmoretocomeinthenearfuture.

Privateequityhasalsoenteredthespace.Withpredictablerevenues,highoperatingleverage,andhealthymargins,somecompaniesintheindustryfitthefinancialprofilethatintriguesfinancialbuyers.

Lastly,internationalbuyers,mostnotablyfromChina,havebeenveryacquisitivethisyear.

Interestingly,wehaveseenprivateequitybuyersstepupforMarTech assets,payingmultipleswetypicallyassociatewithstrategicbuyers.

AndChinesebuyershascomeonstronginAdTechwithanumberofscaledexitsjustinthelastquarter(e.g.Smaato,Media.net,andAppLovin).

Inthepast6-12monthstherehasbeenincreasingfocusandawarenessonartificialintelligence(AI).However,asForbessuggested,wearenowinaperiodofskepticism(“disillusionmentandchaos”)ofAIasthemarketexperimentswithAItodeterminewhetheritprovidesabenefit– ornot.Butwefirmlybelievethatwewillbeenteringthe“amazement”phaseverysoon.

TheAImarketisstillveryearly.Theaboveprojectionremindsusoftheprogrammaticadvertisingmarketin2010whenmarketerswerefirstexperimentingwiththetechnology.Whentheindustrysawtheeffectivenessofprogrammatic,themarkettookoff– anditisnowabout2/3ofthedisplayadvertisingmarket.WebelievethesamedynamicwilloccurwithAIasitgetsappliedmoretoAdTechandMarTech andtransformstheindustry.

Wearen’ttheonlyonesbullishaboutAI.TechgiantslikeGoogleandIBMaremakingsignificantinvestmentsinthistechnology.Googleisplanningtoapplymachinelearningacrossallitsproducts,andIBMismakingthe“biggestbet”initshistoryaroundcognitivecomputing.

EventhePresidentisweighingin.AIwillbeappliedacrossamultitudeofindustries:automotiveandtransportation(self-drivingcarsandlong-haultransportation),healthcare,researchand- ourfocusarea- marketingandadvertising.

AIhasbeenappliedtothemarketingindustryforsometimebutmainlyatthe“edges”,meaningnarrow,specificusecases.Forinstance,indisplayadvertising,AIhasbeenappliedtobid/creativeoptimization,andpredictiveanalyticshavebeenutilizedforreal-timecontentinsertionforwebsitesandemail.WebelievethatAIwillnowmovetowardsthe“core”tocoordinateactivitiesacrossthesechannels.Moreonthislaterinthepresentation…

InthepastAdTechandMarTech wereverydistinctindustries,withlittleconnectionbetweenthetwo.AsAdTechevolvedintodata-drivenadvertisingandMarTech intodata-drivenmarketing,wehaveseenthedatalayerbecometheconversionpointfortheseindustries.ThisconsistsofDMPs,online/offlinedata,andplanningandattributionsystems.

Twosub-trendsthatarepartofthelargerAdTech/MarTech convergencetrendare:1)theevolutionofdatatechnologies,specificallyDMPs,and2)theriseof“identity”solutionsasacriticallystrategiccapabilityinthemarket.

WhenDemdex,oneoftheearliestDMPs,launchedin2010,itwasprimarilyacookiemanagementplatformfordisplayadvertisingforpublishers.Inrecentyears,thecapabilitiesandusecasesofDMPshaveexpanded.DMPsnowincludeadditionalfunctionalitysuchasdataanalytics andtagmanagementplusrobustmobiledatamanagement.AndusecaseshaveexpandedfromjustdisplayadvertisingtoareassuchaswebpersonalizationandA/Btesting.

IthaslongbeenchurchandstatebetweenCRMsystemsandDMPs,separatingpersonallyidentifiableinformation(PII)fromanonymousdata,butwearenowstartingtoseethesedatasetsstarttoblendwithinplatformssuchasDMPs.ItwillbeespeciallyinterestingtoseehowSalesforceintegratesKrux oncethatacquisitioncloses– andwhethertheycombinePIIandtraditionally“anonymous”datasets.

