The Digital Signage Insider

DOOH Networks: Will There Be Only One?

Published on: 2010-10-11

After attending the Strategy Institute's Digital Signage Investor Conference, two observations stuck out in my mind. First, there is a lot of M&A activity going on right now, both inside and outside of our sector. Second, most of the perceived value of these acquisitions still lies in the pursuit of scale, not synergy. The drive towards scale makes sense from an investor's standpoint: synergy has gotten a bad rap lately, and many companies sitting on piles of cash probably like knowing that they're simply buying more of something that they already have and understand, rather than creating a "new" value that wasn't there before. But the pursuit of scale got me thinking... particularly during RMG (formerly Danoo) chief Garry McGuire's keynote on the first day of the conference. RMG has its sights set on becoming the biggest and most integrated DOOH network in the United States, and has the clout to do it. But what does this mean for small niche networks, DOOH ad sales brokers, network aggregators, and even us software guys? My crystal ball is fuzzy, but we should all start thinking about some of the possible outcomes.

In my best Sean Connery voice... "There can be only one"

Opposing forces battling it out in dazzling displays. Would-be enemies forming alliances to fight off stronger foes. Winners absorbing the power and might of the losers. It could be a plot of the 1986 sci-fi/action classic The Highlander. Or it could be the state of M&A activity in the DOOH space -- metaphorically, at least. To date, companies like Zoom and RMG have gained scale by purchasing smaller network operators (or just their assets) and adding them together, or by forming sales alliances that allow them to sell onto a much larger number of screens than they own themselves. These practices make DOOH more attractive to advertisers who are accustomed to purchasing both reach and frequency in very large numbers. Of course, the flip side is that by using this approach, it's difficult or impossible to value the clientèle of one venue (or type of venues) over another.


Image credit: Mrs Logic on Flickr
Let's say GlaxoSmithKline's agency wants to put up a DOOH ad for their latest wonder drug. They can either deal with the few large networks that can yield big reach and low CPMs (but for somewhat untargeted audiences), or else they can buy more expensive time in much more targeted venues like doctors' offices and pharmacies (but have to deal with a larger number of small network owners). Neither is ideal from the advertiser's perspective. Certainly, even the big guys (who aren't that big in the grand scheme of things) would cut deals to sell time on the more targeted screens for a higher CPM, but at some point that starts to undermine their value proposition.

The solution, of course, is for there to be only one national (or even global) DOOH network, right? One company operating all of the screens, collecting all of the money and placing all of the ads can maintain the value of scale for those brands who need massive reach. If an advertiser with more specific customer requirements wants to buy time on only a subset of screens in more targeted venues, they can simply choose their screens, pay whatever higher rate the company dictates, and otherwise know that everything else from content ingest to reporting will work the same.

While such a prospect might pique the interest of some advertisers and media planners looking for an easier way to do business, I think most would see the glaring number of problems this kind of ecosystem would create. First and foremost, a single mega-sized DOOH network would have no competition in its space, and could set prices accordingly. This isn't a big deal now, when many networks are just about giving away space because it's so hard to sign up advertisers. With increased scale, however, comes increased spending (or so the theory goes), so this would eventually become a problem.

At this point, I know what you're thinking. Isn't this really a job for the network aggregators like SeeSaw, who can help buyers purchase time across a whole range of disparate networks? Yes, that is their function today. And I don't think anybody would dispute that their existence has brought more advertising money into our space. However, how would somebody like SeeSaw compete if suddenly 25% of the available screen real estate in the US belonged to a single network operator? What about 50%? This mega-net would neither need SeeSaw to get visibility with major advertisers, nor want to share any of their revenues with them.

Who will become the Clear Channel of DOOH?

The DOOH-side of our industry is starting to remind me of the radio industry before Clear Channel came to town. Many small operators across the country were serving their local niches and areas, sometimes making a tidy profit, and sometimes going under due to poor management or unforeseen risks. As Clear Channel bought up station after station, they were able to streamline operations, cut costs and increase profitability by making radio easier and more valuable for advertisers to buy (arguments about the decreased quality of radio programming notwithstanding). Today, there are still plenty of independent radio stations, and there are a few other, smaller conglomerates, but Clear Channel is the 800 pound gorilla of their industry. The same thing will happen to us.

And before you rejoice, think about what that means. Mega networks, even if there are several of them, will have preferred vendors who will consequently control the lion's share of the hardware, software and services purchases -- in the digital out-of-home advertising market, anyway. Content producers may start to see their creativity curtailed as they have to work inside the mega network's box -- or perhaps even with the mega network's own agency. And of course, small niche networks that prefer not to sell will face an uphill battle as mega networks apply pricing pressure with the goal of making business so unprofitable that it'd be better to simply sell out.

Those last few points rang true for me as RMG's McGuire finished up his speech, saying that he expected 25% of networks to merge or be acquired in the next year or two. He would very much like that to become a self-fulfilling prophecy, since his company will be on the buying end for some time to come. In short, if you're not prepared, what's good for RMG (or any other mega-network in waiting) -- and what may in fact be good for the DOOH industry -- may not be so good for you.

