Adobe is getting out of the adtech managed services businesses. CEO Shantanu Narayen told investors last week during a Q2 earnings call the company will not continue to offer its Advertising Cloud transaction services.
It marks a significant retreat for the marketing tech leader and may raise some questions in the mind of corporate buyers about the extent to which advertising technology and marketing technology belong in the same integrated cloud, although industry leaders still believe this is the way forward.
Adobe’s advertising cloud is based to a significant extent on Tube Mogul, which it bought in 2016 for $US540M.
Interestingly Phil Fernadez, the founder of Adobe’s Marketo offering – which was acquired by Vista Equity Partners in 2016 for $US1.8B and subsequently sold to Adobe in 2018 for $US4.75B after his departure – told Which-50 at the time that he was skeptical about the whole ad tech market.
In an unpublished interview, he said that the business model was simply too different to marketing technology. He also noted at the time that the whole sector seemed to be boiling down to Google and Facebook, a trend which has continued since his departure.
Since 2013 Adobe, Salesforce and Oracle which have the three largest marketing clouds have been buying up adtech solutions and integrating them into their offerings either directly or as aspects of other cloud solutions they market. It has not always been smooth sailing, as Oracle’s troubles with its DMP Blue Kai recently attest after billions of its records spilling online due to lax security.
For now, at least Adobe’s Narayen is still singing from the integrated martech/adtech songbook, “CMOs want a single source of reporting and attribution for their advertising investment, which we can uniquely offer through the combination of Advertising Cloud and the Adobe Experience Cloud. ”
Speaking to investment analysts he said, “We have decided to accelerate our previously stated strategy of eliminating the low-margin Advertising Cloud transaction-driven offerings. These offerings are no longer core to our overall value proposition of delivering on customer experience management nor contributing to our subscription-based bookings and revenue and in fact, are extremely resource-intensive. ”
Narayen said the impact of this strategic shift was evident in the companies Q2 revenue, and he said, “Cost of goods sold and gross margin results and will be factored into future Digital Experience targets.”
According to an Adobe Australia spokesperson, “Given Covid-19 has further slowed the adoption of a data-driven business model in the TV industry, Adobe is focusing its Ad Cloud strategy on its software solution for search, display, video, audio and connected TV advertising as well as new integrations between Ad Cloud and other areas of Experience Cloud.
The spokesperson said, “We decided to no longer invest in our managed service, transaction-based product for programmatic TV advertising and fully align the business with our Experience Cloud software-based go-to-market strategy. With this shift we’ll be able to increase our investments in other strategic growth initiatives to serve our customers’ evolving needs.”
The company also confirmed it will not be contracting any new TV or digital campaigns on a managed service basis, but added, “Adobe is committed to fulfilling any ad campaigns that are currently running or that we are in the process of contracting.”
Which-50 also sought industry reaction to the news both here and in the US.
Local IAB chief executive Gai Le Roy said, “Adobe is following the market trend to move away from managed services, in this case IO (insertion order) driven media buying, to self-service and subscription-based services.”
“In the latest IAB Online Advertising Expenditure Report only 38 per cent of total display ad dollars, including video, came via an agency IO in the March 2020 quarter versus 58 per cent for March quarter 2019. Large organisations that have invested in the ad tech space will continue to find ways to try to optimise and automate their services,” she said.
Scott Brinker, editor of Chiefmartec said, “In the big picture, I absolutely consider adtech a component of martech, just as advertising is a component of marketing. If we step back from individual channels and tactics, it’s the responsibility of marketing to identify the right audiences for their company’s products and services, find and attract those audiences, engage and delight them, convert them into customers, repeat customers, and brand advocates.”
“That’s a journey with a massive scope and a myriad of different touchpoints,” he said. “Some of those touchpoints are ads, on websites, videos, social networks, mobile apps, etc. But they certainly don’t happen in a vacuum. If your advertising is siloed from the rest of your marketing strategy and operations, you’re doing it wrong.”
High-cost, low margin
Guarnaccia said that given the economic rollercoaster the world is in right now, they don’t want business functions that carry high overheard (people) costs that can’t flex as the market does, “hence they are turning this one down.”
“They are still leaving the self-service version in place, so they can still operate in the market, but through partners instead of staffing it themselves. As to the larger implications of Adtech and Martech, I don’t think it carries that much signal. Adobe is saying they are doubling down on content creators, which is their core business, and we’re seen the same thing at Hootsuite.”
He also said Hootsuite has seen big jumps in publishing and social activity across the board at the beginning of the crisis. “It’s now starting to trend back to pre-crisis levels, but content is always core to customer experience, whether it’s social, web, or any other channel.”