TheDMPhasbeenknownasoneofthekeysoftwareplatformstoenabletargetingfordigitaladvertising.WiththeevolutionofDMPcapabilitiesandusecases,itnowsits“atthecenterofthemarketingcloud”asthe“hubofenterpriseintelligence.”

DespitetheevolutionoftheDMP,wearestillintheveryearlyinningsofthisindustry.LargeenterprisesareonlyjustbeginningtoimplementDMPsandmanagingtheirfirst-partydataassetseffectively.Onetrendwebelievewillemergeisadramaticriseofsecond-partydatasharingamongcompaniesincomplimentaryindustriesaswellasthegrowthofdataco-ops.AdobeispursuingthisopportunityaggressivelywithitsAudienceMarketplace.

IfyouobservetheriseoftheMarketingClouds,youwillnoticethattheyhavebeenveryfocusedonconsolidatingpointsolutions(Phase1)– whichmakessense.Asmentionedearlier,DMPcapabilitiesandusecaseshaveexpanded.ESPssuchasExactTargethavealsoevolved,addingSMSandsocialchannelstotheirplatforms.Butacrossallthemarketingclouds,thevariouspointsolutionsarestillfairlychannel-focusedwithonlyminimalintegration.

WebelievetheMarketingCloudswillnowaggressivelymoveto“Phase2”,whichisto“orchestrate”activitiesacrosschannelsinordertooptimizethecustomerexperience.Thisorchestrationlayerwillincludebothrules-drivenandAIapproachestohelpmarketersaccomplishtrue1:1marketing:sendingtherightmessagetotherightpersonattherighttimethroughtherightchannel.ThiswilldrivefurtherconvergenceofAdTechandMarTech.

“Identity”isakeyindustryfocussinceitiscriticaltobeingabletocoordinatethecustomerexperience.Identityofferingshavebeenadvancingrapidly,withincumbentsfurtheringtheirofferingswhileothershaveenteredthemarket.WehavelongtalkedaboutOraclebeingthemostactiveinbuildingitsidentitysolutionswithits“DataCloud”,butthereareothermajorplayersbuildingrobustidentitysolutions,suchasAdobe,Neustar andAcxiom.

The“identitygraph”,whichorganizesmultipledatasets– purchase,demo,behavioral,digitalIDsandlocation– foreachindividual,hasemergedasakeyidentityoffering.Theidentitygraphsnotonlyenablesophisticatedtargetingformarketing,butalsofeedintoplanningandmeasurementapplicationsaswell.WewillcontinuetoseesignificantinvestmentinidentitygraphsfromtheMarketingCloudsandstartupsalike.

Predictivemarketing platformsemergedafewyearsagoandarebeingadoptedbye-commercecompaniestoenable1:1personalization.Thesesystemscombinedatafrome-commerceplatforms(providingpurchasehistoryforeachuser),browsingdata(short-termbrowsingbehavior)andothersystems.Combinedwithapredictiveanalyticsengineandaproductfeed,theseplatformsthencoordinatepersonalizedcontentacrosschannels.

Mobilemarketingautomationcompaniesemergedduetodynamicsintheappeconomy:1)consumersaredownloadingfewerapps,2)itisexpensivetoacquirenewusers,and3)mostappsarefreeandapppublishersstruggletomonetizeusers.Theseplatformscreateprofilesoneachuser,andcoordinatetriggeredmessages:in-app,pushnotificationsandemails.SomealsohelpoptimizetheappwithanalyticsandA/Btesting.

Whatdo“predictivemarketing”and“mobilemarketingautomation”companieshaveincommon?Theybothhaveadatahub/CRMsystematthecore,andalsoprovidetheorchestrationforinteractionswitheachconsumer.UnliketheMarketingClouds,withpointsolutionsthatneedorchestration,thesehaveorchestrationatthecore.Iftheyneedtoaddanewchannel,suchasemailorSMS,theygenerallyuseOEMsystemssuchasSendGrid orTwilio.

