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Digital advertising is a trillion-dollar global business. Recent changes by its largest players are flipping the script on the industry. Digital advertising expert Dhaval Kotecha offers his perspective on what this will mean for investors.
March 10, 2022 – By Simon Erickson
Businesses around the world spend nearly $800 billion on advertising every year, and two thirds of that is taking place digitally. There are three players who dominate the ads we see when we’re glued to the screen, as Alphabet (Nasdaq: GOOGL), Meta Platforms (Nasdaq: FB), and Amazon (Nasdaq: AMZN) together capture 74% of the digital advertising market opportunity.
Yet there are big changes underway that might cause a shift in the balance of power. Apple (Nasdaq: AAPL) recently announced in its IOS 14.5 update enhanced privacy controls, which now allow iPhone users to opt-out of seeing personalized advertisements. Specifically, this move shields the mobile device’s IDFA identifier from websites and apps, who might want to use it to place targeted advertisements for users. It was a crushing blow for companies who rely on those targeted ads. Facebook/Meta Platforms CFO Dave Wehner has mentioned the move will likely cost their company $10 billion in lost revenue in 2022.
As expected, this restricted led to a mass-migration of mobile ad budgets away from Apple iPhones and toward Android devices instead. But now even Google is disrupting its own cash cow in the interest of protecting user privacy. Big G has announced it will be curtailing cross-app ad tracking within the next two years.
These are important changes! The business world needs to advertise to drive sales conversions, and it needs direction from the tech giants on how they’ll do personalized advertising while still respecting data privacy. Is this the beginning of the the walled gardens of Google and Facebook toppling, and being replaced instead by a new “Open Internet”? Are there new advertising media — perhaps Connected TV — that are becoming the battlegrounds that tech companies know they absolutely must win? How should investors decipher these technology changes? And are there specific stock market opportunities they should be considering?
To answer these questions, we’ve brought in an expert. Dhaval Kotecha is an individual investor with years of experience in the digital advertising space. He has worked for programmatic advertising platforms and has accurately read the tea leaves to invest in many of the industry’s top-performers.
In this exclusive interview, Dhaval chats with 7investing founder Simon Erickson about the higher-level impact of Apple and Google’s recent changes. The two discuss Roku’s (Nasdaq: ROKU) recent earnings release and what might have caused the stock’s significant selloff.
Dhaval then describes several programmatic ad platforms, including The Trade Desk (Nasdaq: TTD), PubMatic (Nasdaq: PUBM), and Magnite (Nasdaq: MGNI). And as a fun way to wrap things up, he explains his recent interest in non-fungible token (“NFT”) marketplaces and how investors might think about their rising popularity.
Publicly-traded companies mentioned in this interview include Alphabet, Amazon, Apple, Magnite, Meta Platforms, PubMatic, ROKU, and The Trade Desk. 7investing’s advisors or its guests may have positions in the companies mentioned.
01:15 – Apple’s deprecation of IDFA
06:03 – Google’s interest in cutting cross-app ad tracking
10:56 – Which companies will be winners or losers from the ad industry’s recent changes?
16:41 – Discussion about ROKU’s recent earnings
19:17 – Connected TV addressable market opportunity
20:38 – Discussion about AdTech players (DSPs and SSPs)
21:32 – Dhaval’s interest in NFT marketplaces
Simon Erickson 0:00
Hello everyone and welcome to today’s episode of our 7investing podcast. I’m 7 7investing founder and CEO Simon Erickson. We’re gonna be chatting about digital advertising today. This is an innovative space of the market. There’s a lot that’s going on right now. We’re going to be talking about connected TV, we’ll be talking about Google’s technology changes. Separately, we’re going to be talking about NFT’s. But we’re going to also be focusing first and foremost on the changes that Apple had, which allowed people to opt out of personal advertisements., and joining me is my favorite person in the world to talk to about digital advertising. Dhaval Kotecha is an individual investor, he’s worked a lot in the digital ad space, I consider him to be one of the global experts here. Dhaval, always a real pleasure to have you on our 7investing podcast.
