September 2015 technology.ihs - SpotX...by law, IHS shall not be liable for any errors or omissions or any loss, damage or expense incurred by reliance on information or any statement

IHS TecHnology

Video advertising in europeThe Road to Programmatic Ubiquity

September 2015 technology.ihs.com

Daniel KnappSenior Director, Advertising

eleni MarouliSenior Analyst, Advertising

Advertising intelligence

prepared for

by

© 2015 IHS

IHS Technology |

Advertising Intelligence Service

Video Advertising in Europe

2

1. About the study 31.1. Purpose, scope, method 3

1.2. A note on forecasts 4

2. Programmatic video in europe – the big picture 5

3. country profiles 103.1. Belgium and Netherlands 10

3.2. Central and Eastern Europe (CEE) 11

3.3. D-A-CH region (Germany, Austria, Switzerland) 12

3.4. France 15

3.5. Italy 16

3.6. Nordics (Denmark, Finland, Norway, Sweden) 17

3.7. Spain 20

3.8. UK 20

4. A perspective on publishers 224.1. Broadcaster programmatic: from periphery to centre 22

4.2. Typology: how publishers are embracing a programmatic mindset 22

4.3. Publisher cooperatives 22

4.4. Partner, build, acquire: new strategic imperatives 23

5. conclusion 24

6. Definitions 256.1. Programmatic 25

6.2. Video advertising 25

6.3. Net advertising revenue (NAR) 25

September 2015 technology.ihs.com

IHS tecHnology Insight Report

IHS TecHnologycopyright notice and legal disclaimer© 2015 IHS. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent, with the exception of any internal client distribution as may be permitted in the license agreement between client and IHS. Content reproduced or redistributed with IHS permission must display IHS legal notices and attributions of authorship. The information contained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it, and to the extent permitted by law, IHS shall not be liable for any errors or omissions or any loss, damage or expense incurred by reliance on information or any statement contained herein. For more information, please contact IHS at [email protected], +1 800 IHS CARE (from North American locations), or +44 (0) 1344 328 300 (from outside North America).


Territories coveredFrance, Germany, Italy, Spain, UK, Denmark, Finland, Norway, Sweden, Belgium, Netherlands, Austria, Switzerland, Poland

contactsDaniel KnappSenior Director Advertising Research, [email protected]+44 (0) 20 7424 2871

Amanda RussoCorporate Communications, [email protected]+44 (0) 20 8276 4727

Joanna BurtonVP European Strategy, SpotX [email protected]+44 (0) 20 3770 6876

The Road to Programmatic Ubiquity

Daniel Knapp, Senior Director and Eleni Marouli, Senior Analyst

1. About the study

1.1. Purpose, scope, methodThis study, conducted by IHS and commissioned by SpotX[1] , provides an update of our 2013 report which for the first time sized and projected the programmatic video market in Europe. Two years in digital is as transformative as a decade in analogue time. When it comes to ‘programmatic’, the umbrella term for automated transactional mechanisms using data and software that has come to uproot the advertising industry as we know it, time evolves even faster. An update is overdue, so we fast-forward from the green shoots of programmatic video in 2013 to its 2015 expanse.

Back in 2013, we covered the European ‘Big 5’ markets – France, Germany, Italy, Spain, and the UK. In a market environment that was in its infancy, and where reliable data sources were scarce, this was a conservative but necessarily limited scope. Yet today in 2015, programmatic video advertising is a reality in an ever greater amount of European markets. In this study, we revisit the markets which we have analysed in 2013, add the Nordics, Benelux, embed Germany in the wider D-A-CH[2] region, and for the first time take a look at the emerging video programmatic landscape in Central and Eastern Europe (CEE).

Already in our first report, we stressed that an aggregate market perspective cannot understand the nuances of programmatic advertising. Programmatic principles entail a radical shift for companies across the advertising value chain and transform decades of established business practice. In particular, media owners/publishers who combine content production and its monetization are faced with an array of challenges on the road to programmatic. This is why we developed a publisher typology to understand how different companies approach programmatic video. Companies make markets, so we decided to include this company perspective in our 2015 report as well with an updated publisher segmentation.

1 Formerly SpotXchange, the company rebranded on 2 September 2015 to SpotX

2 Germany (D), Austria (A), Switzerland (CH)

Video Advertising in europe

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Since the sponsor of this project, SpotX, sits on the supply side, we at IHS in this study are principally concerned with the revenue generated through programmatic video advertising by media owners, and not with the volume of spend being invested from the demand side and going to various intermediaries. This is why our core metric to express market size is net advertising revenue, or NAR, which stands for the revenue generated by media owners after any deduction of media and technology fees, discounts and other payments along the way from buyer to seller. The focus on NAR also allows us to situate this project within the wider revenue sizing studies for the overall advertising market that IHS, and also media agencies, publishes regularly.

‘Programmatic’ is an elusive term that escapes a straightforward definition and is employed differently across market and companies, often being skewed towards the prevailing business model of those who mention the term. For this study, we draw on the definition of ‘programmatic’ that IHS and IAB Europe, the online advertising trade association, have developed in conjunction with national market participants[3].

Similarly, ‘video’ is in the eye of the beholder[4]. In the process of this study, this posed a challenge – numbers supplied to us often used a broader definition of video and we needed to discount numbers accordingly. The results of this study represent harmonised numbers that are comparable across markets and assessments from our participants.

For this study, IHS conducted 35 interviews with media owners, sales houses, agencies, technology intermediaries, advertisers and industry organisations. We would like to express our gratitude for their participation. Interview data was combined with the proprietary IHS advertising market database across all media which includes media buyer and seller sentiment indices, market size and growth trends. Additional quantitative and qualitative inputs from validated 3rd party sources (e.g. volume of ads transacted through a programmatic platform, number of DSPs active in a market) were harmonised and aggregated in the IHS econometric advertising forecasting models to produce an outlook to 2020.

