Trident Capital Blog

03/27/2014

The Bright Future of Online Video Advertising

Online video advertising is the fastest growing sector of adtech. In addition to various analyst reports supporting this claim, our extensive adtech portfolio that includes companies like Brightroll (online video advertising), Turn (demand side platform), Jiwire (mobile advertising platform) and Exelate (data management platform) provide us with additional confirmatory data. Today online video advertising represents a $4B market that is growing at over 30% annually. It is expected to reach $8B by 2015 (and greater than $10B by 2016) in the US alone, representing a three-year CAGR of 38% (’12-’15) vs. 20% (’12-’15) for overall online advertising and display advertising that is growing at 10-12% annually. Last year mobile advertising grew faster than video advertising it hasn’t yet cracked the $1B per year level. We all know that advertising budgets follow eyeballs, i.e., reach. This is why TV advertising today is a $180B worldwide business with close to $80B of that coming from the US alone.

There are several reasons why video consumption is moving online. First, it is consistent with the general trend of consuming media online, e.g., news, and music, because of changing lifestyles, e.g., time constraints, place shifting, etc. Second, even though there are now multiple routes for online video to find its way to the living room, e.g., connected TV, tablet. However, online video consumption is primarily driven by the accelerating adoption of mobile devices, particularly by the Millennials (and here), and the expanding availability of broadband speeds that enable bandwidth hogs, such as video, to be consumed through such devices, e.g., 4G LTE. Third, because the online consumption of video enables “unbundling,” i.e., the idea of paying only for the content a consumer wants to watch, rather than the pre-packaged channel collections offered today by the distributors of linear TV.

While online video advertising budgets are growing and the CPMs of video ads are the highest among those of other online advertising formats, the price of online video ads remains very low compared to the corresponding linear TV ads. Until now three reasons were presented for this discrepancy. First, TV’s large reach, i.e., the audiences for TV content, even low quality content, tends to be much larger than the audience for online video content. Second, agreements that have been in place for decades dictate the allocation of video ad revenues between linear TV video content producers and distributors. This is why, for example, Comcast, a video content distributor, decided to acquire NBC, a video content producer. Online video advertising contracts have been handled separately from linear TV advertising contracts.

This price discrepancy is about to change for four reasons. First, big advertisers want access to Millennials. Second, more original video content developed particularly for online consumption and through mobile devices is becoming available. Third, advertisers and their agencies are packaging online video ads together with linear TV ads. Fourth, accelerating rollout of broadband with speeds that accommodate the consumption of online video.

Millennials are developing completely different habits than any of their preceding generations. The sharing economy is one such characteristic. Their wide use of online resources is another. Advertisers realize that the analytics and segments they had used over the years for TV advertising do not apply to Millennials. In order to create new analytics they need the appropriate audience data. And in order to get the audience data they need to start interacting with Millennials through their preferred channel, i.e., online, and across multiple devices, from smartphones to large screen connected TVs. As a result, advertisers are not only increasing their online spending, but they are also increasing the budgets for the acquisition of online data and associated analytics. Whereas with linear TV the price of a video ad is driven by the overall size of the audience the content can attract, with online video ads the price will be determined by our ability to precisely understand an audience and associating the appropriate content that is surrounded by the right video ads to that audience.

Over the past few years we started seeing the formation of studios targeting exclusively the creation of online video content, including mobile video content. More recently we saw the formation of Multi Channel Networks (MCNs), such as Maker Studios. In the last few days Disney acquired Maker Studios and Dreamworks acquired AwsomenessTV. Other such studios, e.g., Alloy Entertainment and Machinima are also attracting significant investor and acquirer interest. The reason for this activity is because these studios have developed original online video content that is starting to get strong following, particularly in the demographic segments advertisers are interested in.

