AdTech is booming. Our podcast guest this week is Terry Kawaja, founder and CEO of LUMA Partners, who explains what’s happening and where things are going.

Many of you know him for his industry visualizations called the LUMAscape, his firm’s deals, his speeches and his very humorous take on things in his clever videos. He is a unique and admired presence in our industry and I am pleased that he has joined me for this episode.

During the pandemic, he and his team have been very much engaged in deal making. After a slow Q2&3, LUMA has been on fire with several high profile transactions. He sees accelerated activity in the M&A for this year.

In our chat, he talks about a number of topics including a roaring stock market for adtech, which he figures was up about 200% last year. (The TradeDesk enjoys a market cap of about $35 billion.)

And he talks about a pretty amazing upside for outcome-based marketing which he says could create trillions of dollars in value. That’s right trillions. He says that App marketing has proven the math and science of marketing to outcomes. He predicts these practices will become increasingly pervasive in all media, including linear TV.

Wow: It seems like only yesterday, in 2015, that Terry declared to an assembled VIP industry group, that “winter is coming” to the adtech space, a winnowing of players, perishing in a dark world dominated by Google and Facebook.

Well, there has been a lot of consolidations and flops, but it’s very encouraging to see the innovation and value creation taking place in our industry.

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Transcript:

Andy Plesser: Terry, how are you doing?

Terry Kawaja: All good, Andy.

AP: All right man, it’s been a crazy time. I miss you, I miss the parties on the rooftops and the yachts and deserts, and wherever else we are. But how are you managing in isolation?

TK: Managing just fine.

One of the things that we discovered over the course of the last 10 months I suppose, at this point is that for those of us who are lucky enough to be able to conduct business remotely. Life, after a short interruption and some inconveniences, life didn’t… Not only did it not change, it’s actually in some ways oddly, right? Feels awkward to say, got better! Better in the sense that we don’t have our commutes, we don’t have all that arduous business travel, get to spend more time with our families. And so, I count myself lucky that I have a business that can function in this kind of remote capacity, and just feeling grateful about it.

AP: That’s great, and I know, following your work you guys have been very productive and a lot of deal flow. And I think we’re also very fortunate to be in an industry where there’s a lot of innovation and investment and change in value. And that’s a really cool aspect of what we’re doing versus some other sectors.

But I wanted to sort of bring this into the focus of current events, and the new administration, new control of Congress. How that might shake out, some thoughts around antitrust, around privacy, around liability for the social media companies. What do you think might happen? What are some concerns, and what will you be watching for in terms of our sector?

TK: Yeah, well, I think largely much of the initiatives of the governments, whether in Europe or in the US, relating to issues like privacy, social media abuse and even antitrust, were apolitical. In other words, after a long bout of quiet from regulators, we saw the privacy issues arose during the Trump Administration.

Same with antitrust, right? They took a fundamentally more aggressive approach towards the doctrine of antitrust, because one of the things in that world that’s been so fixed for the last 40 years is this notion of consumer benefit. So if there was no harm to consumers one couldn’t formulate a case.

Well, that certainly wasn’t the way antitrust was originally derived nor even applied in the contexts of, let’s say Standard Oil and even AT&T, those famous breakups. So I think a lot of these initiatives will continue under the Biden administration they’re largely apolitical, and perhaps some of them are functions of just the timeliness, right?

I mean, privacy, I think is really, we’ve only really sort of caught up on what the sensitivities to consumers are of all the data that’s available and sort of ubiquitously shared. So I think that’s a function of coming to light, the information coming to light and some people being upset about it.

Social media is, that sort of issue has been growing over the course of the last 5 or 6 years. So I think that’s a function of the times, and quite frankly, antitrust we have gotten to a point where these behemoth multi-trillion dollar in some cases, market cap companies are yielding so much power.

Whilst they don’t charge consumers so one can barely make the case about consumer harm, they certainly have an impact on the marketplace, the net effective. Which is to starve oxygen from the marketplace, which in theory is anti-competitive, and will ultimately lead to less innovation. So I think there’s, good rationale is good.

There are appropriate timeliness of these applications and they’re largely apolitical so I would fully expect for them to continue a pace.

AP: So if you were a betting man, would you bet against Google being broken up?

TK: I would bet against Google being broken up, yes. Listen, I think the application I’m not naive enough to think that these are tough putts, these government initiatives, and in particular the Google ones.

I’ve read the salient part of the documents of both the federal and the Texas led state case, and they just don’t seem that compelling. I don’t know, I’m no expert but I would guess that they’ll result in some kind of agreement consent decree. There’ll be transparency around transfer pricing with doubleclick, what have you, but I doubt they will force a breakup. And, honestly, I’m not really sure what a breakup would do.

