In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on the trend, "The definition of scarcity is continuously evolving away from linear. What happens next?”
I somehow missed in November that Adam Gerber had left his role as executive director of U.S. investment strategy at media buying agency GroupM. His new role is Head of Client Development, Advertising at Netflix.
I enjoyed quoting Gerber and wrote about him three times in 2022, specifically how he had become central to the debate over measurement across devices. He had become a vocal and pugilistic agitator for change after a GroupM study with iSpot.tv found that 17% of advertisements shown on televisions connected through a streaming device—including streaming boxes, sticks and gaming consoles—play while the TV is turned off. The study also found that on average, between 8% and 10% of all streaming ads were shown while the TV was off.
Needless to say, as for GroupM, Gerber was openly unhappy about wasting 20 cents out of every ad dollar spent. Listening to him at the Interactive Advertising Bureau’s Video Leadership Summit last June, it sounded like the iSpot.TV survey had left him skeptical of all Connected TV data.
Key Takeaway
GroupM's Adam Gerber was a vocal agitator for change in the connected TV ad market. His new role at Netflix is both a bullish signal and raises important questions, too.
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He also had been openly discussing his issues with the walled gardens of advertising: streaming services and CTV devices are too walled off for their data on viewers to be more broadly applicable. As a result, the increasing supply of new data sources was adding complexity to measurement.
I didn’t assume those were signals that he was going to leave. I also don’t know him (we met briefly for the first time at the Summit, and amusingly, he grimaced when I mentioned that I had written an opinion piece for The Information disagreeing with him… implying that he had read it).
I think it’s worth briefly asking and answering, first, why an executive in his position may have left GroupM for a smaller business at Netflix (and, yes, I think that answer is obvious), and second, what it reflects about the ad marketplace in Q1 2023.
Why leave GroupM?
I think there is a simple reason for an executive in his position leaving: Netflix is a growth opportunity, particularly in Connected TV, and GroupM projected ad spend for Connected TV to be going up in 2023 while linear and other traditional media face increasing headwinds.
I wrote in December: “Media companies are headed into recessionary headwinds and advertisers pulling back spend on linear. Even if Connected TV (CTV) spend is going up as linear goes down — the IAB projects CTV spend will go up 14.4% as linear declines by 6.4%, while GroupM envisions the growth in Connected TV to “more than make up” for the decline in linear.”
It’s also worth factoring in something Netflix Executive Chairman (and then Co-CEO) Reed Hastings told the Dealbook Conference last November:
The big thing that I missed is I was on the Facebook board, so I bought in for a decade to the belief that systems relying on data were going to be able to do higher CPMs than anyone else. So Google and Facebook were going to mop up the world — and they have in non-TV advertising.
What I failed to understand is that there is a lot of TV advertising that now couldn’t find the viewers because the 18- to 49-[year old] segment had moved on and were not watching linear TV. And so the advertisers are desperate for connected TV or Internet TV solutions. So that's the real thing that I missed and that we didn't have to steal away the advertising revenue. In fact it’s pouring into connected TV if the inventory is there.”
Netflix may be late to the game, as Hastings conceded (and stories are emerging about executives like CFO Spencer Neumann having a long track record of lobbying Hastings to change his mind on ads, without much success). But they are entering at a time when demand is growing.
Netflix’s growth opportunity
Netflix has global scale (231MM subscribers), and an exclusive partnership with Microsoft’s Xandr. It has launched its ad tier in the U.S., UK, Australia, Japan, Brazil, France, Germany, Italy, South Korea, Canada, Mexico, and Spain. It told investors “While it’s still early days for ads and we have lots to do (in particular better targeting and measurement), we are pleased with our progress to date across every dimension: member experience, value to advertisers, and incremental contribution to our business.”
In Q4 Netflix fell short of ad-supported viewership guarantees made to advertisers and allowed advertisers to take their money back for ads that have yet to run. Digiday reported that those with shorter flights for the holidays took the money back, while others asked instead to move their ad dollars to the first quarter of 2023. But, as MobileDevMemo’s Eric Seufert has argued, returning dollars suggests near inelastic demand for Netflix inventory.