He said he believes that the crisis will accelerate brands’ urgency to transform into a digital-first footprint. “We’re seeing that in our customer base as well. Brands are all rethinking how to be digital-first or even digital-only now given the uncertainty of how long we’ll be living in this COVID-driven world. ”
Locally, Simon Larcey, the managing director of Viztrade said, “With the advertising technology industry moving towards a self-serve model, it was no surprise Adobe announced that it would be shutting down its managed service division. For a company of its size, it makes no sense to keep a declining market or unprofitable division alive. Companies of this size watch the bottom line. It is a numbers game and when the numbers do not add up, they eliminate the drain.”
He drew a comparison with the decision of the local arm of media giant Newscorp shutting down 70+ community newspapers in Australia. “This was a decision based on numbers and made commercial sense for the business.”
“However it would have been a different story had each community newspaper been individually owned, as would Adobe’s decision had the Adobe Advertising Cloud still been TubeMogul.”
“You see small community newspapers would have worked harder and done anything to keep the news going. They would have had no other option as the paper would provide the only source of revenue.”
“And in the same instance, if TubeMogul was still around, their whole business was based on advertising solutions, self serve and managed and they would never have shut it down. They would instead look to improve the managed service they offered so it continued to add value and assist their clients that did not have the time to do it themselves. And they would have done this because they would have no option.”
He also saw at least one positive in the decision. “It may open the door for another independent advertising technology business to pick up the slack and offer an alternative solution. Some brands and marketers will always seek a managed service, it’s just Adobe won’t be providing one.”
Duncan Craig, a senior industry communications executive with extensive experience in the adtech sector told Which-50, it looks like Adobe has given up on digital media trading and taken a quiet exit. “This announcement marks the end of an era for Adobe and it’s three-year foray into the world of programmatic advertising or digital media buying. ”
According to Craig who’s business specialises in adtech communications, “The managed service demand-side platform business has undergone significant consolidation in the past three years, and it’s no longer an attractive growth market, as advertisers have reduced the number of software-based programmatic ad platforms in their stack.”
The advertising spend slowdown was the likely death-knell for this Adobe business unit, and they have indicated that the Adobe Ad Cloud managed service business will only continue as a maintenance business for existing customers, he said. “Self-service will provide a tiny amount of revenue, but they are effectively shutting up shop by announcing no new investment into the space. They can make better money in the Digital Experience area.”
Craig noted that the purchase of TubeMogul in late 2016 was a bid to bulk up Adobe’s Media Optimizer offering, and put them in a position to automate linear TV advertising. “TubeMogul had unveiled their Programmatic TV software solution in 2014 and like many players in adtech they were eyeing the US$70 billion linear TV market in the US. ”
He cautioned that the programmatic TV space is difficult and there have been many casualties. “Adobe is not the first company to fail in this space. A decade ago Google tried to get into the TV space by selling ads through set-top boxes, but got nowhere with the venture and was forced to close the service in 2012.”
That view was echoed by Dave Morgan writing on Mediapost who said, “With the announcement, Adobe joined a long and venerable list of companies that have met their match trying to automate the activation of TV advertising. Remember eBay TV-Ad Auction? Spot Runner? Google TV Ads? Microsoft Admira? Aol/Adap.tv? Videology?
Executive Vice President and Chief Financial Officer John Murphy said COVID-19 drove the decision to abandon the transaction-driven Advertising Cloud deals, as he outlined the impact of the decision to financial analysts.
Adobe seems to be running a “No big deal” communications strategy around this news, but the impact on the company’s performance tells a different story. Fiscal year ad cloud revenues will fall from $US360M to $200M, whereas Adobe originally anticipated growth.
“Together this resulted in a shortfall of approximately $50 million relative to our targeted Q2 revenue. A significant portion of the revenue from the transaction-driven Advertising Cloud offerings is recognized on a gross basis, with the related cost of media purchased recognized as cost of goods sold, resulting in low gross margin percentages for these offerings.”
On the upside, he said the change would drive improvements in Adobe’s overall gross margins, DSO (Days Sales Outstanding) and the profitability of our Digital Experience segment, as already evident in this quarter’s results.
He said the company is now expecting $200 million in total Advertising Cloud revenue for the full fiscal year, of which $70 million will come in the second half, representing a significant deceleration.
“As a comparison, we achieved $360 million in Advertising Cloud revenue in fiscal 2019 and our original 2020 targets assumed that Advertising Cloud would grow at rates consistent with the overall subscription revenue for Digital Experience.”
Despite the ad cloud set back the company still achieved record quarterly revenue of $3.13 billion in its second quarter of fiscal year 2020, representing a 14 percent year-over-year growth. Diluted earnings per share was $2.27 on a GAAP basis, and $2.45 on a non-GAAP basis.
However, the company also indicated that it is withdrawing the annual fiscal 2020 targets. “Our targets factor current macroeconomic conditions, continued impacts of the pandemic and typical Q3 seasonality across the summer months of June, July and August,” said Murphy.
This article has been updated to include comments from Adobe Australia