I mean I get that a doubleclick separation from Google would have a material impact. I just don’t understand what, say breaking up Instagram from Facebook would do in any way, shape or form to limit their power.

AP: Got it, got it. So Terry, so it’s been a crazy year with the pandemic and I wanted to ask, as I said earlier in our conversation we’ve benefited from a lot of accelerated change.

Terry, give us an overview on how the pandemic has accelerated streaming, gaming and eCommerce.

TK: Yeah, so those three sub-sectors are what we term the pandemic trifecta where we saw, in effect, eight years of acceleration in the course of eight months. So in streaming, it’s both in audio as well as videos.

So the rise of podcasting, which was a trend that pre-existed COVID, is just that it was accelerated during COVID. We’re seeing that interesting ad market grow from a relatively nascent stage to become an interesting and sizeable ad market. CTV has completely exploded. I mean the habits of consumers to discover the fact that they can largely get the content that they need for a fraction of the price and then a better UX than their cable bundle.

And that was in particularly aided by the fact that sports, live sports was on hold. Because remember, live sports is still the vestige of linear live TV. And so the greatest argument against cord cutting is sports. When sports goes away for four, six months as we saw in 2020, that rationale for not cutting the cord and switching to a streaming package, or sets of streaming channels, largely goes away.

So that inflection we believe is permanent, and has accelerated not only the viewership away from linear and towards streaming, but so much so that we saw the media companies respond in two primary areas. One is their content windowing, you notice that they’re even top. Movie releases, some of which are going directly to their SVOD apps, to streaming platforms, or perhaps coterminous with the release in a movie theater, although that’s only of recently.

And second is their reorganizations. Each of NBCU, Disney, and WarnerMedia underwent in August and September, fundamental reorganizations which recognized the primacy of streaming. So I would say in each of those cases, major media companies were looking at streaming as, yep, absolutely, it’s coming, and it’s important. Maybe we’ll put it under some innovation guy or gal to manage.

And now the acknowledgement this summer from these major reorganizations was the realization that streaming is in fact their primary distribution and monetization channel. And that has existential implications as to whether they get that right or not, and so those reorganizations were reflective of that realization. So lots of things happening on the streaming front.

Gaming is up pretty significantly during the pandemic. That one I would put down as, I mean look, gaming’s been on the rise for the last 15 years, so that’s not a surprise. It was certainly accelerated during the pandemic and it’s possible, it’s possible, that that’s a function of people having more time on their hands.

So query whether that may revert to the norm which was already good growth when things get back to normal. And then finally e-commerce. And that I believe to be reasonably permanent as well. It’s hard to keep them on the farm, once they’ve seen Paris is the expression. And in the case of buying goods and services, having them very rapidly delivered free of hassle.

Once more people avail themselves of that convenience, and low-cost, it’s hard to see them going back. Of course when things get back to more normal there will be foot traffic in stores. But I think e-commerce penetration gains in the course of 2020 are here to stay, and look, we were way behind China, right?

China was sort a 30% penetrated in e-commerce. We were sitting around 12 or 13%, depending upon what data you look at. And now we’re at mid-20s percentage. So we materially accelerated the penetration and yet we’re still well below China and it is growing. So I think there’s even more head run for that to keep growing.

So net net, there’s lots of implications associated with the accelerations of those four sectors. The audio and video streaming, gaming, and e-commerce. And I believe we will see the benefits of that for some period of time to come. Rarely does one have a business environment in which you get that kind of acceleration.

And it’s gonna benefit a lot of the industry for a long period of time.

AP: Now a big part of all of this stuff is identity, having these industries that are more digital in a totally digital world, including the streaming. What’s up for identity particularly in this post IDFA, post cookie world, and what are opportunities?

What’s happening in that sector?

TK: Yeah, well, the whole identity world is one that was in flux prior to the pandemic. Google, of course in February of 2020, Chrome announced the intention to deprecate the cookie. And then in the summer, coincidental with COVID, the lockdown, Apple came out and announced that they were gonna be deprecating IDFA signals.

In effect, eliminating the ability to target and do a lot of the attribution that people were used to. Suffice to say that these coupled with the privacy restrictions will place a significant burden on the industry. I think this is tantamount to effectively redoing the fundamental architecture of identity, the currencies of identity.

And I believe that means that all players in the ecosystem, whether you’re a marketer, an intermediary, or a publisher, you have to scramble to try and reconfigure your technology in order to enable some kind of targeting and attribution. Why do you have to scramble? Well it’s not as though we are going to say, well, I guess we won’t do things on an audience basis anymore.

We’ll just revert to contextual and selling things on the basis of the crude targeting of the content channel. Hell no is the answer, no way are we ever gonna go back. The decrement to yield for publishers would put them out of business. The benefits of audience targeting that’s been built over the course of the last decade is really the only thing that’s keeping publishers alive, the yield is so much higher.

