Microsoft Buys Xandr, What This Means for Marketplaces

February 16, 2022 | Listen to the podcast here.

Some of you may be like me, patiently waiting for AT&T and Verizon to be the media powerhouses they set out to be, only to be disappointed that that’ll never happen. With Xandr being acquired by Microsoft, this is virtually the end of the foray telecommunications companies were taking into advertising.

This made a lot of sense six years ago. Telecommunications in the US had already matured at that point and AT&T was certainly feeling it. I think their average revenue growth from 2008 to 2016 was only around 3.7%. By comparison, digital marketing revenues grew something like 19% from 2010 to 2016. So these telcos definitely needed to find their next growth engine.

Now, AT&T at the time had very strong free cash flow, especially in 2016. At the end of 2015, their free cash flow stood at $16 billion, up 64% from the year prior. They had a good year and they were coming from a position of strength. I’m not intimately familiar with the telecom industry but I can imagine that decades of building infrastructure has finally paid off in terms of profit or cash flow so it was really the top line revenue that they needed to worry about.

While all of this was happening, OTT was clearly becoming the future of advertising for TV. OTT being over-the-top refers to any streaming service on the internet. Ads you see as part of these services are purchased digitally as opposed to how traditional TV buys are made, which I believe are at the DMA level and you can really only rely on a few broad metrics to decide when and where to serve your ads. I think you look at network or show, time of day, demographic details and whether it’s live or not. OTT ads are highly relevant to the households viewing these ads. Advertisers are able to layer in purchase behavior, search history, and contextual targeting among others, in addition to all targets you can use for traditional TV to serve ads to reach qualified audiences. 

Netflix is widely synonymous with streaming but they don’t actually have ads. They are a subscription model which serves as a proof of concept for this new way to distribute content. You then have Hulu, Sling TV, Roku and the like who capitalize on advertising.

So opposite telcos who distribute, you have all these content giants like Disney, 21st Century Fox, Dreamworks, CBS, Sony really any company that creates movies and tv shows that are faced with a major shift in their business model for distributing content. Content creators could no longer distribute their content like they used to and needed to very quickly digitize this process. And yes, TimeWarner was one of these companies.

On one side you have companies who have the infrastructure to distribute content to households and the other side that has the content to distribute. Hence, the AT&T acquisition of TimeWarner. What the world expected was this giant media conglomerate who could easily distribute content to customers.

With all the data it has from both sides of its operations, AT&T can very easily offer relevant ads to its customers, when they are most engaged, creating a highly effective advertising vehicle. Enter Xandr, which was called AppNexus back then prior to its acquisition by AT&T. I believe the tag price was $1.6 billion on a $2 billion valuation. 

They are, til today, a DSP and SSP with a major focus on CTV. On their website, they describe their solutions as “An open, end-to-end platform, we are innovators at the intersection of TV and digital.”

Let’s break this down.

DSPs or demand side platforms are platforms that advertisers use to set up campaigns and purchase any programmatic media. Say Brand A wants to serve ads, it is not going to go to every single streaming service and negotiate contracts. It will use a DSP who would do this for them.

In the same vein, the streaming services will not negotiate with every single DSP. They will use an SSP or supply side platform. They will put their placements up for auction in SSPs for whoever to buy.

Now both these platforms need to talk to each other and that is what you call the ad exchange.

AT&T really had all the components it needed to become the media giant it wanted to become. It already had a vast customer base who was consuming content. They had the content to distribute and the technology to monetize it.

Ultimately, what AT&T didn’t realize, in my opinion, is that they needed to manage and grow three distinct businesses while they integrate them all.

AT&T needed to maintain its network and in the years to come upgrade to 5G. WarnerMedia needed to produce content and Xandr needed to compete against other technology, including BigTech.

Just by looking at the number of movies produced, Netflix released some 257 movies globally last year, that’s 69 in the US. WarnerMedia came in at 17. So really, AT&T was banking on nostalgia from the library it acquired from the TimeWarner purchase to attract users.

I am a very very avid fan of Friends and even that has not compelled me to become an HBO Max subscriber. I almost considered it because of Succession but there are other places to watch that.

