Richard Kramer, founder at top TMT equity research firm Arete, argues that ad spend predictions are too optimistic and that CMOs have a great opportunity to reduce their expenditure with zero change in effectiveness. 

Market Expectations

Big Tech is expected to outgrow the market – This year started optimistically with double digit sales growth in Ads forecasted, alongside moves to pre-empt regulation, anticipating antitrust rulings/EU DMA and engaging in an “arms race” to “corner the market” in compute resource for AI. We started this year expecting Digital Ads growth of 7%, higher in the first half of the year due to tougher comps in the second. 

Industry analysts (from the likes of IDC, WPP, eMarketer), point to $55-60bn of global incremental digital ad spend this year. Adjusting for China, these industry analysts’ ad spend numbers imply incremental U.S. internet platforms (GOOG, AMZN, META, SNAP, PINS) would be 120%+ of total incremental digital ad dollars, which ignores 

(a) other growth in CTV (Netflix/Disney+, ~$2bn combined)

(b) TikTok (~$3bn+ incremental in 2024)

(c) Retail Media (ex-AMZN) growth (with Walmart likely capturing $2bn+ incremental in ’24)

(d) Political  spend. If these expectations are correct, other categories will shrink

Consensus estimates are for $60bn of incremental Ad sales in ‘24E from Google, Meta, Amazon, Snap and Pinterest (vs. $41bn in 2023), raising the question “Where does this spend come from?"

Richard Kramer speaking to the audience at Uncensored CMO Backstage @ MAD//Fest in July.

The Market Muddle

The ad climate is changing in four key ways: 

1) Ongoing signal loss, restricting use of 3rd party data such as cookies and IP addresses.

2) New curbs from sustainability concerns and Privacy Law in the US and Europe.

3) A Zombie Apocalypse of sub-scale ad tech companies, unable to find exits.

 4) A constant stream of (bad) revelations, around MFA wastage, brand safety, misdeclared inventory, fee transparency, and AI “flooding the zone” with fake users/content. 

Agencies and marketers risk ignoring these issues, due to FOFO (fear of finding out) or FOLD (fear of looking dumb) in the face of tech claims (programmatic! targeting!)

Battle Royale / Hunger Games?

The Frankenstack of Ad Tech has imposed a toll on CMOs and media models. We see “buy side” and “sell side” converging to resemble Walled Gardens, while CMOs are failing to take action about Ad Tech fee stacking and waste/fraud. What can CMOs do?!

1.    Buy Direct! – “Programmatic”/ Open Web hides a multitude of sins/costs and take rates should be far lower (5-6% vs. 20-40%+) on direct buys. 

2.    Demand Transparency – “Forensic” Ad Tech is the only segment incentivised to reduce spend. Needlessly complex Ad Tech adds cost and rely on flawed measurement and “vanity metrics.”

3.    Change Your Audience – CMOs need to “own” first-party data, not donate it or outsource to Big Tech/agencies. CMOs can force changes as cost savings measures.

One should expect more unwelcome disclosures around failure of brand safety vendors to protect clients, around mis-declared inventory in “hot” areas like CTV, and around targeting “solutions” which rely on poor quality “IDs.”  Of the 15 Ad Tech IPOs of the ‘20/21 crop, all but one are trading below issue price, and many are struggling to survive.  There are dozens more small vendors seeking to carve out niches, while all the leading agency holdcos are guiding to organic growth barely above inflation.

Conclusions

·  2024 expectations for total ad spend look ambitious, against a stretched consumer, with fewer sources of additional ad spend.

·  Big Tech is cornering the market (on AI), outspending ad-tech by a huge margin. Post Privacy Sandbox, DV360 Spins Out and Shorts Ad Tech.

·  Open-web/Long-tail apps face accelerated de-funding (Retail Media, CTV vendors). Social video competes for “CTV” spend as “Linear TV” drops off/

·  Darkest Before Dawn for Publishers/Media? With 3P data sales under pressure, premium pubs could see higher yields and spend, even post Privacy Sandbox.

·  CMOs have a one-off chance to massively reduce spend for same effectiveness.

·  Forensic Ad Tech can help avoid waste/fraud/malvertising going into “cheap reach.” Most Ad Tech is “whistling past the graveyard” in making buying needlessly complex.

Please contact Richard Kramer (richard.kramer@arete.net) or Isabelle Doran (isabelle.doran@arete.net ) for a copy of the full presentation and underlying data