What you need to know:

• Seven companies now account for a third of the total value of the US S&P 500 – and the bulk of their collective trillions in market value comes from marketers and advertising.
• A crazy number, but Terry Kawaja, the fast-talking founder and CEO of top adtech investment bank Luma Partners, reckons another wave of advertising and marketing related tech spin offs is incoming.
• After a barren adtech M&A period, he sees fresh action in creative tech, but also a badly needed wave of consolidation to scale the disparate adtech industry and wipe away some of the dirt that’s “materially” hurting valuations.
• Fewer bigger companies are required – especially in the face of retail media’s rise. He thinks it will eat a third of open web ad dollars.
• More broadly Kawaja says industry’s response to privacy regulation has been “stupid” and it’s now paying the price.
• He also backs those shining a disinfectant light on bad data and poor industry practices to force change. “There is a lot of junk,” admits Kawaja.
• Meanwhile, he thinks Google’s antitrust cases could end up benefitting Alphabet, it’s shareholders and the broader industry – everyone, in fact, apart from Apple, which Kawaja reckons stands to lose $20bn a year.
• There’s a whole lot more in the podcast. Get part one here.

Problem child

Adtech “refuses to grow up,” says Kawaja. Just about every other industry goes through start-up innovation, then maturity, then consolidation phases. Adtech remains a sprawling, fragmented tribe, with many a recalcitrant teen stashing tissues under the bed. “There is a problem,” admits Kawaja. “We still have this massive fragmentation, and that enables people to hide, it enables people to do nefarious things.”

Some of those activities amount to “crimes”, says Kawaja, but he files most of the bad stuff under “shenanigans”. Either way he says take-rates, or the cut, commanded by ad tech, “forty per cent plus” versus a low single digit margin for TV, “makes no sense”.

In the early days, “I was fine with six, seven different intermediaries all trying to make their 20 per cent margin taking a piece, because the technology was in the innovation curve. We're well past that – it's now one of the biggest industries in the world, and it's time for it to grow up.” Sixty SSPs is a tad over-served, he says. "What's wrong with ten?"

To compete with big tech walled gardens, adtech has no choice but to grow up, Kawaja repeats. It needs scale, now, because retail media is the next big wave.

“Retail media is … going to usurp, potentially, a third of the open web spend. So that's quite material – and from a near standing start.”

Kawaja says he saw it coming.

“In 2008 people thought I had lost my head when I said Amazon's getting into media. They thought I was crazy. Then in 2015 I sold HookLogic to Criteo to enable their pivot from a retargeter into commerce media – so we've been seeing this trend for quite some time. Not everybody listens, but the point is it’s [not just] retailers, it’s merchandisers, it is delivery companies, it is travel and hospitality companies, it is finance outfits – JP Morgan, PayPal and Klarna all have media networks now. Heck, even Palantir, a defence company, announced that they were going to be optimising their data stream,” says Kawaja.

“Don’t get me started on AI … but AI companies now are pursuing advertising models as well. So adtech is eating the world.”

Bad for business

While bad behaviour persists, “That’s on the margins,” Kawaja insists. What about reports that suggest fraud or junk inventory is as high as 30-40 per cent?

“It’s not that much,” says Kawaja. “I’m familiar with the ad fraud zealots.”

But it’s not just about ad fraud zealots. What about the mountains of junk data that arguably underpin the entire industry, such as the laughably poor segmentation uncovered by former UM privacy chief Arielle Garcia? (Garcia accessed her own profile from an adtech vendor and found she was bucketed within 500 highly contradictory audience segments where she is simultaneously woman and man, below and above the poverty line and works in food service and defence contracting. She says data brokers are incentivised to put people into as many segments as possible to earn more money – rendering redundant much of the premise of data-driven targeted advertising.)

“There is a lot of junk,” Kawaja concedes, “and I herald all of these efforts by these different groups to bring it to light.” While “some take it too far … bringing it to light is essential … there are dark corners and sunlight is the best disinfectant.”

Curbing junk data and sharp practice would also help dealmakers like Kawaja, as well as adtech companies – because the dirge is creating drag on their valuations.

“It is material, I think it is contributing [to lower valuations],” says Kawaja. “Advertising technology stocks right now on average trade at three, three and a half times revenue. That is a terrible valuation. The ‘shenanigans’ … is definitely a pall on valuations for adtech companies and so it is material and needs to be addressed.

“But it is a separate point from the opportunity – the TAM (total addressable market) – that I see being enormous under the rubric of this concept of adtech is eating the world, which is to suggest that any company with large amounts of consumer data has a real opportunity to pursue media.”

Inappropriate response

Kawaja is convinced advertising is going to get better – at least partially due to an incoming investment wave in creative tech. But he acknowledges that there are a lot of things to fix. He also accepts that some may be sceptical of jam tomorrow cheerleading, given data and tech were supposed to create a personalised ads nirvana but in fact just pissed off consumers, spawned an ad blocking industry and poked data privacy regulators with a big stick.

“It’s been a failed promise,” admits Kawaja – and industry probably hasn’t helped itself with the disdain that characterised its collective response to consumer and regulatory concerns.

“My biggest chagrin about this industry is it has done a terrible job of defending itself. When privacy came, I thought, ‘What are you doing industry?’ How stupid are you to have addressed privacy concerns the way they did? Swagger, arrogance, knee-jerk responses. It was like the Shaggy song, ‘It wasn’t me’,” suggests Kawaja.