So I do not believe we will move towards a contextual only world. We’ll just have to figure out other ways to do audience based media buying and targeting. And I think the challenge is a big one and it’s gonna take time. So I smirk a little bit when I see companies, perhaps the companies that are most susceptible to this coming deprecation, coming home.

Very boldly in saying we’re in well position for a post-cookie world and I’m scratching my head because I just don’t see it. It sounds like a strong offense is the best defense. Their rationale from an IR perspective, but I’m not buying it. And we’re gonna see this manifest itself in Q1 here of 2021, cuz the first domino to fall is IDFA deprecation.

And then followed a year later by cookie. And I believe this is gonna hurt some companies and that’ll be evident in their financial results. So there’s a lot of bravado out there about companies claiming to be well prepped for this fundamental change in architecture. I am not buying it.

Obviously this will prioritize first party cookies. But let’s be careful about that. I mean first party cookies, obviously, are better than third. Deterministic identity better than probabilistic. These are just blatant truisms that no one would argue with that said. There are complications associated with aggregation and federation of first party data, one has to think about data privacy security.

There are some promising technologies like cleanroom technologies and other approaches around essentially cooperation amongst parties that would enable the first party data to scale. But it doesn’t scale like third party data and it certainly doesn’t federate like third party data so. I think it’s gonna take some period of time.

Now, everyone and their sister seems to have come out with an identity solution. We note that between Google’s Sandbox initiatives, and how those have manifest themselves over time, as well as that trade desk. And their ID 2.0, which seems to be a consortium that’s garnered a substantial amount of cooperative buy in.

But I don’t think the jury has come back on which identity standards will be the answer for a post-cookie world. And I think it’s gonna take some time to sorta.

AP: Terry, I wanted to talk about the marketplace. And it seems like adtech is hot again with IPOs sort of in the pipeline.

It seems like more active than it has been. I wanted to ask you about the IPO side, and also the venture investment side. What’s going on with adtech now?

TK: Yeah, all you have to do is stick around long enough, and you’ll oscillate through market cycles. So if you’re a natural pessimist, there’ll be a time for you.

And if you’re a natural optimist, just hold on. Yeah, 20, you’re absolutely right. In the last year, our sort of aggregation, or our sort of LUMA ETF, if you will, of adtech companies. Which is now comprised of seven public companies, there’s an additional three, but they weren’t trading for the full year.

Those seven companies are up 222% in the last year. The MarTech index, which has slightly greater, it has ten companies in it, is up 183%. And then digital content outside of gaming is up 125%. So 2020 has been very good to digital companies, and in particular, the advertising technology and marketing technology intermediaries.

I think if you looked at the chart, they all dipped in Q2 as the pandemic drove advertisers to halt spend, or cut back. But that was very short lived. By June, spend was back. And of course, coupled with a robust stock market, those indices have absolutely taken off, so much so that there are some companies.

In adtech, there are three companies that have achieved what I call escape velocity. The Trade Desk, Roku, and Unity Software are all trading at $40 billion, plus Roku over $50 billion in market cap, tremendous valuations, tremendous multiples. And it’s really important to point out these escape velocity examples, because these are independent companies.

And remember, the narrative not so long ago, just a few years ago, where Google and Facebook are gonna suck up all the oxygen, and there’s really no hope for independent adtech. It’s what drove a lot of VCs out of the sector. And meanwhile, as it turns out, there is now multiple examples of companies that can’t have gotten to material scale on feeding only on the independent, non-triopoy ad opportunities.

So net net, the markets are on fire. I can’t fully justify or rationalize these valuation levels, so I simply won’t. Dealmaking is up. I mean, the year actually started off strong, went into sort of hibernation, or pause in Q2. Dialogue picked up in Q3. And by Q4, we started announcing deals again.

It’s an upward trajectory from Q2. And based on the volume rising, that momentum is continuing well into 2021. We believe Q1 and Q2 now are going to be incredibly busy and vibrant times for dealmaking in the sector. So net net, it’s been been surprisingly positive.

AP: Terry, for our listeners, can you just summarize some of the deals that you’ve done in the sector in the last 12 months?

TK: Sure, we have had the good fortune. Here’s the thing, Andy. If you take ten years to focus on a sector, and build digital expertise, one would hope that when activity does pick up, that you be well-positioned. So let’s say we kicked off the year with we sold a AI video company to Snap.

We sold a CDP, speaking of identity, one of the hot sectors called Evergage to Salesforce. We merged Rubicon and Telaria. We merged Factual with Foursquare and the location space. Those were all deals we were worked on in the first quarter. And then goose eggs in Q2 and Q3.