1.2. A note on forecastsWhile our historical and 2015 data reflects reality as it happened, forecasts are a look into the future. The further we move away from the present, the more difficult it becomes to imagine the future in other categories than an extension of the present. Forecasts require assumptions. As informed and backed by empirical evidence as any assumption may be, reality can turn out to be different than a model due to unanticipated factors. This is especially the case in a fast-moving and emerging market environment.

We only consider hypotheses on the future of programmatic video in our quantitative forecast if we have tangible evidence today. A forecast based on a solid understanding of verified facts has a lower margin of error than a forecast that tries to anticipate all the things that might happen, exponentially throwing the forecast off course if one of them does not materialize, or only to a degree. Specifically for this project, the emerging video strategy of large platform players represents a caveat. Alongside YouTube, in particular Facebook is emerging as a global video player. Yet the Facebook video product is subject to change and will evolve over the next years. Our forecasts can only consider what we know about Facebook video today. Similarly, we do not consider the impact that for instance a newly launched advertising sales house alliance in Germany would have on programmatic video take-up. Too few facts are known about future programmatic video deployment through this initiative.

Forecasts then require a different reading from historical data. They show a trend on how the market will likely shape up all known factors considered and a clear set of assumptions. They are to be seen as directions, especially five years out, and not as universal truths accurate to the last digit. As media and advertising forecasts proliferate from various vendors, too little effort is generally spend on explaining what forecasts intend to achieve and how to interpret them. This risks diluting the analytical value of informed foresight. We are transparent about what our data and analysis can achieve, but also about their limitations.

3 See ‘definitions’ section at the end of this report

4 See ‘definitions’ section at the end of this report

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2. Programmatic video in europe – the big pictureVideo programmatic revenue in Europe[5] has grown almost twenty-fold from €22m in 2012 to €375m in 2015 and will achieve €1,967m by 2020. This amounts to an average annual growth rate of 39.3% between 2015 and 2020. From 2.2% of all video advertising revenue in 2012, programmatic will account for 16.8% by the end of 2015. By 2020, more than half of all video advertising revenue (51.4%) will be generated programmatically. We call this growth the ‘road to programmatic ubiquity’ because programmatic video is rapidly moving from an experimental stage to mainstream. In three of the markets surveyed, Netherlands, UK, and France, programmatic will even become the predominant source of video advertising revenue at the end of our forecast period.

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Today in 2015, programmatic maturity, measured in share of video revenue generated programmatically, varies widely between markets, from Poland at the low end (2.9%) to the Netherlands (34.2%) in top spot. By 2020, we expect a stronger harmonisation among markets as growth in emerging programmatic markets picks up more dramatically from 2018 onwards. Second and third mover markets will benefit from established best practices, technologies, and principles of ecosystem creation developed over time in pioneer markets. In smaller markets, the need for aggregation, large market shares of single companies, and cooperation between large media owners will move ad spend to programmatic mechanisms exponentially rather than incrementally.

5 ‘Europe’ here and throughout this report refers to the countries covered in this analysis: France, Germany, Italy, Spain, UK, Denmark, Finland, Norway, Sweden, Belgium, Netherlands, Austria, Switzerland, and Poland.

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A similarly large gap can be found in the actual size of the programmatic video markets. The UK takes the top spot with programmatic video NAR of €135m in 2015, whereas other markets will generate below €10m. This gap in absolute NAR prevails until the end of the forecasting period. It is owed to the different sizes of the addressable markets determined by the size of internet population and change in media consumption.

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These absolute NAR numbers mean that in a European programmatic video market worth €375m in 2015, the UK commands a 36.1% share. This share will go down to 30.6% by 2020, as currently lagging markets will grow more aggressively. Yet the gap between the UK and the next biggest country will remain in excess of 10% by 2020.

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The bubble chart below benchmarks the markets considered in this study, using 2015 market size to determine the size of the bubble, the Y-axis to record the 2014 share of all video NAR, and the X-axis to show the growth potential until 2020 expressed as compound annual growth rate (CAGR). The chart shows a curved relationship between market maturity and growth potential. It also allows a visual grouping of markets into

1. a leading market tier consisting of the Netherlands, UK and France

2. a high potential tier consisting of the Nordics, Spain and Italy

3. an emerging market tier consisting of Belgium, Switzerland, Austria and Poland

4. a German market that sits between the high potential and emerging market tiers (which will be subject of more detailed analysis)

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Bubble size = size of the market

x - axis = CAGR 2015 - 2020

y - axis = Programmatic share of video 2015

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Across Europe, the programmatic infrastructure is being laid and extended. A good proxy is the growth of the number of video demand-side-platforms (DSPs) in a given market.[6] Our data shows growth between Q1 2014 and Q4 2014.

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6 DSP count is an aggregate, treating each country iteration of a DSP brand as a separate entity.

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3. country profiles

3.1. Belgium and netherlandsThe Dutch digital advertising market has always been a hotbed for innovation, and we consider it the present and future European leader in programmatic video. In the Netherlands, the majority of national broadcasters generate revenue from programmatic video advertising. In 2015, we expect 34.2% of all video advertising revenue to be generated programmatically, rising to 63.3% in 2020.

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The Dutch digital advertising market has traditionally been performance-driven, which has meant a low entry barrier for programmatic banner advertising. Price deflation, a common early fear from publishers across Europe, was not an issue. Like in Spain, the rise of programmatic video was helped by a market depression in 2012, when the online video advertising market actually declined and budgets moved back to linear TV due to low TV CPMs and questions about video advertising efficiencies. Video advertising CPMs had bottomed out, and publishers embraced programmatic to successfully bring them up again. This move was helped by a strong general programmatic literacy in the market that developed in the performance-driven banner display advertising culture. In programmatic video, performance indicators are making way for brand safety and other brand-related priorities.