Our adtech portfolio companies that work on video campaigns, e.g., Brightroll, which until recently were used to dealing with online-only advertising RFPs, are now seeing integrated campaigns that package online and linear TV ads around specific goals and themes. We had started to see that approach initially around the Super Bowl but we are not seeing it around other premium content or events. Advertisers and their agencies realize that because of the duration and format of mobile content there may be very few advertising slots around each piece of content. Determining how to take advantage of these slots in a way that is well integrated with linear TV campaigns becomes an advantage.

Video distributors such as Comcast, Verizon (see Verizon’s acquisitions of Edgecast and Intel’s TV assets), AT&T, DirectTV, and more recently Amazon and Netflix are accelerating their investments in IPTV and in broadband Internet, rolling out networks that will enable them to offer online video to a larger portion of their subscriber bases. The continued increase in the prices of online video ads will depend greatly on the ability of the IP infrastructure to handle the demand for online video content.

I’m also watching for the adoption of programmatic approaches, currently being used by online advertising including online video advertising, by linear TV advertising. While the public markets have shown that they are disinterested in first generation video advertising networks (see the market performance of recently public companies Tremor Video and YuMe), they have also shown great support for companies with platforms that support programmatic approaches and Real Time Bidding (see acquisition of Adap.tv by AOL). Programmatic approaches enable not only streamline the video advertising process and make it more efficient, but they will also make it more transparent as they will enable better attribution, and measurement. Attribution and measurement, along with verification, have been identified by IAB as three important problems that need to be addressed effectively before online video advertising can be adopted even more broadly.

I expect that programmatic techniques will start being adopted first in conjunction with local TV advertising and particularly around not premium content, instead of premium content, e.g., Super Bowl. The adoption of such technologies will enable media planners to fill out their advertising plans faster and more efficiently. I expect that by 2020 we may see 5% of local TV advertising budgets being addressed through programmatic approaches.

Online video advertising has a great future by itself. However, as it starts to be combined with linear TV advertising to address the realities of today’s video market it represents a very large opportunity that we just started uncovering.

Mar 27, 2014 12:44:42 PM | Online Advertising, Venture Capital

02/03/2014

Mobilizing Enterprise Applications

Because mobility is starting to impact so many parts of the enterprise for some time now we have been considering how enterprises should be thinking with regards to mobile applications for their customers, employees and partners and have been formulating relevant investment theses. Based on input we have received from several senior IT and business unit executives we tried to determine when to use mobile-first as an application development strategy and when to focus on a mobile-only strategy. Through these executive interactions we have also come to realize that, the mobilization of existing applications is a high corporate priority because many of these applications automate proprietary logic about a specific business process that allow an enterprise to differentiate itself from its competitors. As such, the majority of these applications are bespoke, having either been developed internally or under the specification of the enterprise. For this reason we have focused our initial efforts on understanding the growing startup ecosystem that provide solutions to address the mobilization of existing applications. (At the end of the post I provide our thinking of this ecosystem). In this post I want to focus on third-party mobile applications which are starting to play an important role in the enterprise.

Enterprises must pay attention to 3rd party mobile applications for two reasons. First, in order to determine which of the 3rd party desktop, including browser-based, applications they have previously adopted will need to be mobilized. Second, in order to consider such applications as viable alternatives to internally developed applications whose mobilization is proving unfeasible.

With regards to the horizontal and vertical desktop applications they have already licensed, enterprises face an interesting dilemma. In some cases they may be able to license an adopted application’s mobile version. Because enterprises are increasing the use of mobile devices, many vendors have already developed, or are developing, mobile extensions to their flagship products, e.g., Salesforce, SAP, Microstrategy. In many instances this is the preferred approach because the enterprise is already familiar with the application vendor, has the appropriate license agreements in place, and the relevant data and application integration (and configuration) tasks have already been performed. However, because mobile application development talent is in short supply, many of these mobile application extensions tend to have several issues such as incompatible and even clunky User Experience (UX), security flaws, web-only implementation while a native application would have been a better fit, and poor functionality compared to their desktop counterparts. In many cases the software vendor is not able to incorporate in the mobile app key pieces of functionality that the enterprise had previously configured for the desktop app. For these reasons alone, corporations may want to consider licensing a mobile-only enterprise application from one of the new vendors that are quickly emerging to fill the void (for a partial list of such vendors see here). For example, RoamBI provides a mobile-only application for business intelligence that competes with Microstrategy’s.