Wehavetalkedaboutaccount-basedmarketing(ABM),deliveringtherightmessageattherighttimetotherightaccount,andpredictiveanalytics,whichfoldsintoABM.Theybothhavegrowndramaticallyinthelastyear.ThenextkeytrendtowatchistheconvergenceofMarTech andSalesTech.WhileAdTechandMarTech convergenceappliestoB2Cmarketers,MarTech andSalesTechconvergenceappliestoB2Bmarketerswithdirectsalesteams.

Thereisnowaburgeoningecosystemofcompaniesfocusedonbuildingtoolsforkeystepsandworkflowswithintheentiresalesprocess.WehavecreatedtheSalesTechLUMAscape tohelpmapoutthegrowingecosystem,whichyoucanfindonwww.lumapartners.com.

CRMsystemslikeSalesforcearefocusedonthemanagementlayerofanorganization,nottheindividualsalesperson.InthelastcoupleyearswehaveseenanincreasingnumberofstartupsemergethatarefocusedonmakingtheactualaccountexecutiveorSDRmoreeffectiveathis/herjob.Investorshaverecognizedthisaswell,asweareseeingmoreVCinvestmentandgrowthinthisarea.

Duringtheearlydaysofperformancemarketing,theindustrywasfilledwithveryquestionablebusinessesfromtoolbarcompaniestoincentivesites.Notonlydidthesecompaniesnotdriveincrementalsales,buttheyalsodrovespam,adwareandotherproblems.Whenperformancemarketingismentionedtoday,manystillconjureupimagesofthesequestionablepractices.

Butwhatdefinesperformancemarketingtoday?GoogleandFacebook.

InMay,MorganStanleyreportedthatGoogleandFacebookcapturedover85%ofincrementaldigitaladspendinQ12016.Thisisaverytoughdynamicfortherestoftheecosystembattlingovertheremaining15%.ArecentanalysisconcludedthatGoogleandFacebookactuallycapturedover103%ofthegrowthinthefirsthalfof2016.Inotherwords,therestoftheindustrymayactuallybeshrinking.

Butnotallislost.Marketerswantperformanceandifavendorcandeliverit,theywillcontinuetospend.Criteo hasbuiltascaledbusinessbyservicingadvertisersdirectlyandusingCPCpricing.Customersspenduptotheefficientfrontier,justlikesearch,resultinginalways-onadspend.AppLovin hasbuiltatremendousbusinesswithstaggeringgrowthandprofitabilitythroughdevelopingterrifictechnologyandusingpricingthatalignswithitscustomers.

WehavewitnessedtheevolutionofpricingmodelsfromCPMtoCPCtoCPI,andultimatelyCPA,drivingtheactionmarketersaretryingtoachieve.Byaligningpricingwithitscustomers’desiredoutcomes(anddevelopingrobusttechnologytodeliverthoseoutcomes),leadingperformancemarketingcompaniesareabletocreateterrificscaled,predictableandprofitablebusinesses.

WehearsomepeoplesaythatCriteo isjustanadnetwork.However,let’scompareCriteo tothepublicadnetworksandalsotothemostsuccessfulSaaScompany:Salesforce.In1H’16,Criteo hadhigherrevenuegrowthwithlowerS&Mcostasapercentageofrevenue– highlightingitspredictabilityofrevenuesandhighoperatingleverage.Thepublicadnetworks,incontrast,generallyarenotgrowingandhavehighercostsingeneral.

LUMAInstituteisthedivisionthatincorporatesourresearch,contentandeventsinitiatives.ThemissionoftheLUMAInstituteistoprovideeducation,insightsandmarketdevelopmenttoallconstituentsofthedigitalecosystem.Wepartnerwithmedia,marketingandtechnologycompaniestoprovideadviceandeducationatleadershipoff-sitesandcustomereventsonacustomizedbasis.IfLUMAcanhelpyourorganizationsortthroughthiscomplicatedanddynamicsector,contactGayleMeyersatgayle@lumapartners.com.