Wednesday, January 29, 2020

CTV's "Walled Garden Risk" and Implications for Trade Desk

A few months ago I did a write-up about Trade Desk (TTD) here. That article focuses on TTD's upside and provide some context for this post. Here's a quick note on what I consider the biggest risk.

The long thesis is heavily predicated on the development of Connect TV (CTV) market, so any risk should focus on that area as well. Specifically, I'm watching out for any signs that the CTV market becomes vertically integrated walled gardens, which could shut out third parties like Trade Desk.

It is a somewhat theoretical concern. The idea is that a nascent industry needs vertical integration to maximize efficiency and work out the kinks, and that firms can "modularize" too early.

I wonder if CTV is that case. This is a risk not just for TTD, but for all independent 3rd parties like Telaria and Rubicon.

Are there in fact some advantages to vertical integration? There are signs the answer is yes. I'm just not sure how strong these advantages are and if they are enough to force the entire CTV industry to go walled garden.

Where Aggregation Happens, and Advantage of Integration

A couple discussion points below:

1. Here's an article on how Amazon has been pushing its SSP. This could be viewed either way. 

The negative take is that Amazon sees potential fragmentation coming to the CTV industry (not just Amazon Fire, Roku, Apple TV, Android TV but also players like Xbox, Samsung, Playstation, Comcast...etc). In case viewership fail to aggregate at the CTV platform level, Amazon wants to be able to aggregate them at the SSP level. 

As Amazon Publisher Services (APS) signs up more CTV platforms, this aggregation of eyeballs gives it negotiating leverage over ad buying platforms like TTD.

The article also indicates that Amazon's SSP is best used with Amazon's DSP. Whether Amazon extend that optimization to its partnership with TTD remains to be seen. Again, Amazon has the leverage here.

The positive take (for TTD) is if Amazon's SSP could be used on say Xbox or Playstation, that further shifts CTV industry away from walled garden approach. Also, APS actually allows ad buying from Trade Desk, so the more platforms APS hooks up with, the more TTD benefits.

2. Here's a discussion on advantages of vertical integration.

Basically the SSP can send data to some DSPs and not others. This would allow those DSPs to target better.

Signals of Changes in Industry Structure

The strongest CTV platforms are Roku, Amazon Fire, Apple TV and Android TV. Their decisions will determine the industry landscape.

For a while Amazon appeared to be going away from walled garden model with its deal with Trade Desk and Dataxu. But it recently dropped Dataxu after the Roku deal.That leaves TTD the only DSP capable of buying CTV ads on APS. This makes me wonder about Amazon's commitment to the open internet model.

The publishers have a say as well. It's important to know that Amazon's SSP actually owns only a portion of Fire TV ad inventory. As long as publishers can use their own SSPs, it's hard for the CTV industry to go totally walled garden. See comment on Reddit below:

TTD and DataXu are the only ones with access to Amazon fire inventory via Amazon SSP (or Amazon Publisher Services or whatever they call themselves these days). That makes up probably 20-30% of Amazon hardware CTV inventory. Publishers like Sling TV, Xumo, Pluto TV, etc., who have Amazon CTV apps still can sell that inventory via whichever SSP they choose to work with - SpotX, Telaria, FreeWheel, etc., and those SSPs offer access to DSPs other than TTD and DX

Source here

In conclusion, we need to watch out for 2 things on vertical integration: 1) Do CTV platforms allow publishers to use 3rd party SSP's?  2) Do those SSP allow 3rd party DSPs?

The answers to both have to be "no" for the industry to go "walled garden". So for now I think the probabilities are small.

If 3rd party SSP's like Telaria get bought out by a CTV platform, say Roku or Google, that would indicate a shift back toward walled garden, and be negative for TTD.

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