Corporations must consider mobile-only third-party applications for four additional reasons.

In order to rapidly automate a mobile-centric business process that hasn’t been previously automated. Even if the corporation has an application development group, depending on the group’s priorities and talent, it may be easier to adopt the third-party application instead of developing it internally. Applications like Dudamobile’s that is used for automatic creation of mobile websites and Digby for e-commerce provide good examples for this case.
In order to leverage other third-party software through APIs. Mobile payment applications provide a good example of this. Several companies are tackling this space because it is difficult for banks and other organizations to develop their own solutions. Mobile payments have been growing rapidly, e.g., during 2013 Starbucks drove $1B through mobile payments, and for many enterprises they are starting to represent one of the most important monetization channels.
Allowing enterprises to cost-effectively mobilize an internally developed application. Cost is measured along a variety of dimensions:

Cost to hire the appropriate talent (as many companies are quickly finding out a strong internal application development organization doesn’t automatically imply that it will have strong mobile application development skills; see Yahoo’s recent mobile talent acquisitions in this area).
Cost to create the right User Experience (UX). UX is one of the most important factors to a mobile application’s success. For example a customer-facing application has different UX requirements than an employee facing one, as banks and insurance companies are coming to realize through the adoption, or lack of, of their mobile banking applications. This talent can also often be difficult to find.
Cost to develop, test, deploy and maintain each application, even if the talent is available. As in all application areas, oftentimes it is more than adequate to provide 80% of the necessary functionality quickly rather than wait for a long time to provide more than this level of functionality.
Cost of being late to market because of the previous 3 issues.

Each corporation has developed many different applications, in several cases thousands of them. Mobilizing them in a timely manner often becomes impossible. As a result adopting a third party application represents the fastest path to mobilization. Alternatively they can try virtualizing their desktop applications and in this way make them available through a mobile browser. Companies like PowWow, Capriza, StarMobile, Citrix, included in the ecosystem at the end of this post provide solutions in this space).

While mobile consumer applications continue to dominate investment and M&A discussions these days, mobile enterprise applications present, internally developed or third-party, present an interesting set of issues that we consider as we determine in which parts of these ecosystems to continue investing.

We have broadly organized the custom mobile application ecosystem into six categories depending on whether the companies provide application:

Development environments, e.g., Sencha, Xamarin, Verivo and Appcelerator.
Testing, e.g., uTest and Appurify.
Virtualization systems, e.g., PowWow, StarMobile and Capriza.
Management, e.g., MobileIron, Appfirst and Critercism.
API management, e.g., Apigee and Mulesoft.
Security, e.g., Mocana, Cloudmine.
Development services, e.g., Solstice, Vibes, Kony.

Feb 3, 2014 6:00:00 AM | Mobile, SaaS

01/06/2014

Mobile-first vs Mobile-Only: Additional Thoughts on Mobile Enterprise Applications

In a previous post I discussed how the adoption of mobile devices by customers, employees and partners, as well as the desire of these constituencies for a mobile-like experience even in their desktop devices, is leading to the emergence of mobile as the next enterprise software platform and causing enterprises to accelerate their mobile application strategies. As a result, CEOs and even corporate board are making mobile applications a priority. For the most part thus far these strategies involve mobilizing existing applications and embracing a mobile-first approach for the new applications they are licensing or developing internally. But internally developed enterprise applications, legacy and new, present corporations with an interesting and complex challenge during this period when IT investments remain constrained causing corporations to ask whether they should adopt a mobile-first or a mobile-only approach.