And then in Q4, we were back with a vengeance. We sold TruOptik to TransUnion. We sold Tapad from Telenor to Experian. We sold Beeswax to Comcast. And we represented Blackstone in the acquisition of Liftoff Mobile, so it’s been net net a very busy year.

AP: And finally, Terry, I was wondering what you think in terms of startups, new companies.

The companies you’re involved with obviously are mature. But if there’s some lessons you might want to impart, or guidance for entrepreneurs who are listening to our show about finding the right business, creating the business, creating value. And what do you think opportunities are now for early stage?

TK: Yeah, well, usually, the best time to launch a business, or any investment strategy would be to take a contrarian approach.

So I believe it was Warren Buffett who said when everyone else is greedy, be fearful. And when everyone else is fearful, be greedy. In other words, take a contrarian approach to the marketplace. And I don’t think that could be better applied than in the startup world. When a sector looks out of favor, that’s the time, really, to launch a company.

And one of the premises of this space is that I believe we have the underlying fundamental trends are in our favor. What do I mean by that? I mean that increasingly, all aspects of media and marketing, whether it’s ad sales, or media buying, or workflow, or data. Whatever it is, one can assume that there are certain inalienable sort of truth around trends.

And those fundamental trends are media becomes more addressable. And that means the digital channel, which is naturally addressable, continues to grow. OTT grows. Even linear TV becomes addressable. Even some out of home becomes addressable. So more and more The media world becomes addressable. Once it’s addressable, one can do lots of interesting things with data to optimize results.

Essentially what happens, if we step back, is the entire world that we know in media and marketing becomes less like an art, and more like a science. More data, more software, more precision, in terms of where to spend your money, less waste, less guessing. And when that happens, you fundamentally change the nature of spend from discretionary expense, to a cost of goods sold.

We’ve seen this. We’ve witnessed this. We have a canary in the coal mine in the form of app marketers. So companies like gaming companies, or Uber, or Airbnb, all of these companies that market to customers on the mobile app channel, they convert customers in the mobile app channel.

They deploy their good service in the mobile app channel, and they track usage in the mobile app channel. In other words, they have a perfect closed loop. That is what advertising looks like if it was in a perfect world, no guessing, or as to attribution. Did that person who walked on the lot and took a test drive, did he see my ad?

Was it a search query that drove them there? Or was it a display ad? Perhaps it was a 30 second spot. No more guessing. In the mobile app world, it is a perfected and clean environment. It’s like a petri dish. And what has happened in that environment is that the major marketers that are constantly looking for new customers, two things happen.

Number one is, they treat their cost customer acquisition based on lifetime value as math. They simply say I will buy media at a fixed CPA, cuz they know exactly what the conversion is, up until the efficient frontier of customer acquisition. What happens when the net of that is that there are no campaigns for Uber?

That is to say, there’s no stop on the campaign. They will continue to spend, provided the math suits their equation of relative value to customer acquisition, relative to lifetime value. So with perfect attribution and perfect knowledge of conversion, one can boil it down to math. And that means for those marketers, it’s a constant.

It’s an always on marketing situation. And that means for the intermediaries, and the publishers that are on the other side of that, it is a bonanza, because provided, they can convert. If they can deliver customers, they get spend like there’s no tomorrow. There is no $50 million campaign that then gets expended.

It is just open ended. And so I don’t believe we’ll get to that perfect world with the rest of marketing. But even just migrating towards that, we’ll have a multiplier effect that will cause for a value creation in this sector, enumerated I believe in the trillions of dollars.

And I don’t believe that’s an overstatement. So that’s what all the excitement is about. We’re already seeing it, by the way, in the year 2020, in the sense that while the stock market has taken off, it hasn’t taken off for everyone. So if you look at the traditional legacy providers, whether they be in the data world, or the traditional TV world, or tech services, or cable companies, those companies, sure, they’ve gone up with the stock market.

But nowhere near to the extent that the big digital giants, the marketing clouds, the gaming companies, the content companies, and as I mentioned, AdTech and MarTech. And it’s that separation which is what we call the innovation gap. So there are increasingly greater returns for being on the forward leading edge of that conversion from art to science.

And that is what long-term will drive massive value creation for companies with good solutions in the startup area. This is a great time to be a start-up founder.

AP: Terry, this is very, very inspirational and positive. And it wasn’t that long ago where I was at a conference, at one of your conferences LUMA does, the CEO Leadership Conference, where you talked about the nuclear winter coming, and we’re all gonna be dominated by the walled gardens.

And it’s so exciting for me being in this industry to see innovation, investment, and growth. And I know you’re a big part of it, and I appreciate your time, and this conversation, and your leadership in the industry.

TK: Thanks, Andy, great to chat with you.

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