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Similar to the Nordics, media owners have restructured their sales teams, closely aligning programmatic and non-programmatic sales forces and fostering healthy competition between the two. A growing proportion of broadcaster audiences are logged in with their personal data when consuming online video, offering an increasingly strong portfolio of first party data. Strong competition from global platforms means that Dutch media owners are under pressure to innovate. In contrast to other markets, programmatic development is largely driven by the supply side, advancing ahead of requirements articulated by the demand side.

Although the Netherlands shares a border with Belgium, the markets could not be more different. A single Belgian advertising market does not exist. The country is divided into two media ecosystems, one on the French-speaking and one on the Dutch-speaking side. The programmatic video advertising market is still in its infancy. The French-speaking side is generally served from players in France. Flemish (Dutch-speaking) media owners are making first own forays into programmatic video, yet predominantly on an experimental basis. The Flemish digital advertising market is more advanced than its French-speaking counterpart and we expect faster development driven by the supply side. Dutch technologies and players are also eyeing the Flemish market, providing best practices which we believe give the market a third mover advantage. Despite a low share of programmatic video revenues of 8.1% in 2015 (largely due to global platform players), we expect the market to pick up rapidly and reach a programmatic share of video advertising revenue of 39.8% by 2020. Main drivers are cost savings and economies of scale, similar to Central and Eastern Europe, Austria and Switzerland. In small markets, programmatic technologies can connect supply and demand across borders and reduce overhead for smaller media owners.

3.2. central and eastern europe (cee)The programmatic video market in CEE (excl. Russia) is still in its infancy. We estimate market development to lag three years behind mid-tier Western European markets due to cyclical and wider structural reasons. Macroeconomic volatility across the region means that advertising markets are still suffering from the recessionary environment that started in 2008. While recovery has begun in 2014 and 2015, in aggregate, the region will take until 2020 for advertising markets to recover to pre-recession levels. Sluggish GDP growth, pressures on disposable income and household debt negatively affect market growth. Advertising price deflation over the past seven years means that television advertising, a primary outlet for branding campaigns, remains attractive for advertisers to generate scale at low cost. The development of multichannel TV that complements incumbent channels is still underway and offers advertisers affordable, and tried-and-tested means to reach more niche audiences.

The on-going strength and cost-effectiveness of TV, a still developing measurement infrastructure and cost-barriers for publishers to invest in the development of digital assets slow the migration of budgets from traditional to digital media. In 2014, the average regional share of advertising revenue generated by digital media stood at 23.1% in CEE, compared to 29.8% in Western Europe. These trends also put up a barrier to online video market development and keep CPMs for digital advertising very low. These low CPMs also mean that at present, publishers struggle to absorb the technology costs involved in deploying programmatic strategies. Historically, CEE advertising markets exhibit a complex rebate structure and high discounts on ratecard prices. Similar to Germany, high rebates are a fundamental barrier to programmatic. For programmatic to take off in high-rebate markets, the entire logic of media valuation, pricing and buying needs to change, requiring advertisers, agencies and media owners to find a new common ground. As CEE markets are returning to growth due to an improvement of macroeconomic conditions, market participants today have less incentive than in other, more mature advertising markets, to make such wider structural changes. Due to these factors, we concluded that it is premature to conduct a market sizing and forecasting of programmatic video advertising for all CEE markets. The empirical basis does not afford a robust market assessment and quantitative outlook.

Yet we estimate that markets will reach an inflection point between 2018 and 2019, when organic growth due to cyclical recovery slows, media owners have higher amounts of cash at disposal and media consumption changes become material. This combination provides a basis for growing CPMs in digital media, and creates urgency for more rapid investment in digital advertising formats. The growing influx of global platforms to monetize digital audiences will further boost local media owners’ forays into programmatic. Some CEE markets have already laid the groundwork for the rise of programmatic video to take off in this environment. Most notably the Czech Republic was early in developing a cooperative between publishers for display programmatic. This market understanding and familiarity with programmatic processes will serve as the backbone for programmatic video growth. A key driver for programmatic video growth is the

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potential for aggregation of these markets. Several large media owners have a pan-regional footprint, cooperations, joint ventures and co-ownership structures in place with Western European media owners. This means that implementation of programmatic video only requires a few key players and enables buys across markets, which drives attractiveness for the buy-side and allows full leverage of the efficiencies of programmatic buying. Once CEE markets move from cyclical recovery to structural reform, we also find them in a third mover advantage position, where they can draw on what parent companies or partner companies have learned or deployed in other markets.

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Poland is an exception to the factors that foreclose a quantitative assessment to date. It is digitally more mature than its peer markets and was able to recover from recessionary factors earlier, while the recession overall was less severe. The market dynamics in Poland are more similar to Western European countries such as Austria, Switzerland and Belgium. This shortens the time horizon for programmatic video deployment to take off and we see first experimentation. Global platforms already trade part of their video advertising inventory programmatically in Poland. We estimate that the programmatic video market in Poland will be worth €1.6m in 2015, or 2.9% of total digital video advertising. A mix of CEE-specific cyclical and structural factors paired with Western European market characteristics means that by 2020, 27.7% of all digital video advertising revenue will be generated programmatically, with a surge of growth from 2017 onwards.

3.3. D-A-cH region (germany, Austria, Switzerland)Germany has the largest advertising market in Europe and the second largest digital advertising market after the UK, or even the largest if factoring out paid-for-search. The German online video advertising market will be worth €331m in 2015, establishing it as the number three video advertising market in this study behind the UK and France. Structural factors specific to the Germany mean that the programmatic share of video advertising revenue is comparably low at 9.3% in 2015. Several market participants have dubbed Germany a ‘sleeping programmatic giant’ and we see first evidence of this giant waking up. By 2020, we expect that 44.9% of all online video advertising revenue in Germany will be generated programmatically. This will put the market on a similar development level as the Nordics. Yet the path to programmatic video in Germany differs from other countries.