Dhaval Kotecha 0:45
It’s my pleasure to be here.
Simon Erickson 0:49
Dhaval, I gave a little bit of a roadmap, but let’s go to the first of those topics that we discussed a couple of months ago. Apple had an update, its iOS 14.5 update, which is now allowing people with mobile devices to opt out of seeing personalized advertisements. Apple’s, last I checked, a pretty big company. Could you share some thoughts about what you thought about this announcement and how it might be impacting the digital ad industry?
Dhaval Kotecha 1:15
Absolutely. So after this announcement by Apple, what are the statistics that I have come across? So as advertisers, they experienced a 15 to 20% revenue drop, and inflation on attribute in organic traffic, right? So just because the IDFA that got lost when Apple announced this change, right, basically, there was a lot of drop in revenue. And again, like people kind of thought there would be more options, but only 20% of the consumers said yes to the ATT prom, right. So the ATT prompt is what you see when you are going on the apples device and going on a particular app, and basically it will say, okay, do you want us to track your behavior? And when they when you say yes, then only those IDFs could be shared, right? So if you saw in the post IDFA world, especially like companies like Facebook and other social media companies, which were the most impacted from from this change, they recommend focusing on a persona lead creative, right. So what that does is basically allows them to regain the efficiency by allowing social paid social algorithms to cluster users based on behaviors and creative trends right? Now, like without the deterministic attribution, right, so the deterministic attribution is something where you could attribute a particular app install with the IDFA. The advertisers, they lose the ability to effectively attribute revenue. And they are experiencing an erosion of lifetime value and effectiveness of those models. Right. So just to kind of highlight what LTV means is it’s the cumulative revenue user generated since they install the app. And it includes revenues from in app purchases and revenue from ads. So just because the advertisers were not able to track revenue effectively, ad dollars spent on iOS advertising dropped, as it became less efficient due to restricted measurement and poor personalization capabilities. So where did they go? They went to Android. So according to a marketer, marketing marketing budgets were split evenly in February of 2021. between iOS and Android, by June, this was 30%, iOS and 70%. Android. So is advertising dropped, Android advertising increased around eight to 20%, due to Google maintaining advertisers ability to personalize and customize ads properly, because Apple deprecated the IDFA, but Android continue sharing their Android ID with those marketers. So yeah, like mobile again, if you see right, is a huge contributor in terms of the programmatic landscape ad landscape, and people still spend majority of their time on smartphones. And I was reading a report from statistic. And on an average, like 57% of people in the US spend over five hours daily on their phone. And most mobile phone users check their phones up to 63 times daily. And, and 13% of the millennials spend over 12 hours on their phones daily, right so Obviously there’s there’s a lot of traffic, a lot of inventory still coming in from mobile and all these changes from say Apple kind of impacted a lot in terms of the marketers capabilities to monetize the people who are there on the platform.
Simon Erickson 5:17
It certainly must be frustrating for advertisers when you kind of calibrate around the way that the industry is going. And then all of a sudden, there’s a wrench in your plans to start over. And of course, only 20% of people opting into ads to see personalized ads. That’s quite a bit. That’s significant. Can you chat a bit, too, we saw another announcement about Android, you mentioned that a lot of the ad budgets were switching from Apple to Android. But now we’ve also seen that Google is is considering cutting its cross app ad tracking, which means a lot of apps that were able to track with multiple locations of what you were looking at Facebook, one of those might be even limited in what they can do on Android devices to what’s the announcement big that Google just made? Why is it important?
Dhaval Kotecha 6:03
So Google just made the announcement that they are going to deprecate the Android advertising ID. And it’s the similar sort of ID which Apple has as IDFA. Right? So they are going to deprecate that. And they’re coming up with the replacement. Right? So Apple announced something called a scan network that were like the marketers were able to kind of attribute the app installs, but not at the user level. Similarly, with, say, Google, they are coming up with, say three main things, which is called say the topics, the fledge, and their core attribution API. Right. So those were the three main things that they announced at this point. And I can go over each one of them very quickly, if you want me to go with those.