So essentially, AT&T is dwarfed on the content side, it is very much dwarfed on the tech side and it needs to stay competitive with its 5G rollout. There were simply no synergies between its businesses for it to gain momentum.

Verizon didn’t fare any better with its acquisition of Yahoo and AOL, which it also sold at a loss. It paid nearly $10 billion for both, only to recoup half of that.

Both these companies rushed to acquire properties, rather than unlock the value of the data they are sitting on. And I can’t necessarily blame them for wanting to move up the value chain. BigTech has been thriving on the internet, using their networks, pushing them down to the lowest point in the value chain.

I have a much better appreciation though for what T-Mobile has been up to. They have their Magenta Marketing Platform which is really an audience provider based on their subscriber base that looks into all data around app usage - preferences, locations and many other data points. They purchased PushSpring in 2019 for an undisclosed amount and have made several other ad tech startup acquisitions to make this happen.

It’s now quite clear why T-Mobile wanted to buy Sprint and MetroPCS. Yes, to widen the network but more so to amass even more data on a wider pool of mobile usage consumption. It was really to drive scale for its advertising solutions.

I must say this is a much better expansion strategy. It’s following an organic evolution of its business, thereby creating a proprietary offering, much like what tech companies do. Facebook has unique access to its users and sells placements to reach those users. T-Mobile is pretty much doing the same thing but on the programmatic side.

Now the question is what will Microsoft do with Xandr and will it be a much better synergy than AT&T.

Well now we get into what Microsoft has been doing and who they’ve been acquiring over the last few years.

Many people are probably familiar with Bing and the same people are probably laughing at the search engine as a far second to Google. Although Bing may be a foregone conclusion to Google, Microsoft is certainly not for search engines as a whole.

And, this is where we get into Marketplaces. 

Amazon has been selling stuff on the internet since it started with books in 1994. But it wasn’t until 2012 (18 years later) when it created its advertising divisions - Amazon Media Group, Amazon Marketing Services and Amazon Advertising Platform. I remember being one of the first to take the certification for AMS and needing to tell Amazon that they incorrectly marked my answer wrong. Today, these groups are known as Amazon Advertising and are most visibly known for Sponsored Products and Sponsored Brands ad units.

What puts Amazon in a unique position to offer ad placements is that it has exclusive access to its customer data. Amazon has a vast pool of customers and it charges brands to place their products in front of these customers, in addition to all other charges they make for selling on their platform.

While Amazon is certainly the biggest and most active marketplace, it is not the only one with a significant size. Walmart can certainly rival Amazon in many ways, including the size of its CRM list and general demand it commands both online and offline. A company of that size can build out its own marketplace and offer advertising solutions, just like Amazon.

Many many other brands are seeing this phenomenon and wanting in on the action as well. But even companies like The Home Depot, Kroger are large enough to want to monetize their site but not large enough to build out a home grown platform. This is where PromoteIQ comes in. They will integrate marketing solutions into the marketplaces of large e-commerce businesses.

In 2019, Microsoft acquired PromoteIQ.

I also remember quite vividly when this happened. I’ve had the opportunity to join early conversations of how they were approaching providing this offering to qualified brands.

PromoteIQ is not the only third-party provider for marketplace ad solutions. There’s a lot going on with Criteo and Citrus Ads. In fact, Target uses them both.

Naturally, Microsoft needs to build its competitive advantage and leverage CRM data to the fullest. So before the ink dried, Xandr launched Xandr Curate which essentially creates more placements on marketplace sites, packages them and sells to buyers through DSPs. However, instead of the open exchange it will be prioritizing these packages with PMPs.

PMPs stand for private marketplace which are customized deals for premium placements that are more directly sold by publishers (all of these marketplace websites) to brands (of the products they sell).

With this latest acquisition of Xandr, Microsoft is able to further assimilate its offering to Amazon, Criteo and Citrus Ads in offering comprehensive ad solutions on marketplace sites.

I do hope that they find value in continuing on in the CTV space. Microsoft has quietly become an advertising beast, offering Search through Bing.com, Social through LinkedIn, and Marketplace through PromoteIQ.