Programmatic advertising is not a goal in itself. Programmatic technologies are problem solvers, yet when there is no problem at hand, their deployment is not mandatory. The German market has so far found its distinct, local way, of transacting digital video advertising largely independent from the programmatic ecosystem that structures most other markets globally.

German media owners employ their own technologies, often developed before the term ‘programmatic’ swept across the Atlantic, already providing the market with comparably high degrees of transparency and efficiency. Strong media brands also mean that sales houses continue to define the terms of online video transaction mechanisms. In particular, the broadcaster sales houses occupy a strong position, selling both their own and third party inventory. Broadcaster catch-

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up video inventory is still limited and this shortage is causing stable or rising prices, reducing the incentive to employ programmatic technologies for potential uplifts. The largest surge for programmatic video in the Netherlands and Spain came when the market was depressed and CPMs had bottomed out, reducing apprehension to try new forms of doing business. This is currently not the case in Germany.

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Across all media, Germany is an advertising market with a strong discount and rebate culture. Whereas the Sapin law in France curtailed such a business model, leading to the surge of programmatic driven by agencies, in Germany, the different agency incentive structure makes it difficult for programmatic to have a high penetration on premium inventory.

More widely, and importantly, the German advertising market is consensus-driven with media owners, advertisers and intermediaries jointly defining metrics. While changes in measurement and introduction of data sources may take longer than in other markets, the role of joint industry committees where market players come together means that the German market has a sound and strong agreement on metrics and measurement. The market has avoided the so-called measurement paradox: that in the digital age there is more data than ever, but less agreement than ever what this data actually means. Most digital advertising markets are post-consensus markets with competing data sources and struggles for measurement dominance. This risks media price deflation. The German model has kept this threat at bay. An international observer to our study has stated that ‘everything has to be an Audi before the Germans try it out’, yet the consensus-driven nature of the market provides the basis for long-term stability of the digital ecosystem. The German approach to digital media transaction and measurement also has to be seen in a regulatory context. Germany has one of the strictest privacy laws in the EU and high consumer sensitivity towards targeting. Media companies need to tread carefully to both adhere to the legal environment and to respect consumer sentiment. Yet the data landscape is not static, as the August 2015 initiative of a sales house alliance to pool media owner data and to let advertisers bring their own data illustrates. Whether this initiative is indeed the ‘Audi’ remains to be seen, but it is further evidence for a sustainable, evolutionary approach of German market participants who have the long-term view in mind.

This configuration makes the German market a very local market with limited ability for foreign players to transact. Nevertheless, many technology players see Germany as one of their largest opportunities in Europe. The overall video market is sizeable and growing and inventory not managed by broadcaster sales houses in the long tail is making a migration to programmatic in order to consolidate. Two to three SSPs/Exchanges are selling a growing share of local inventory outside of the broadcaster remit and outside of global platforms. We see global platforms and long-tail inventory to dominate programmatic video in the mid-term. Yet broadcasters as the strongest players are not ignoring programmatic as recent acquisitions both by RTL Group and ProSiebenSat.1 illustrate. We expect broadcasters to leverage their technology with regards to programmatic video in two ways. Firstly, we anticipate a gradual move of third party inventory to broadcasters’ programmatic platforms. Secondly, we already see evidence for programmatic trials of broadcasters’ own premium video inventory. While such trials are still contained, we expect a first wave of premium inventory being made available programmatically video revenue in H2 2016, followed by a further growth surge in 2018. Yet any such steps

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will take place in accordance with joint industry standards and will not be ‘lone wolf ’ initiatives. This careful evolution of programmatic is to be seen in the context of changing buy-side expectations. While Germany is a supply-driven advertising market, large platform operators already offer programmatic video capabilities and media owners need to ensure that they can compete. The proliferation of private market places also offers an increasingly safe environment to transact video inventory.

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Although Austria and Switzerland are different markets, their development at least in part hinges on Germany, as the German commercial broadcasters are key players both in Austria and Switzerland. We expect German broadcasters to rollout programmatic video in conjunction with their German strategies, factoring in a six to eight month delay. In our forecast model, we have therefore pegged a proportion of Austrian and Swiss market development on German growth. In Austria, for 2015, we expect 6.5% of video advertising revenue to come from programmatic channels. Partly this is due to the role of global platform players, which are ahead of local media. In Switzerland, we see 8.2% to come from programmatic in 2015. This proportion is slightly higher due to the larger fragmentation of the Swiss market into different linguistic zones, similar to Belgium. Apart from Germany, French players in particular are also moving to monetize Swiss francophone video audiences programmatically. Mid- and long-term, we expect market growth to pick up, reaching a share of 38.9% of all video revenue in Austria in 2020, and 40.7% in Switzerland. Efficiencies and bundling are key in smaller markets and we anticipate programmatic video to enable that.

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3.4. FranceFrance is a programmatic pioneer market. Native French advertising technology players have achieved international success and the idea of a publisher cooperative, where media owners pool inventory and data in a technology-enabled joint venture has become a template from France for other European markets and companies in the US. The French market had home-grown programmatic technology ‘before the term programmatic was used’, as one respondent to this study put it. While imbalances between a data-savvy demand side and a data-poor supply side have meant growing pains for many programmatic markets, France had an equilibrium, which helped overcome hesitation and preconceptions of programmatic. This environment helped the expansion of programmatic from banner display formats to higher-value video formats. We project that by end 2015, 18.6% of all video advertising revenue in France will be generated by programmatic means, placing it third behind the Netherlands and the UK in terms of market penetration. By 2020, we forecast 54.1% of all French video revenue to be generated via programmatic channels.

