August 8 2014
RTLs recent acquisition of a majority stake in SpotXchange gave Decipher a nervous moment of deja vu last week, reminding us of a previous broadcaster’s dramatic foray into emerging digital media.
In 2005, ITV under a previous management regime, paid £175M for the British social media site FriendsReunited. The deal delivered £30M to the founders, Steve and Julie Pankhurst. At the time this was charitably viewed as an ‘unusual’ deal – what Sir Humphrey would have called ‘brave’- although Friends Reunited was one of the most visited UK web sites of its day. But the reality for ITV was this was a deal made in desperation by a management team who didn’t understand the new market that was unfolding in front of them. They needed a ‘digital’ play and didn’t know how to deliver it.
With hindsight there were two major issues with the deal. The first was that the ITV management had no idea what to do with FriendsReunited. At a strategic level, they vainly hoped that such a high profile deal would buy them into the world of new media valuations and convince the City that they had a strategy for the emerging digital media world. In the short term the ITV share price rose 1/2p, but that was the extent of its impact.
On a tactical level, there was some vague noises about combining the FriendsReunited customer base with the then stumbling ITV.com. It was also to deliver audience marketing for the online elements of shows like Pop Idol – a pre-cursor to XFactor – and the other ITV web sites. The problem was that this wasn’t an attempt to move up or down the value chain, it was a leap onto a completely different value chain in a market they didn’t understand. It was also a foray into pay content by a business that was free-to-air at heart. No successful content or commercial integration was ever achieved.
The second problem was that ITV bought their way into a market that had experienced its first explosion of growth, but which was to experience a brutal cycle of supplier consolidation before further consumer growth appeared. FriendsReunited had arrived at a point where it needed aggressive VC investment and international expansion to maintain its competitive position in the face of emerging competition from Bebo and Facebook. Or its founders could cash out, which is what they did. ITV at that time were seen as a declining cash cow by the City and they certainly weren’t the kind of partner that could fund the necessary global investment for Friends to compete or deliver a international network that Friends could exploit.
Also, the social media phenomenon was changing from a ‘pay service’ model to a ‘free-to-use’ model. FriendsReunited needed to evolve to survive but ITV and the City couldn’t countenance turning it free and giving up the one bit of revenue they were getting from an online entity – particularly given the premium ITV had paid for it. FriendsReunited was ultimately suffocated by its association with the old ITV and it failed to protect its customer base from, first Bebo, then Facebook. In 2009 ITV sold FriendsReunited for £5M effectively destroying £170M of shareholder value and condemning a generation of ITV management.
And so to RTL and their purchase of 60% of SpotXchange, the ‘video supply-side platform and programmatic marketplace’ for $144M. As the FT pointed out here this is also an ‘unusual’ deal and RTL is the first TV broadcaster to buy an ad exchange. This would be a groundbreaking deal if it didn’t feel so similar in many respects to the ITV/FriendsReunited deal. Firstly, like the old ITV RTL needs a better ‘digital’ story than any of its organically grown properties have delivered. It has also needed an answer to the question vexing all broadcasters – how to deal with the arrival of programmatic advertising systems in the market for digital video. Like the FriendsReunited deal, there are two familiar problems: how to integrate SpotXchange into the RTL business and how to continue to invest in it as the market for exchanges aggressively consolidates.
The first of these problems, managing SpotXchange and combining it with the RTL business in a way that is meaningful for both parties, is painfully similar to the ITV/Friends situation. Firstly, if RTL brings SpotXchange close to the RTL properties – effectively making it the in-house ad infrastructure for RTL properties – it destroys its ability to compete in an aggressively consolidating market.
Secondly, RTL can’t favour SpotXchange or vica versa in any media deals without compromising it. It will alarm potential advertisers about the decision making process behind how their money is allocated to RTL owned media sites. Advertisers are already nervous about the consolidation of media agencies and exchanges – leading some advertisers to build their own (like P&G and Unilever) or to demand that their media agencies given them open access to other players in the market (as outlined in the ExchangeWire note here). Having an exchange owned by a media owner is just another flavour of the same problem. The SpotXchange CEO Mike Shehan said ” we’ve taken a route that will allow us to operate independently while becoming a core part of RTL’s global business and strategy.” It may turn out that those two options are mutually exclusive.
Most importantly, for RTL as a media owner, the deal doesn’t help them defend the key strategic problem they face with the ‘agency-owned’ exchanges. That is the ability and willingness of media agencies to use their TV budgets as bargaining chips to force access for their programmatic systems into media owners’ digital properties. The old ‘if you don’t let us plug our trading system into your video player, we’ll pull the TV spend off your broadcast channels’ ploy. Owning their own exchange makes this more likely to happen, not less, as the media agencies now have a competitive reason to undermine the trading systems owned by the broadcaster.
In the long term there may have to be a regulatory solution to the vertical integration that is happening in the online ad market. The regulators may need to look at whether media agencies AND/OR media owners should be allowed to own the exchanges at all.
If RTL decide to keep SpotXchange at arms length to protect its marketing credibility, we have to ask how RTL can help it compete and grow as we hit a wave of consolidation in the market. As a potential investment partner for SpotXchange, RTL may be better positioned than ITV was for FriendsReunited. It is already an $8Bn, international media conglomerate. However, SpotXchange is still playing in a market with a fundamentally different risk profile to most of the RTL stable of companies, and like FriendsReunited, its needs are more suited to the VC market not the corporate finance market. Only time will tell if RTL parent Bertelsman is happy to deliver the scale of financing and support necessary for SpotXchange to continue to invest and compete. The internet has shown itself to be a brutal environment and its not yet clear how many exchanges the world needs – it is likely that some (many?) will merge or fold. AOL’s CEO Tim Armstrong was quoted recently saying “there are 200 ad tech companies, and it feels like there are going to be chairs for 25 to 30 over time”.
RTL have taken a punt on SpotXchange being one of them. Mike Shehan said that they did the RTL deal “Instead of selling to a major US technology company, and becoming one feature in a giant ad tech stack”. However, in the long run, that may prove to have been the most logical way for SpotXchange to exit the market. For Shehan, like Steve and Julie Pankhurst, they have a significant personal cash pile to cushion any concerns about poor decision making. Anyone holding Bebo or Friends Reunited shares right now may feel differently.
Our final concern with the deal is timing. Armies are often accused of preparing for the last way, not the next one. Similarly, this deal feels like a response to the last great digital media battle, not the next one – the convergence of web and broadcast ad-tech in the connected home era. (This is the focus of Decipher’s current FutureMedia2014 Research). The market is still deciding who is going to drive this next form of consolidation. Decipher believe that it will be entities that can deliver advertising into broadcast, on-demand, PVR and second screen video across all broadcasters in a single market. But we believe that it the market will also favour companies that can do it on a pan-regional or global basis for international advertisers. The only companies who can logically do this are the emerging international TV ‘platforms’, not the ‘broadcasters’. Had UPC or the newly merged Sky Europe or even Vodafone bought SpotXchange it would have made sense. Sky’s AdSmart is the first platform level programmatic innovation to emerge in Europe. RTL has a small German cable play, but can’t in any way be counted as a competitive international TV platform. Neither RTL or Bertelsman can deliver this market to SpotXchange and it may be the ultimate weakness that scuppers the deal.