“It was terrible. [Industry] did themselves no favours, because they kept saying, ‘Yeah, but ads are more relevant’. Meanwhile, consumers said, ‘Wait a second, you're saying that ads are more relevant. The only manifestation we're seeing is this bullshit retargeting ads – the same lamp that I bought two weeks ago is following me around the internet’.”

He says CTV has likewise damaged its prospects by screwing up the basics, with “kludgy ad loads, ad pods where you get absolutely no cap on repetition and bad loading. Come on guys, television works perfectly. Why can’t you make this work?”

Pipsqueek on pipsqueek action

No industry is perfect, and “there will always be noise in the system”, says Kawaja. “But I think we can materially improve the quality”. He reiterates that consolidation from the “fragmentation wild west” will be required to drive those improvements.

“I think actions are a function of environment, and the environment is highly fragmented – that allows people to hide.” The question is who will drive that consolidation.

“We need scale players. Right now, our pallbearer is The Trade Desk, and at $55 billion market cap, it's a pipsqueak, it's nothing. Jeff Green (The Trade Desk’s CEO) is right about almost everything that he says – the open internet is important, and we need scaled companies who can take on the big guys. He's been successful, and maybe a couple [of players] in the mobile app space, but then I'm done. Everyone else is sub ten billion market cap. Most of them sub five billion. You can't put a dent in anything with that,” says Kawaja.

“So I think consolidation amongst the also-rans in the open internet to build scaled, independent competitors [has to happen].”

Which is where he thinks the Google antitrust cases could yet solve some broader problems.

Google playing to lose?

In its current adtech trial versus the Justice Department, it’s yet to be seen whether Google is judged guilty of breaching the Sherman Act and therefore guilty of antitrust. Even if that transpires, appeals could take years.

But Google has already been found to be a monopolist in search – a decision that Kawaja thinks should have Alphabet’s shareholders in private punching the air. Apple and its shareholders less so.

“I think Google being found guilty in the search case is probably the best thing that could have happened to Google,” he says.

“Right now, they spend upwards of $25 billion to different people, largely Apple, to distribute their search app as the default on your phone. Well, if the government said you can't do that anymore, fine, they get to keep the $25 billion, all of which goes directly to the bottom line.

“There is no [longer] cost associated with those deals and you would be free as a new iPhone purchaser to select the search app of your choice. What are you going to pick? Google. Why do I know that? What's the number one search term on Bing? Google. What’s the number two search term of Bing? YouTube. So in other words, Google has already won hearts and minds,” says Kawaja.

“In 2025, whenever those distribution deals come off, my guess is left to their own devices, consumers will pick Google … they'll save $25 billion a year and still have that incredible market share,” he adds.

“So I think search is a bit of a no brainer to have been found guilty. And if it turns out that the Google legal team, as brilliant as they are, that this was their long game all along? That's like a novel anyway.”

Trebles all round

Playing for a loss may likewise be a smart strategy for the adtech antitrust trial. Some observers have already expressed “bafflement” at Google’s legal team’s apparent inability to put up a good fight – and hence the case ending early.

Perhaps that's the whole plan. Should Google be found guilty and be forced to break up its adtech business, Kawaja thinks Alphabet shareholders will again hit pay dirt – but the broader industry would also win and in a happy coincidence, M&A dealmakers would likewise hit full pig in shit mode.

“I would say there is a decent shot that Google is found guilty. They could run this out with umpteen appeals, but I don’t think they should.

"Google's made the case that it would be impossible to pull this apart. Bunk,” says Kawaja. “It’s not trivial, but you absolutely could pull it apart."

He’s run the numbers on the key components that make up the whole – “and if that whole thing were to be divested, point number one is it can’t be sold,” reckons Kawaja. “I am of the view that transaction [for a company that then becomes DoubleClick or variant thereof] … would be in the $75-100 billion range,” he says.

“There's no company large enough to purchase that, there’s no private equity consortia large enough to purchase that. So the form it would take would be a pro rata spin off to Alphabet shareholders. In other words, Google’s owners would benefit,” says Kawaja. “You would just separate it from Google O&O (owned-and-operated assets).”

“Time and time [again] analysis has shown that when companies get broken up, the sum of the parts is greater than the whole, and so Google shareholders will benefit as a result of this spin off. The adtech ecosystem would be oxygenated – lots of competition, lots of new opportunity for all players. Advertisers would benefit. Publishers would benefit. Consumers would benefit. Heck, adtech folks, investment bankers, would benefit greatly, because there's a spike in M&A. So I think everybody benefits.”

That includes Google operationally as well as financially.

“Right now, this [adtech] business is the lowest growth, lowest margin, highest headache business of Google writ large," per Kawaja.

“For them to be freed up from this so they can focus on YouTube and Google Cloud and all the Google search and all the higher margin, higher opportunity things that they should be focused on without being under the lens of government scrutiny, I think would be a huge benefit to Google. It'd be a huge benefit to this DoubleClick Google adtech spun-off business.”

Meanwhile, Kawaja reckons YouTube inventory, freed from the self-imposed confines of the Google stack, would see a significant bounce.

“I would say YouTube's yield goes through the roof. Why? Now you've got The Trade Desk and DV360 and Yahoo DSP and Criteo and every other DSP now competing to represent them,” he suggests.

“So I think the win in all of this is a guilty verdict – as it turns out, even for Google.”

Want more? Get the full download via the podcast.