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358

1.5% 7.6%

15.2% 18.6%

26.1%

32.5%

39.7%

49.3%

54.1%

0%

10%

20%

30%

40%

50%

60%

0

50

100

150

200

250

300

350

400

2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue Share

France video programmatic market size & share


€m

%

Alongside the rollout of programmatic video, the transactional mechanisms and programmatic strategies have transformed. France is witnessing the fastest proliferation of private marketplaces in Europe as media owners seek to offer high-value inventory in controlled environments. Open exchanges for video are on a downward trend. At the same

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time, broadcasters are increasingly moving the management of video inventory in-house and to new partners out of the cooperatives, which paved the way for programmatic. We expect cooperatives to remain important market players, but see upside for the programmatic market as a whole by such broadcaster moves. It incentivises the release of more inventory into the programmatic market, allows higher valuation of inventory not being sold ‘blind in a bundle anymore and enables broadcasters to build a comprehensive cross-platform strategy with programmatic IPTV and in future programmatic TV. As programmatic proliferates, direct sale CPMs are being challenged. Programmatic provides media owners in France with greater evidence for the quality and performance they deliver.

The regulatory environment in France supports adoption of programmatic video. The Sapin law, introduced in 1993, set transparency standards in media deals, requiring that intermediaries only act on behalf of advertisers and not on their own account, and that they reveal any ties they have to media owners or inventory brokers. This law affected agency remuneration, squeezing margins and dampened the discount practices symptomatic of other markets. In early 2015, the government proposed to extend the Sapin law from offline to ‘any’ media. Both the transparency afforded by programmatic channels and new technology fees chargeable for new services provides an opportunity for agencies to simplify legal compliance and to improve margins. Advertisers also embrace this transparency, leading to a strong push from the buy-side for programmatic adoption. A strong liquidity of supply and demand in the French market further generates agency interest in programmatic.

3.5. ItalyItaly is a programmatic video market waiting to happen, and we expect the market to explode in late 2016 and 2017. Programmatic video is at the forefront of publishers’ considerations, yet so far ambition and plans have outweighed programmatic practice. The reasons are mainly structural. Italy is a strong TV market and digital budgets are usually fixed after TV negotiations have been completed, putting the development of the digital video market at the mercy of trends in TV, meaning that today it is still a reactive, rather than a proactive market. Agencies in Italy value the margins they obtain from TV and often see digital investment as a secondary consideration. We also see parallels to Germany in the sense that there is a strong concentration of supply on few media owners with stable CPMs which means that price increases through programmatic efficiencies are not as easy to come by as in more fragmented and diverse markets such as the UK.

58.7%

66.4% 71.4%

49.4%

28.2%

17.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2015 2016 2017 2018 2019 2020

Italy growth acceleration until 2017


%

In addition, Italy is a very relationship-driven market where buying and pricing decisions are partly made on the basis on personal connections and obligations. These relationships also affect programmatic development. A strong physical presence of programmatic market participants and local experts known and trusted by the market is key for facilitating programmatic growth. Foreign companies dominating programmatic technology have initially received scepticism and soon realised that managing the Italian market remotely from another country did not yield the desired outcomes. In 2014 and early 2015, our analysis shows that technology providers from across the ecosystem have set up, or drastically increased their physical presence in Italy, building an environment of trust. Players have realised that despite the name,

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programmatic is not merely about technology. Relationships remain of vital importance.

On the media owner side, local experts in programmatic have been a limited resource in the past. Leading Italian media owners have begun to hire local programmatic experts and build programmatic teams over the past 12 months. Once these teams are up and running, and given a growing ecosystem of locally embedded intermediaries, programmatic as a whole will accelerate. We expect that an initial focus on programmatic display will be complemented with increased video-specific efforts in 2016.

Key for Italian growth in programmatic video is the data situation. Privacy laws in Italy are ambiguous. The unclear regulatory landscape has hampered media owners’ development of proprietary data strategies and third party data is close to non-existent in Italy. We consider the revision of European data protection regulation and the establishment of the EU Digital Single Market as major drivers for improving volume, quality and utility of available data. To date, the vast majority of programmatic video revenue comes from global platform players with first party data. We put the share that programmatic commands of all video revenue at 12.3% in 2015, but the figure is much lower if we only consider local media owners. Yet Italy is a market ‘on the cusp of getting there’, as one participant to our study articulated. We remain bullish about the programmatic potential in Italy and see the market to rapidly scale to a strong middle position among European markets by 2020, when we expect programmatic to fetch 46.6% of all video advertising revenue.

2 6 24

38 64

109

163

209

245

1.4% 3.4% 9.1%

12.3%

17.7%

27.1%

36.6%

42.9% 46.6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

50

100

150

200

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300

2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue Share

Italy video programmatic market size & share


€m

%

3.6. nordics (Denmark, Finland, norway, Sweden)

Nordic advertising markets are among most digitally mature markets globally. A late liberalisation of the TV advertising market with comparably low shares of TV advertising market shares, strong legacy print brands, rapid media consumption changes, a strong digitally-minded and well educated work force paired with healthy media owner balance sheets have propelled digital growth. In 2014, 41.2% of all advertising revenue in Denmark was generated from digital media. In Sweden, this figure stood at 37.3%, in Norway at 31.3% and in Finland at 22.2%.

Amidst rapid media consumption changes, TV advertising budgets are beginning to erode, pressing local media owners to absorb audience migration and fragmentation digitally. In particular legacy publishers have been fast to adopt digital video strategies with broadcasters following suit. Nordic media owners were among the first in Europe to recognise that transitioning to digital business models required organisational restructuring and new ways of strategic thinking. These are reflected in closer alignment between traditional and digital sales teams, which are often located on the same floors in close proximity and the establishment of digital innovation units.