Simon Erickson 6:49
Absolutely. You’re trying to FLoC has been the new acronym of Google, right? The federated learning of cohorts, it sounds very similar to what you just described, you’re looking more at the app level rather than the individual users.
Dhaval Kotecha 7:00
Right. So the FLoC was something that they announced. And now they have deprecated that so they’re not going along with the flock because of a lot of pushback from the industry. And it was not well accepted. Right. So they kind of replaced that flock and they already have a sort of timeline on their on their website. But again, like with, with SEC topics, right? So if I were to talk about topics at a very high level, so topics are like recognizable categories that are inferred based on the app usage of an individual. So as an end user, if you are an app that pertains to sports, or say entertainment, you fall under those topics. And if you stop visiting the sports app after a few days, then you drop out of that topic, and don’t get the ad so relevant to the topic. Moreover, like you, as an end user, you can see and control the topics on your device, right? So you can say, Okay, I do not belong to this topic anymore. Even though you are telling me I belong to this topic. Or you could say, okay, I don’t want to kind of pick any topics and I don’t want relevant advertising. So you could say, okay, to not use any of the topics from for me right to target me as an end user. But again, like you see, right, there’s no user level data that is getting past this. This is all like, how the user is basically using the app, and it’s automatically categorizing into certain topics. So that was the first thing that they announced. The second thing that they announced was something called fledge. And fledge is something that it’s introducing a new way to show ads based on custom audiences defined by the app developers and the previous interactions with their within their app, right. So this information and the associated ads are again stood locally. So no individual identifiers are shared with the external parties. And this is specifically for enabling the remarketing for businesses to their existing customer base in a very privacy safe way. So again, like if you are, say, having a particular item in your cart, then what they will do is they will build the audiences for people who have the items in their cart. And with those sort of audiences, they will try to run those campaigns and try to remarket them, right. So that’s the other initiative that they kind of launched was. And then the third thing is obviously the core attribution API. Right. So right now, what is happening is marketers are relying on all these device identifiers, right? So advertising ID and whatnot, to be able to evaluate the effectiveness of the advertising. And that’s the user level data. And now the attribution reporting, it aims to replace the current methods of the measurement with solutions that don’t rely on those user level tracking mechanisms. So people’s information is protected in a much better way. Right. So these are The three things that they announced. But the good thing is these things are not happening immediately. So Google has already mentioned on their website that they are going to take another like around two years for doing development testing. And obviously, adoption of these technologies.
Simon Erickson 10:19
Makes a lot of sense. We’ll see what else they want to deprecate, Google likes to think of things have been changed their decisions and where they’re going. But I mean, default, you know, our audience for the show is is mostly individual investors. This is fascinating. The industry’s changes are happening quickly, even years out, it’s a really big change for a huge industry. I have read previously that even just from Apple’s changes last year, that Facebook now Meta is estimating $10 billion in sales losses, because they’re not going to have the granularity of data. Do you think there are any companies who are either big winners or big losers, potentially, from these changes?