Customers, employees and partners are expecting mobile enterprise applications that match their mobile consumer experiences. Moreover, as the portion of the enterprise workforce that is becoming mobile is increasing, the applications used must match the employee work norms. As IT departments are quickly finding out, adopting a mobile-first strategy, particularly for their internally developed applications, can be particularly tricky and expensive because in the process they need to:

Determine whether and how to divide the application’s functionality between the mobile and desktop versions. For new applications this is an easier task than for legacy applications that will need to be mobilized.
Upgrade their legacy desktop and server-side applications along with their application management infrastructure. Before developing and deploying a mobile application that tightly integrates and interacts with one or more legacy applications, the enterprise may need to first upgrade these legacy applications. Such upgrades can be particularly costly as they may also involve upgrading underlying third-party infrastructure software and hardware.
Provide a user experience that matches expectations that are being driven by the consumer internet. This means that the developer must determine whether to re-create a mobile version of a multi-function enterprise application, or to break the original application into several single-function ones. In addition, the user interface of the resulting application(s) must match the user expectations, which are now very high. With older applications it may simply not be possible to create an acceptable, modern mobile user experience.
Develop and manage APIs that allow a legacy application to interact with mobile front-ends and other mobile applications. In many instances one may only be able to mobile front-end to a legacy application, typically using HTML5. In other cases, it may be possible to develop a full-blown mobile application that incorporates a portion of the legacy application’s functionality. These alternatives mean that it may be necessary to expose and manage different sets of APIs for each application.
Address the multitude of security issues associated with mobile devices and the operating systems they use. In many instances, IT organizations don’t yet trust the security provided by third-party mobile applications. Forrester Research reports that more than half of the enterprises in North America and Europe are implementing mobile application strategies so that they don’t find themselves with hundreds of security leaks because employees bring their own devices.
Deploy a mobile application management infrastructure. In most cases, the existing application management infrastructures are inadequate for managing mobile applications as well.

For these reasons, IT organizations are considering mobile-only versions of applications as a means to better respond to customer, employee and partner needs for mobile applications while better capitalizing on their application development budgets.

Jan 6, 2014 6:00:00 AM | Mobile

12/10/2013

Interview with Bloomberg

On 12/10/13 I was invited for an interview on Bloomberg TV's Money Moves with Deirdre Bolton (@DeirdreBolton). You can see a replay of the interview here. After a quick introduction to Trident, the interview centered around big data, big data applications and the big data companies where we have invested. I remarked how digital marketing applications provide an excellent big data application space and mentioned Exelate and Brightroll as two of our portfoio companies that collect, manage, analyze and utilize big data for more effective online advertising decisions.

Dec 10, 2013 4:47:05 PM | Big Data, Online Advertising, Venture Capital

11/13/2013

Thoughts on the Internet's Monetization Opportunity

A few days ago I hosted the meeting of our Internet Advisory Board. Preparing for that meeting led me to jot down my thoughts regarding the sector’s monetization opportunity.

I remain bullish on the transformative potential of the Internet in the enterprise that we view as the channel for achieving scale inexpensively and transforming every industry. Three drivers feed our bullishness:

The US-based Millennials (the most Internet-savvy consumers) are entering their prime buying and influence period. But they carry a heavy debt load leading them to use services and share rather than own giving rise to the subscription and sharing (and here) economies.
High-speed mobile access combined with improved smart devices (smartphones, tablets, embeddable devices) further accelerates Internet usage. The mobile device opportunity is having a far greater disruptive impact than anticipated
Low penetration of the Internet channel in most industries. In a recent survey conducted by Booz executives from 350 companies reported that they spend 8.1 percent of their R&D budgets on Internet-related tools.

The Internet offers a great opportunity, but also a great challenge for marketers seeking to engage consumers at a time when publishers and platforms are ceding control to users. We see this impacting two areas of focus for Trident: online advertising and marketing applications and services.