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0%

10%

20%

30%

40%

50%

60%

2012 2013 2014 2015 2016 2017 2018 2019 2020

Denmark Sweden Norway Finland

Nordics: programmatic share of video NAR


%

Programmatic video has found a fertile ground in this environment due to a digital-centric market culture. Just as traditional and digital sales teams are not separated by an ‘iron curtain’ as in other markets which hampers innovation, programmatic and non-programmatic direct digital sales forces are collaborating closely, with a growing number of sales teams even working across both programmatic and non-programmatic direct deals. Our analysis of publisher selling strategies shows that increasingly even non-programmatic direct buys are logged in programmatic transaction systems, meaning that the division between programmatic and non-programmatic deals is becoming ever more artificial. In such a sales strategy, a direct deal via a sales agent would need to compete with offers received programmatically, and if the price is right, would be given preference. The division between programmatic and non-programmatic then increasingly is one of priority access to guaranteed inventory, rather than a rigid dualism as in other markets.

As a consequence, programmatic video markets in the Nordics are picking up quickly, reaching close to 50% of all video advertising revenues by 2020.

In terms of size, Sweden is ahead of Norway, followed by Finland and Denmark.

0

10

20

30

40

50

60

70

2012 2013 2014 2015 2016 2017 2018 2019 2020

Denmark Finland Norway Sweden

Nordics: video programmatic NAR


€m

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Broadcasters have only recently entered the programmatic video markets in order to better understand structure, dynamics and best practices. This careful approach has served broadcasters well and prevented them from getting ‘burned’ by a faulty strategy. It demonstrates that programmatic is neither good nor bad for pricing and bottom-line per se, but that any good technology requires a good implementation. A major deterrent for broadcasters was the issue of fraud in 2014 which affected ecosystem trust and media owner CPMs. This has been a valuable opportunity to enter the market for broadcasters who provide a safe and controlled inventory. Buyers have been willing to pay higher CPMs for the guarantees that a broadcaster can provide.

Nordic markets are supply-constrained, which puts media owners in a strong position to keep up CPMs. While this might act as impairment for programmatic growth, this has not happened in the Nordics. Agencies have led the way in requesting programmatic buying techniques and media owners have put these requests into practice. A key reason for complying with these buy-side requests is the need of media owners to generate scale beyond what are fairly small markets measured in terms of absolute population. Digital is a scale business, also in a premium environment. Agencies need programmatic to reach global supply, and media owners require it to scale demand, either globally or across the Nordic region, or even a larger share of the local market beyond their own audience. Leading publishers are active across several Nordic countries, and programmatic provides them with efficient means to connect demand beyond national boundaries. Broadcasters have begun to operate their own ad networks and taken over sales house duties from third parties to build larger scale nationally.

Our interviews testify that programmatic video volumes ‘increase over night’ and in aggregate we consider the Nordic region six to eight months behind leading European programmatic video markets such as France and the UK. The rapid rise in programmatic video is evidenced by the growth of active DSPs in a market. In Norway, we saw the number of active DSPs (demand-side platforms) grow by 300% between Q1 2014 and Q4 of the same year, and similar triple-digit growth in Denmark and Sweden. Deployment was more contained in Finland.

11

22

25

30

0

5

10

15

20

25

30

35

Q1 Q2 Q3 Q4

Active DSPs in the Nordics in 2014


Q1-Q4 2014 growth: +172.7%

The differences in DSP activity also point at structural differences between markets. Denmark and Sweden lead the way in terms of overall DSP activity. The high growth of DSP activity in Norway comes from a low base. Finland is still trailing behind the other Nordic markets due to a smaller and less mature digital market, lower synergies across other Nordic countries and more robust traditional media revenues, however we expect it slightly ahead of Norway due to the higher need to aggregate supply in the market and due to strong media groups operating also in the leading Dutch market. Overall, we expect convergence in programmatic market maturity by 2020 with little differences in market penetration. In terms of size, Sweden will be leading the Nordics.

By 2020, we expect Nordic video advertising markets to generate between 43% (Finland) and 49% (Denmark) of their revenues programmatically. Current constraints for higher programmatic video market shares are principally due to a scaled data infrastructure. We believe that a consortium between leading publishers in overlapping markets to bundle

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data and aggregate supply would provide a key source for further growth. Although we consider it probable, as tangible evidence for such an initiative is still limited, we have not factored this into our forecasts in order to avoid speculative factors influencing a market assessment from today’s perspective.

3.7. SpainAccording to common logic, Spain should be trailing the rest of Western Europe in terms of programmatic video development. The Spanish economy has suffered severely since 2007 and the advertising market is just returning to growth from a deep double-dip recession. In 2014, for the first time, TV and other media recorded healthy figures. This environment normally would not be conducive to programmatic video growth, as for instance evidence from Central and Eastern Europe suggests. However, the Spanish programmatic video market is in good shape and ahead of other European countries. In 2015, 11.5% of all video advertising revenue was generated programmatically, a figure that will increase to 46.5% by 2020.

Audience migration to digital media and CPM deflation both on traditional digital media has triggered media owners to innovate and to understand market pressure as a chance to accelerate the future. 2014 saw the launch of a broadcaster private marketplace, initially with unsold video inventory, to test programmatic video and enhance CPMs. Publishers in Spain have also seen the opportunity which the Spanish language provides, offering the a potential audience in other countries, in particular Latin America. Such foreign impressions historically have been wasted and programmatic permits publishers to monetize a much larger audience. Spain thus is a market where both the economic environment and the promise of global scale have created a fertile ground to leverage programmatic efficiencies.

