The Venture Capital industry’s interest in digital media has cooled off recently. But there are still good reasons to be interested in the sector.
Digital media, encompassing advertising and marketing technologies (‘adtech’ and ‘martech’), has long been the darling of venture capital. But investment interest has recently shown signs of stalling. Earlier waves of well-funded businesses are struggling to find attractive exits amongst significant competition, and the principle players who are building ‘full stack’ services have made the acquisitions they need and are now sharpening their focus. The digital media landscape retains the complexity it is well-known for, with a multitude of different brands jostling for position within a range of specialist service ares (see the famous Lumascapes diagrams to get a sense of this). So in the midst of this recent pause, we ask ourselves – should investors still be looking at digital media?
Digital media has captured the attention of private early stage capital having progressed rapidly due to the convergence of technology and easy availability of consumer technologies. This has paved the way for interactive mediums that engage the audience, something that traditional media did not provide.
As per the oft quoted adage, “People don’t read ads. They read what interests them. Sometimes it’s an ad.” Advertising spend has shifted over time to reflect the change in the way we consume media. And this shift has been radical.
Firstly, the world is of course increasingly online. In 2012 total global ad spend (encompassing all channels including TV, print and online) was $500bn according to eMarketer, and the proportion of that spent online or “digitally” being just 18%. Since 2012 and over the period to 2015 digital ad spend has grown at 15% compared to an overall market growing at just 4%. Digital media’s share of global ad spend is forecast to be more than 25% in 2015.
The composition of this digital spend is also changing and is now increasingly mobile. Over the three years to 2015 mobile ad spend has grown 7x faster than desktop digital, which in itself is growing 4x faster than traditional advertising. Mobile ad spend is expected to be 25% of the overall digital market by the end of this year.
The shift to mobile advertising is largely a byproduct of increasing social media use. The average user now spends more than an hour online on their mobile devices each day, and nearly 40% of that time is spent on social media activities, including viewing videos. So it’s not surprising that Facebook, a dominant player in social media, increased their global market share of mobile advertising from 5% in 2012, to 17% in 2013, to 22% in 2014. Mobile advertising now comprises over 40% of Facebook’s revenue. Their share price has reacted accordingly, rising c. 3x in two years.
Despite these leaps, digital advertising spend is still lagging behind the pace at which technology is adopted. In 2014 printed publications accounted for only 4% of media consumption time in the US market, yet still attracted nearly 18% of advertising spend. These figures are changing rapidly (being 5% and 20% respectively in the previous year) and will continue to shift to better match consumers’ preferences and habits. But for the time being, the mobile sector is a long way short of attracting its fair share of expenditure – accounting for 24% of consumption time, but just 8% of advertising expenditure. This is partly because of the technological challenges of accurately targeting and tracking the performance of mobile advertising spend. But those challenges are being addressed, and so there is a real opportunity for increased media spend in the mobile sector.
The growth of mobile does not just present an opportunity for advertising and marketing technology companies. As the giants of the tech world (principally Apple, Google and Amazon) seek to dominate the mobile space, a whole new industry of digital product distribution has sprung up. In just five years the global app market has grown at a compound annual rate of more than 150% to $20bn. And global investment in app development is estimated to have doubled since late 2013, reaching $10bn in 2014.
Games currently represent an estimated three-quarters of the global market for mobile apps, and one of my other recent blogs comments further on the growth of mobile gaming. But non-gaming mobile apps are growing at an even faster rate across a huge variety of sectors – music, travel, health and fitness, lifestyle, entertainment and navigation to name but a few. By 2017, non-game apps are expected to account for half of a total app market that will have grown to $70bn.
In summary, the digital media sector opportunity is underwritten by a trend in media consumption and remains relevant. The world is increasingly online and online is increasingly mobile. The opportunity is still relatively untapped despite prior high growth rates, particularly in mobile. Opportunities still exist for adtech and martech companies (despite recent, perhaps cyclical, changes), “content” propositions, and indeed for the “services” supporting them.