CFO Spencer Neumann added an important detail: “we wouldn't be getting into this business obviously… if it couldn't be a meaningful portion of our business. So we're over $30 billion of revenue, almost $32 billion of revenue. in 2022. And we wouldn't get into a business like this if we didn't believe it could be bigger than at least 10% of our revenue and hopefully much more over time in that mix as we grow.
That means the business will be anywhere from $3B to $5B in additional revenues over the next decade and serving inelastic demand. That is less than 10% of the $63B in annual media investment through agencies Mindshare, MediaCom, Wavemaker, Essence and mSix&Partners, and also through programmatic audience company, Xaxis.
But it is growth, and it is currently near inelastic demand, so I imagine Gerber’s contract has some healthy incentives to hit those targets. It also probably helps that Netflix’s stock price in early November was 30% lower than its current price.
The ad marketplace in Q1 2023
At GroupM Gerber was at the front lines of what Hastings was observing as a board member of Facebook: the valuable 18-49 audiences are increasingly using Connected TVs, but they are increasingly harder to find both within and across walled gardens. As I wrote above, he was openly unhappy about this dynamic.
As I wrote back in June:
For example, Hulu will record someone who logs in to watch a show on their Vizio TV at 9 p.m., and then goes to bed and continues to watch that show on their Apple iPad at 10:30 p.m., as the same subscriber. Hulu will also record that ads were served to that subscriber on both devices. But Apple and Vizio will each report back to the media buyer that different people watched those ads on different devices.
It’s an absurd outcome: A person logging into the same account in the same app to watch the same content in the same house across two devices is not counted as the same person. Moreover, neither Hulu, nor the ad buyers, nor the measurement services can report who in the household was using the Hulu account at the time; that’s important because advertisers pay a premium on connected TVs to target ads to individuals within a household.
Adding to the confusion, ad buyers may define an impression differently than the connected TV makers. The IAB and the Media Rating Council both require that at least 50% of an ad be visible for at least two seconds. But some ad-buying agencies may require an ad to be visible for a longer time to count as an impression. So, in the Hulu example above, the same user may have viewed ads across different devices, but not every ad served will meet an ad buyer’s definition of an impression.
Gerber was not always in a position to solve these problems at GroupM. I have learned that complexity is as strong a counter-incentive as any for someone staying in their role. Sometimes the salary isn’t enough, the problems pile up, and more compelling challenges are emerging elsewhere (in this case, Netflix).
There has been progress in recent months in solving these issues: the IAB Tech Lab announced new standards at its Annual Leadership Meeting this week, and alternative measurement providers EDO, iSpot.TV, VideoAMP and SambaTV have all announced they will be working with Disney to measure streaming impressions.
But, as IAB CEO David Cohen’s fiery speech to IAB Members highlighted earlier this week, obstacles to growth in digital advertising are emerging in politics and within Apple. There is also a compelling argument being made by MobileDevMemo’s Eric Seufert that “Apple’s App Tracking Transparency (ATT) privacy policy, along with consumer preference changes reflecting a reversion to pre-COVID behaviors, has created a recession within the social media advertising economy and certain other advertising-dependent categories.”
In short, for someone like Adam Gerber, it’s better to be managing client relationships around near-inelastic demand for Netflix inventory and solving these issues within Netflix than to be solving for complexity across platforms.
Lingering Questions
An open question is whether Microsoft’s ambitions as Netflix’s exclusive partner (with its Xandr platform) are broader than Netflix’s. They see the deal as “a first step towards building an ad service that supports a wider group of media companies, at a time when Google’s advertising practices have come under regulatory scrutiny.” It certainly helps to be dealing with the complexity Apple is creating with Anti-Tracking Transparency at one platform, and not across many (a problem I wrote about back in August 2022).
Another lingering, thorny question is the extent to which Gerber work contributes to Microsoft’s ambitions here, too. Who exactly is he problem-solving for in the long run?