1 4 10 15

41

57

69

82

98

1.5% 4.5% 9.3%

11.5%

28.1%

34.1% 37.5%

41.8% 46.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

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40

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120

2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue Share

Spain video programmatic market size & share


€m

%

At the same time, the structure of the Spanish programmatic video market is changing. Initially it was dominated by networks, but after gaining valuable experience and confidence, publishers are ramping up their own capabilities and taking more initiative and control over programmatic deployment. We believe that this will fuel the rise of more premium inventory being sold programmatically, improving the ratio between volume sold and revenue generated in favour of programmatic revenue. A further boost will come from the fact that publishers already cooperate on the programmatic display side through audience extension networks, providing the basis for further cooperation in video.

3.8. UKThe UK is among the leading programmatic video markets in Europe. Only the Netherlands has a higher share of video revenues generated programmatically. In terms of market size, the UK is the undisputed leader, generating more than one third of all programmatic video revenue in Europe in 2015 (36.1%). A number of factors place the UK on the road for programmatic ubiquity by 2020, when we expect 60.1% of all video advertising revenue to be generated programmatically. These factors are located across the buy- and the sell-side and supported by structural and economic factors.

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10 36 86

135

222 280

385

492

602

4.0% 11.1%

18.5% 22.8%

32.2% 37.2%

46.3%

53.8%

60.1%

0%

10%

20%

30%

40%

50%

60%

70%

0

100

200

300

400

500

600

700

2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue Share

UK video programmatic market size & share


€m

%

The UK is the largest digital advertising market in Europe. In 2014, digital in aggregate (including paid-for-search) overtook TV as the leading advertising medium. Audience migration to digital is faster than in many continental markets, a stable UK economy and lack of exposure to the Euro crisis has fuelled advertising market growth when continental markets were either flat or down.

Technology intermediaries have seen the UK as the first stop across the Atlantic to build a programmatic infrastructure, leading to both a strong presence of players and high programmatic literacy across the value chain. This is complemented by strong local players born in the UK.

Agency remuneration differs from markets like Italy and Spain, providing greater incentives to build programmatic capabilities. The digital market is also more fragmented from a media owner side, giving the buy-side more power in driving market structure and allowing greater efficiencies through the scale that programmatic provides. Agency trading desks already expect to generate more than 50% of all revenue from video programmatic in 2015.

At the same time, many UK publishers have been early in building digital business models and possess strong in-house skills. As in Spain, the promise of a global English-speaking audience has triggered considerations to better monetize international audiences. In March 2015, publishers have deployed their own UK interpretation of the French cooperative model through the launch of Pangea, including The Guardian, CNN International, the Financial Times, Reuters as founding partners, and The Economist. Sky in particular and more recently Channel 4 have built strong initiatives for a data and programmatic business. The majority of growth in the next five year will come from broadcaster video moving to programmatic. For UK broadcasters to date the focus is on automation and data overlay, and not on traditional SSP-style programmatic.

Alongside this, further growth comes from a changing structure in the programmatic market towards private marketplaces and programmatic direct deals. The combination of strong technological literacy, a large presence of players and a lot of premium inventory means that the UK will lead the development in Europe to a diversified portfolio of programmatic transaction types. We expect the UK to slowly close the gap to the US, where programmatic video will exceed 60% of the video market by 2019, compared to 2020 in the UK.

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4. A perspective on publishers

4.1. Broadcaster programmatic: from periphery to centreSimilarly to mobile or video, programmatic is one of the key drivers of online advertising and has grown very strongly in the last two years across all European markets. In 2013, this growth was mostly catalyzed by the demand-side who was calling for more transparency and accountability of online video inventory from technology intermediaries and video publishers. In 2015, programmatic video growth in Europe is still forecast to be double-digit at 55.3%, however now the broadcasters and publishers are the stimulus behind the growth. They are innovating in video content and actively exploring advertising technology in-house, through partnerships and acquisitions. Broadcasters have moved from the periphery to the centre of programmatic video discussions and are now building rather than reacting to the market.

4.2. Typology: how publishers are embracing a programmatic mindsetIn 2013, most publishers were still in the early stages of coming to terms and exploring programmatic video advertising. Many actually considered whether or not to enter the programmatic market at all. In 2015, many European publishers have embraced a programmatic mindset and are exploring different strategies. The below table presents three types of publisher strategies: acquisitions, partnerships, and in-house programmatic capabilities. These categories are not mutually exclusive and most publishers adopt a mix of these strategies to best address their programmatic needs.

Media owner typology

Acquisitions Partnerships In-house programmatic capabilities

Rationale Safeguarding for a programmatic future: even if the acquisition is not (immediately) integrated, broadcasters/publishers recognize the future need for programmatic capabilities to execute their advertising

economies of scale: media owners can employ advertising technology without investing capital to develop programmatic capabilities from scratch or acquiring a programmatic company

Tailored programmatic capabilities: technology is developed with the specific broadcaster/publisher’s needs delivering the most accurate programmatic product

Shaping the programmatic landscape: as shareholders broadcasters/publishers can inject capital to accelerate ad tech capabilities of their acquiree and shape their business strategy to best fit their needs

A plethora of choice: broadcasters/publishers can partner with numerous companies to ensure their inventory is available to the largest, available client base

Data protection: broadcasters/publishers can preserve their data within their company avoiding the risk of arbitrage

Benefits Control over first party data, inventory and programmatic mechanisms

Flexibility

Openness

Control over first party data, inventory and programmatic mechanisms and demand-side extension

Challenges May limit client base available from other programmatic companies

Difficulty in distinguishing between advertising technology partners and less influence in shaping partners’ business agenda

Cost

Exclusivity

Typical player Broadcasters Broadcasters, legacy print players and digital natives

Legacy print players and digital natives


4.3. Publisher cooperativesIn 2013, French publishers started cooperatives to trade premium advertising inventory programmatically in a collective manner in a bid to increase their trading power. This has since been adopted in many other European markets (Czech Republic, Greece, Spain) however this approach is not universal. IHS has found that publisher cooperatives are likely to develop in:

1. Demand-driven markets: where agencies have too much power for individual publishers to counter their pressure.

2. Scale-hungry markets: where partnering up provides opportunities to gain from economies of scale, either because the local market is too small or fragmented, or because local media owners see the need to partner against cannibalisation threat from global platform providers.