Dhaval Kotecha 10:56
So I would like to kind of point here that, like, I think open Internet companies benefit from these changes. And that’s contrary to a lot of people think, right? So people usually like to clump all these companies into a single bucket, like, Okay, we are selling the ads. And these are like ad tech companies, right? So the club, Facebook, Snapchat, Pinterest, Twitter, Trade Desk, Roku, everyone in the same bucket. But again, like certain companies are different than the other companies. And I would like to kind of what I usually like to do is to kind of put them into two different buckets. So the first bucket is your walled gardens, which is your Facebook, Snapchat, Pinterest, Twitter. And what they do is they must monetize every single user on their platform. And that’s where you see like meu being a very important metric for these companies right. Now, the second marker which I differentiate is the open Internet companies, which is like, say, your trade desk and such. And these companies, what they are doing, what they are having is these companies are constantly getting a stream of requests from the supply side platforms like your magnets and pragmatics of the world. And the advertiser on on the demand side, they don’t have to bid on every request, if it didn’t make sense to bid bid on those particular requests. And they could be very selective and picking what request they want to bear down, right. So if you have kind of listen to the calls, like earnings calls on trade desk, Jeff Green, the CEO, he has maintained that they haven’t seen any impact due to the IDF deprecation. And the reason is that they are processing 12 million TPS, and only 1 million TPS was data with IDFs. And which they could choose to ignore if they wanted to, right. So as these social media companies, they they lose sales, and you mentioned Facebook, they lost an incredible amount of sales. Due to this change. Open Internet companies are benefiting from these moves, given they have got something called UID. Two point though, and ideal and such identifiers to help them determine the traffic at a user level and enable the marketers to accurately target the end user. So deterministic traffic is the key where if you’re able to target the user, at like, end user at at a user level, right, basically, then that would be more valuable. And that’s the reason why I think like open Internet companies are poised for success more so than the walled gardens at this point.
Simon Erickson 13:30
And it sounds devolved to if I can add my thoughts on this. And you can tell me what you think about it. But they don’t have a lot of that legacy, regulatory baggage and walled gardens. To your right, everyone remembers Facebook and the data privacy and all of these concerns that regulators have just congregated around or continually are bombarding them with if a trade desk or any other programmatic platform can start from scratch, saying, Hey, we’re going to build a more private identifier that’s not going to expose that data. That seems to be the direction that at least consumers and certainly the regulators want to move, right?
Dhaval Kotecha 14:02
Simon Erickson 14:04
Changing gears a little bit. I wanted to chat a bit about connected TV. This is kind of a new media that’s come out, you know, we’ve seen linear broadcasting moved to over the top and recent years. And one of the things that I always like to track is just how much higher the advertising rates are on on CTV versus just a display ad on a desktop computer or even on mobile. Do you think connected TV is a an important medium for advertisers to start pursuing?
Dhaval Kotecha 14:30
Yes, absolutely. And again, like your to understand connected TV is something where people will get deterministic traffic, right. You don’t have issues with Cookie ID deprecation. You don’t have issues with say, Id if an application or Android ID deprecation right. Every connected TV requests like if even if you are say if you are a Roku user then you have to log into your account, basically with your email address and therefore you are a You are easily trackable at a user level or at a household level, compared to say your other device devices, right, say mobile, and that’s controlled by say Google or ID. Apple, right. So again, like, CTV is where the growth is. And I see that the cord cutting trend is well and alive and it continues to accelerate, right? And obviously, you you see, right, there’s a lot of push. And you’d see like, there’s a lot of increased CPMs with with connected TV, just because that’s the medium that people are kind of spending the most amount of time on. So connected TV, like using, like different apps to consume the content on on the internet versus from the linear TV. So tremendous growth in in that connected TV space. And I constantly keep hearing like if I jump on Trade Desk and Roku calls, they keep saying, Okay, are we double, triple are connected TV revenue growth, right. So basically, that’s where they are seeing the most amount of revenue come from
Simon Erickson 16:11
Roku is a battleground right now. Last week, it announced, gave earnings, stock fell like 30, I guess 25%. At one point, it seemed like the platform revenue was still growing at 50% a year but they were having some supply chain challenges of actually getting the TVs delivered. Of course, when you’re talking connected TV, you have to have the TV in the first place. Yes, most people are replacing those as quickly as smartphones. But thoughts on Roku right now? Is it still long term bullish and short term problems? Or is there something more that we should be paying attention to?