Internet advertising has arrived at an important junction that will fuel the next leg of sustained growth. Over the past 10 years we have seen the sector change dramatically. The first wave of Internet advertising growth was driven by direct-response marketing budgets particularly from industries such as auto, travel, tech, telecom, retail, and financial services.

Several structural and technology improvements particularly to display advertising are attracting additional industries but also causing untapped brand budgets sitting inside leader categories to shift. They include:

Programmatic execution combined with advances in media analytics and optimization.
A shift toward integrated data. Data, as well as tools to leverage this data, are now viewed as key component of this new adtech because they are improving targeting and conversions.
Improvements to messaging capabilities through scaled multi-format reach, (though creative still needs to catch up particularly to RTB).
Improved quality metrics on ads.
Brand-safe advertising environments, because brands realize that it is easier to lose control of their brand on the Internet.
Scalable, cloud-based software platforms coupled with a combination of subscription and usage pricing (not unlike what utilities do for their customers) that enable the delivery of this capability as a service.

Taken together, these structural developments will lead to a rising level of confidence among brand-oriented advertisers that will increasingly view online display (in its various forms) as a more desirable complement to, and replacement for, fragmented mass media channels. Brands are allocating an increasing mix of their ad spend to online video. The budget is coming from TV broadcast and print advertising. We see industries such as CPG starting to aggressively allocate budgets to display advertising. While they spend nearly $200 billion globally offline, such advertisers continue to under-invest online.

We are particularly encouraged by projections calling for the share of agency media budgets spent through programmatic channels to increase from 15-20% today to 40-50% by 2015. Some surveys project that between 2012 and 2017 RTB-based spending in the U.S. will grow at a 56% CAGR. Mobile will be a significant driver of overall RTB growth (IDC expects mobile RTB spend in the US will reach $1B by 2015 and $3B by 2017, representing 21% of the total RTB spending).

The accelerating move of consumers and businesses to Internet, as well as the rise of the subscription economy, namely the move to sell products as services sold on a subscription basis, are causing a re-examination of the marketing applications stack. Customers have more knowledge and control over how, when, and why they engage brands. They increasingly expect a unified experience that is consistent across all of their business interactions. Consumers in particular are increasingly empowered to avoid unwanted or undesired marketing. The line between offline and online continues to disappear, and as it does, the line between product and service is also becoming blurred.

As a result of these trends and the associated data explosion traditional marketing approaches are no longer working causing CMOs to reexamine their established practices and assumptions about advertising, demand generation, retention, and loyalty. In the process of this re-examination they are starting to adopt a new class of applications that power awareness, attention, affinity, action, loyalty and optimization. While the space of these new applications today remains extremely fragmented with hundreds of startups having been funded already, large vendors have started to aggressively build, partner with or acquire the technology enabling them to create a new marketing applications stack. To the traditional infrastructure vendors, like IBM, SAP, and Oracle new cloud-based application vendors like SFDC and Adobe have been added, as well as Internet pureplays such as Google, Facebook, Twitter, Linkedin.

The combination of these factors lead us to three observations:

Engagement applications entering the marketing stack. Business applications are becoming critical tools to engage with customers. Engagement applications enable companies to empower interactions with customers across a variety of channels. We have invested in ThisMoment, Extole and 8thbridge under this thesis.
Advertising and marketing are being re-imagined becoming more of a science than an art as earned media become a bigger part of the paid and owned equation and as more data is collected from each customer interaction, integrated and analyzed. Portfolio companies like Exelate, Turn, Jiwire, Brightroll, and Sojern are leading examples of how analytics changes the game in online advertising and marketing.
Subscriptions to software (SaaS) and services will replace existing manual processes and traditional on-premise applications. All of our portfolio companies in this space deliver SaaS applications or provide their service using subscription billing.