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IHS expects to see more cooperatives across Europe in the Nordic region where many companies sell advertising across numerous markets, and in CEE countries, where programmatic is still nascent and publishers are still mostly unfamiliar with programmatic mechanisms

But conversely, IHS has also identified a boomerang effect in those markets with established cooperatives, where as broadcasters and publishers move more of their video inventory into programmatic and become more tech-savvy and literate with programmatic technologies, they opt out of these cooperatives in favour of developing a proprietary programmatic strategy. We expect to see this from the biggest European broadcasters in the Big 5 markets as these players can maintain scale as a solitary entity.

4.4. Partner, build, acquire: new strategic imperativesThe uptake of programmatic video stands in the wider context of a changing self-perception among media owners. Audience-based buying facilitated by programmatic technologies has created an environment where value shifts towards those who hold data, the means of processing it at scale, and the technology to connect demand and supply. For media owners, being the end-point in the advertising value chain and being limited to proprietary audience increasingly is insufficient to ensure a sustainable digital business. Moreover, global platforms, agencies and infrastructure providers are creating horizontally and vertically integrated operating systems for the production, distribution and monetization of content and audiences. Advertisers gradually take advance of the efficiencies created through such aggregation. In light of these structural transformations, the future of digital video monetization for media owners increasingly becomes a question of strategic acquisitions and partnerships to generate scale and/or expand into the functionalities of intermediaries. Publisher cooperatives and jointly-operated private market places are an example of this. Yet increasingly media owners also become ecosystem builders themselves and acquire a technology stack.

Acquistion timeline

Date company Acquisition* Value

Jul-15 ProSiebenSat.1 smartstream.tv (majority) ND

Jun-15 ProSiebenSat.1 Virtual Minds (majority) ND

May-15 Verizon AOL (full) $4,400m

Feb-15 WPP Appnexus (minority) $25m

Nov-14 Publicis Sapient (full) $3,400m

Nov-14 Yahoo Brightroll (full) $640m

Oct-14 Telstra Videoplaza (full) ND

Jul-14 RTL Group SpotXchange (majority) $144m

Jul-14 Yahoo Flurry (full) ND

May-14 Google Adometry (full) ND

May-14 AOL Convertro (full) $89m

Mar-14 Comcast FreeWheel (full) $320m

Feb-14 Facebook Liverail (full) $382m

Feb-14 Oracle BlueKai (full) $408m

Aug-13 AOL Adap.TV (full) $405m

*Represents full, majority & minority stakes. ND is non-disclosed. List non-exhaustive, focus on broadcasters & their competitive set.


Agency

online technology platform

Broadcaster

cable provider

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5. conclusionProgrammatic video advertising in Europe is on the path from experimentation to ubiquity. Yet this does not mean exclusivity. Different publisher strategies and market contexts provide varying growth trends and manifestations of programmatic video.

Unlike banner display advertising, programmatic video is unlikely to generate more than 65% of total video advertising revenue in the mid- to long-term as the direct premium sell is still the standard in brand advertising. In some markets, broadasters also continue to bundle linear TV and online video buys, which means that future growth is hampered unless the paths of programmatic video and programmatic TV begin to cross. We expect this to be a long way out in Europe.

However, as video becomes a key destination for budgets formerly reserved for traditional TV advertising, video will emerge as the largest programmatic category in Europe in terms of absolute size, ahead of banner display.

Yet the battle for video advertising budgets is becoming increasingly competitive. In order to capture them, broadcasters and publishers must have the programmatic tools to serve advertisers, target digital audiences and compete with technology companies like Facebook and Google whose advertising strategies are increasingly focusing on video advertising.

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6. Definitions

6.1. ProgrammaticAdvertising revenue that is generated through transactional or workflow automation mechanisms embedded in an infrastructure that relies on a set of rules applied by software and algorithms, commonly known as ‘ad tech’. Following the IAB’s proposed taxonomy, ‘programmatic’ here is an aggregate category that is composed of four discrete transactional models, each of which we consider a sub-set:

1. Automated Guaranteed

2. Unreserved Fixed Rate

3. Invitation-Only Auction

4. Open Auction.

Advertising revenues are recognized as ‘programmatic’ whenever any of those mechanisms applies, irrespective of the inventory owner’s awareness of their involvement. This means that revenue is also considered programmatic if inventory that is originally sold to an intermediary through non-programmatic means (e.g. agency bulk buying) is re-sold to an end-buyer programmatically. Revenue is recognized as programmatic irrespective of whether the inventory owner acts directly or indirectly via an intermediary.

(Source: IHS, IAB Europe)

6.2. Video advertisingDisplay advertising which principally takes the form of:

• in-stream video advertising (pre-rolls, mid-rolls, post-rolls)

• in-stream banner overlays

• out-of-stream video advertising (e.g. self-play video on social network, not embedded in non-advertising video content)

• in-banner video advertising

• in-text video advertising

• contextual video advertising (e.g. branded video players, contextual banner advertising sold against video content).

(Source: IHS, IAB Europe)

6.3. net advertising revenue (nAR)Specifies a rate of revenue. NAR means revenue generated by a media owner (e.g. publisher, broadcaster) that is net of any fees, commissions, service charges and any other deductions.

(Source: IHS)

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IHS Customer Care:Americas: +1 800 IHS CARE (+1 800 447 2273); [email protected] Europe, Middle East, and Africa: +44 (0) 1344 328 300; [email protected] Asia and the Pacific Rim: +604 291 3600; [email protected]

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September 2015 technology.ihs - SpotX...by law, IHS shall not be liable for any errors or omissions or any loss, damage or expense incurred by reliance on information or any statement