Dhaval Kotecha 16:41
I do think long term, I’m still bullish on on Roku, but like this quarter was not what I would have expected. And obviously, there has been like it has been hit by the supply chain issues more so than the others. And, and obviously, like, there are two aspects to it, when they when they have like partnerships with the OEMs. And that’s where like, they cannot kind of reduce the prices on the TV just because the TV manufacturers are in in control of managing their prices, they could come down with the player prices, like say the Roku sticks, and so to kind of push them into the user’s homes, but at the same time, they cannot control the TV aspect of things. And the TV aspect of things, I think is much more important, right? Just because people are not changing the TVs as frequently as like how they could go and change the players, right? The stakes per se. So yeah, like if they are not able to increase the active accounts, then eventually you will see a hit in their ARPU numbers like ARPU, numbers are still heading in the right direction. And again, like that’s the one thing that I’m kind of still focusing on the streaming hours, like the engagement is still up. But I would want to see them kind of increase that active accounts to kind of fuel the flywheel. And obviously, the the monetization is the most important part. And I would want to see the ARPU still go up right now. Like it has kind of slowed down just because of all these issues.
Simon Erickson 18:25
I do want to while I have you here ask a little bit about engagement and monetization with CTV, because it seems like that’s still the earliest innings of this story. But you know, in the traditional sense of advertising, we saw Google got 10x Its ad rates when it moved from CPM cost per 1000 impressions to CPC of what people were actually clicking in interacting with on the websites. And of course, that’s easy to track on mouse clicks. But it just seems, and I know that you and I chatted about this before that CTV is offering a lot more engagement potential, because you can make custom ads that are fit to the right person who’s watching that show. And it’s video rather than just, you know, an advertisement on the side of the web. I mean, how do you see do you could you talk about what the format of CTV ads you think will likely evolve into in the next few years?
Dhaval Kotecha 19:17
Right. So again, one thing here while we are at Roku, they also hinted like they have been working on something called a branded studio, in, in, in their sort of roadmap and the branded studio is specifically for them to design the ads which are putting into CTV, right so obviously, there’s a lot of innovation that’s happening around that space, obviously, just because they are seeing the growth in CTV there has to be the creatives that needs to be innovative, right, so you could see like people watching the CTV content and they could interact with their ads, where they could say, Okay, have an ability to put in their phone number put in their email address. And then they get a link on their mobile device. And then they could kind of go and make a purchase or do whatever the advertiser needs them to do when they kind of interact with that. Right? So and obviously, like when you talk about CPM and CPC, this would be something where you would go to CPA, which is cost per acquisition, right? So in that case, they would kind of track Okay, how many people actually put their mobile number when they interacted with that particular ad, and, and basically, that’s where I think the world is moving, the CTV is moving in that direction.
Simon Erickson 20:38
Perfect in any companies in this space of all you really like we chat about Roku quite a bit. You mentioned some of the the platforms like the Trade Desk, or PubMatic. Any others that we should be paying attention to as investors?
Dhaval Kotecha 20:50
Yeah, so I think, CTV Macknight and PubMatic on the SSP side, trade desk, Roku on the divine side, definitely like those are the two big players in the connected TV space.
Simon Erickson 21:04
Perfect. And then last but not least, I want to completely change directions here. Let’s talk about a completely different platform. But I know that you have been really involved with NFT’s, with non fungible tokens lately. This is something that’s still a head scratcher. For a lot of people, people don’t really understand this, but you are actively buying and selling them these days. Maybe if I can just let you talk about your experience with NFT’s, what you’re doing. And it may be any advice or things that you’d like to pass on to investors that are interested in this?