Are you worried about the consolidation of today's smaller DOOH advertising networks into a few mega-networks? Or, does a bigger pie mean there's more slices to go around? Leave a comment and let us know.

Nonsense FTC disclaimer: I don't work for the Strategy Institute and they're not paying me for this post, but I did attend the Digital Signage Investor Conference at the Strategy Institute's invitation.


Comments   

0 Ken Goldberg 2010-10-11 13:46
Bill: Your take is well thought out as always. Parallels to radio and cable evolution are valid. But there may be some speed bumps along the road to a single 800-pound gorilla in DOOH. RMG and Zoom have taken advantage of independent operators who have created networks in space they do not own. Corporate investment, particularly in retail, has lagged, but is increasing. As the corporate retailers actually invest and make DS strategic by integrating it with their other systems (example: WalMart), they won't "sell" the network to RMG or anyone else. RMG's response, which we have already seen, will be to pitch ad sales as a service, and then things will get competitive. For instance, if I am Starbucks or Dunkin' Donuts, do I want to be sold in bulk with Danoo? Or can I do better by using them as a reference point? The road to The Highlander will be a bit different for RMG than it was for Clear Channel. As they bag "big game", the technical integration may be lengthy and costly. The number of networks in existence today is a fraction of what it will be in two years, so they may actually be early, leaving the door open to others who will follow by rolling up higher quality, second generation networks. Focused, well-operated networks will be able to compete very effectively, and the same can be said for vendors. We live in interesting times.
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0 digital signage software 2010-10-11 20:30
Great article and I think eventually they'll only be one.
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0 bbdd 2010-10-12 01:23
Ken has a good point about the large operators creating networks in space they donTMt own. In the long term, it makes sense for large retailers to own their network and control it directly. Any outside DS provider working those roll-outs is taking a big risk that the retailer wonTMt bring it internal at some point. That said, there is still an awful lot of non-retail space for DS providers to fill. One group will never own them all. These larger operators will buy up oerelated locations, like health clubs and golf courses, or doctorTMs offices and pharmacies. When you are talking about ad-funded networks, these separations matter, since they attract different ad buyers and require different selling techniques. The number of operators will shrink greatly, but there will never oebe only one when it comes to ad-funded networks.
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0 bbdd 2010-10-12 01:26
Ken has a good point about the large operators creating networks in space they don't own. In the long term, it makes sense for large retailers to own their network and control it directly. Any outside DS provider working those roll-outs is taking a big risk that the retailer won't bring it internal at some point. That said, there is still an awful lot of non-retail space for DS providers to fill. One group will never own them all. These larger operators will buy up "related" locations, like health clubs and golf courses, or doctor's offices and pharmacies. When you are talking about ad-funded networks, these separations matter, since they attract different ad buyers and require different selling techniques. The number of operators will shrink greatly, but there will never "be only one" when it comes to ad-funded networks. (Sorry, the comment box does not like the quotes and apostrophes that I copy-and-pasted from Word. Hopefully, this is cleaner. Feel free to delete the mangled post.)
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0 mary anne fleisher 2010-10-12 11:12
I thought the conference we attended last week was an investor conference. Any talk of investors or the lack there of. What I got from the two days was gloom, gloom and more gloom for small networks. It's always about the money and RMG must have plenty behind them. Throw me a few bucks and watch how fast we take Pennsylvania. Our revenue is sitting on the sideline telling us to hurry up and grow we are ready to buy your networks.
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0 Nikos Acuna 2010-10-12 23:26
To me, M&A, behemoth business models, and the inclination to swallow smaller networks is missing the point of establishing true value for the industry. Value comes from reach, relevance, and audience-targeting efficiency. Advertisers want to know that they are getting the most out of their media budgets. Digital OOH has the scale, but not the efficiency on a collective level. This is why it is critical to build a platform that can unify disparate networks on a very sophisticated level. This means having to distill various data sets on a venue level, or even a screen level. We've been doing this for quite some time and it's not as easy as people think. That's why being Switzerland in an industry that is still maturing is ideal. The end benefactors are brands that can now connect with their audiences at the path to purchase, while networks can benefit from a perpetual revenue stream. But the key is to continuously raise the bar of excellence in accountability when it comes to submitting accurate data, proof of play reports, etc. Making sense of all this disparate information while creating new metric models for digital OOH that are agnostic, intelligent, and most of all--simplified--will continue to be the driver for the evolution of the industry.
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0 mary anne fleisher 2010-10-13 23:26
Metrics, Metrics,Metrics! Radio a traditional media,in my market area, is not giving us metrics anymore. I buy radio for my advertising agency in a three state area and I can tell you it is very hard to find a radio station today who buys the Arbitron numbers. For our digital sign networks we can give exact traffic counts. Is that not as good as how many cars drive by a billboard? Advertising agencies have considered metrics as a currency, rather they believed it or not.
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0 william dulaney 2010-10-19 23:24
Damn, Bill, I look forward to your articles and reflection on our still burgeoning industry! When are we gonna work together?!! You know I even print your stuff out! Old School, BD
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