Dhaval Kotecha 21:32
So I actually started mining NFPs in September of 2021, where I was enamored by the space and I was kind of first I brushed off this space totally where I was thinking, okay, why would someone pay a ridiculous amount for a JPEG but again, like when I understood like, it was not just a JPEG, it was a community that’s being built around that JPEG. And JPEG is just in like something that’s in front of you. But there are like underlying tokens, and obviously, the premise of web three point to the ownership premise. And, and that’s something that’s like, fascinating. And obviously, like, I’ve been a part of a lot of communities for these NFT projects. And I’ve seen like these communities are doing, like a lot of innovation, they’re building a lot of stuff. And obviously, like if you want to kind of get involved, then you could go get involved in like two different phase. And this is where I see like I would categorize like NF T’s into into two broader categories. One is your PFP projects, and PFP projects is your profile picture projects, right? So profile picture projects are those those projects, which have a cute picture of a cat, ape, dog, Fox, or any such art. And these are those those things where you see on the profile pictures of a lot of people on Twitter, right. And you must have seen right Twitter also came up with a profile picture verification, like in the past month or so, and, and they are able to verify the ownership of the NFT, then only you could kind of place a profile picture. But then, in that scenario, what’s important is not the art and the community that the project has tries these projects more so than the art and again, like if you see projects like Bo Dave Yacht Club, right. Do you do I think the image of the board ape is worth that much money? No, it’s not. It’s not the image that is selling for that much. It’s the community behind it, that is selling like that is causing it to be so valuable, right? So that’s the first thing. And obviously, like, what drives these projects is a well thought out roadmap by the team and then executing on what they set out to do. Right? So it’s similar to your companies where the management is telling, okay, we will we will achieve these metrics in this much time. And when they achieve it, people can like obviously, the fundamentals, and the stock prices go up. And similarly, in this case, when these founders have these projects, they execute on the roadmap, obviously, the project becomes much more valuable. And then the second thing is obviously the art projects, right? So art projects are where the real artists are trying to sell their art and these artists could be any anyone, right? So basically say photography, generative art, illustrations, design, music, even writing, right? So this is where I think the most value will be created in the future. And in the past few months, what I’ve seen is there’s a huge influx of artists who are moving from say different platforms like say, Instagram, like people like say from photography, illustration design, they were predominantly on Instagram But now they are moving into, and starting using Twitter to kind of showcase their talent like minting those NFT’s and trying to sell their art and selling that to the people who are on Twitter who are kind of willing to buy and support those artists, right. So they are able to monetize. And I’ve seen like a lot of people making like life changing money by kind of sharing their art with with the community. And I’ve been kind of actively buying and supporting those artists. And I do think they are the ones which are kind of going to stay for a long time. With the PFC projects, I think like 99% of the projects will go to zero. And that’s where like people will will kind of talk about NF TS as a scam. But obviously, like not all NF T’s are the same and everybody like it’s one sort of investment vehicle and you have to kind of do a lot of your due diligence in that too. So obviously, like PFP projects are dangerous, but artists not so much right. Because if they are constantly coming up with new work, then they are going to become much more valuable and be able to demand like much more value in the future.
Simon Erickson 26:16
I really appreciate this perspective. Dhaval, it’s so often that we see the mass market be dismissive of innovative new things. So much of what you just described was exactly what I saw in the earliest days of Bitcoin where everyone was just passing it off as it was a scam and you’re gonna immediately get hacked and lose all your money and yet at South by Southwest or Auditorium is full of lawyers and business people and industry if you’re trying to figure this out and how this technology that’s the blockchain is going to be applied for them. And it sounds very similar to what you just described within a T word the attention and then the headlines and everything is focusing on oh, these idiots are you know gonna lose all their money from you know, these these goofy eight pictures like you were talking about right? But in reality, there are some fundamental changes that are taking shape with with industries. Yes, absolutely. Yeah, well, once again, Dhaval Kotecha. Individual investor, knows a ton about digital advertising. Now I’m dubbing him the NFT guru. We’ll have him shout about that again in the future. Dhaval, really a pleasure. Thanks very much for joining us on the podcast today.
Dhaval Kotecha 27:17
Thanks for having me.
Simon Erickson 27:18
And thank you everyone for tuning in to this edition of our 7investing podcast. We are here to empower you to invest in your future. We are 7investing.
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