Will AT&T sell off Xandr? Part 2
Here we go again
Picture yourself in the summer or early fall of 2016 – a big year for media. The summer Olympics took place in Rio. Marvel ruled the box office with “Captain America: Civil War.” The US presidential election ensured that a lot of political advertising spend went into media owner coffers. Walled gardens were beginning to cement their dominance on the advertising landscape. And advertising targeting and data were seen as the winning combination.
Against this backdrop – and in the wake of other telcos buying media assets – AT&T moved to acquire Time Warner. The deal, announced on October 22, 2016, rang in at $85.4 billion. Following several regulatory approvals and no shortage of controversy, WarnerMedia was officially born on June 14, 2018. It would never reach its third birthday.
As AT&T worked to seal the Time Warner deal, it was also shoring up its advertising assets. In August 2018, it completed the acquisition of ad tech platform AppNexus. With an acquisition price of $1.6 billion, this exit infused some much-needed momentum into a rather dormant ad tech sector, widely perceived at the time as being “over.” In hindsight, we know now that wasn’t the case: A wave of innovation attacking privacy-first, post-cookie environments and the rearchitecting of many areas that proved to be ahead of their time (such as dynamic creative optimization) would follow. At the time it looked like AT&T would build a third major walled garden on top of AppNexus that could compete with Facebook and Google. AT&T’s platform had the potential to unify carrier data from AT&T, exclusive high-quality media assets from Warner, and an industry-leading end-to-end open internet platform that was poised for the push to connected TV (CTV) and could serve walled and open scenarios equally well. On paper, the strategy made sense. In reality, Amazon has claimed the third walled garden spot, Magnite and The Trade Desk convincingly claim the CTV market, and AT&T is throwing in the towel on advertising.
As soon as the AT&T-Warner divorce (Un-merger? Conscious uncoupling?) was announced, advertising folks started to wonder about the fate of the former AppNexus, now Xandr. Rumors that AT&T wanted to divest from it had started swirling in the fall of 2020. But even though Xandr is housed in the WarnerMedia part of the organization, it isn't coming along for the spin out with Discovery (which, in an indication of just how fast this juggernaut is moving, doesn’t yet have a formal name). This about sums it up:
While we may be poking fun at a complex organization, how far could it be from the truth? Telcos keep learning the hard way that operating an ad tech business on a day-to-day basis is very different than operating their core business. It’s akin to trying to integrate an entirely different type of business, with different day-to-day ops, leadership styles, organizational structures, and team composition. The scale at which a telco like AT&T operates is orders of magnitude different than that of even the most lauded ad tech companies. AppNexus’ 400 engineers at the time of acquisition would have been a blip compared to AT&T’s ~240,000. AppNexus’ annual revenue, which at the time of acquisition was in the $350 million range, was hardly a drop in the bucket to AT&T’s 2019 revenue of $181.2 billion. Xandr’s revenue at the time was growing at a 30% YoY rate, with even more staggering recent growth: In 2021, revenue has soared 75% YoY (although any YoY growth that starts with 2020 should be taken with a pandemic grain of salt), with CTV growing by 235% and video accounting for 35% of spend on the platform. If you’ve managed a P&L at a large company, you know that unless a division is showing significant revenue contribution, it’s difficult to attract internal resources and even more challenging to position it as the future of the core business. If the entire Xandr division vanished into thin air today, it would likely take AT&T weeks, if not months, to notice.
So where does that leave Xandr? Well, friends, let’s take another lap around the pool aboard the Fantasy M&A unicorn floaty.
When we first looked at Xandr’s prospects in September 2020, the following types of acquirers readily came to mind, because they have both the means and the strategic interest to buy. Let’s see which ones still make sense:
Other telcos: If the underlying “new walled garden with unique supply” strategy is attractive, then other telcos could step in to pick up the asset. None need to: Verizon has its own solid stack (including Yahoo/AOL), Comcast has Freewheel, and T-Mobile is busy with the Sprint merger and smaller, mobile-focused acquisitions (like PushSpring). The only obvious exception here might be Singtel, which might be predominantly interested in Xandr’s non-US assets.
The verdict: This now seems like a stretch, given that telcos in general appear to be reevaluating their ad tech assets. Singtel is reportedly shopping Amobee, and Verizon sold Yahoo/AOL (formerly Verizon Media) to Apollo. Comcast and T-Mobile seem content with smaller acquisitions (with the former adding Beeswax to Freewheel). The dream of the telco walled garden looks to be all but abandoned. Oh well.
Private equity: If somehow Warner assets remain in play, a PE aggregator of CTV options could make sense, possibly something along the lines of grabbing Xandr and beefing up the sell-side through a merger with someone like Magnite (Rubicon+Telaria). There are a lot of unknowns and assumptions here, so this entire buyer category is more in the “could” than “should” column.
The verdict: The two most obvious candidates, Apollo and Vista, both have extensive ad tech stacks of their own now, and without the media assets (which will all be under the new Warner+Discovery umbrella), this seems, at best, unclear. We still see potential for a PE play if Xandr is positioned as the ad platform for Warner+Discovery. This may be the most obvious hint as to why Xandr is back with AT&T for the moment.
Another walled garden: It would be somewhat poetic if Google bought the former AppNexus, thus solidifying its claim to best acquirer of New York-based ad tech companies ever (plus, many key AppNexians came from DoubleClick and Google, so there’s a history arc there to follow). If Google needs to split up in anticipation of the DOJ antitrust case, buying Xandr and consolidating an ad tech offering around it wouldn’t be a bad shortcut. The other candidate here could be Amazon: It has already picked up Sizmek for a song and likely doesn’t need the tech. However, at the rate of growth of its advertising business, picking up ~1,800 ad tech employees at once may be worth the asking price.
The verdict: This scenario seems significantly less likely than it did nine months ago. Google has several antitrust considerations to contend with, and Amazon is executing remarkably well, commanding a whopping 8.8% of digital advertising market share in 2020 (expected to climb to 9.7% in 2021). This group might as well be saying thanks, but no thanks.
Commerce: Walmart is an increasingly popular candidate in our Fantasy M&A discussions, thanks to its excellent execution and willingness to challenge Amazon on multiple fronts. With Xandr, Walmart would get an instant ad business in a box. Shopify would be another interesting candidate: The e-commerce platform’s clients tend to heavily rely on Facebook and Google for advertising; expanding beyond those two usual suspects and unlocking other types of inventory that used to be more challenging to buy (like CTV) could be an interesting proposition on top of commerce.
The verdict: Even if strategic alignment exists, the price point simply wouldn’t make sense. There are cheaper offerings to consider, and given the trajectory of commerce media, this seems like something a platform like Shopify would want to incubate or buy at a much earlier stage than where Xandr is today.
The Trade Desk: As always, TTD seems to be in a category of its own here, too. As a true leader on the buy side and a beacon of hope for every other ad tech business, TTD might be poised for a shot at world domination. As the most successful ad tech IPO, with a $20 billion-plus market cap and a truly independent business, it could consider buying up what’s left of the industry’s other truly independent platform. Xandr would give TTD access to the sell side. This fantasy conglomerate can then mount a real independent competitor to walled garden platforms.
The verdict: We still like the concept of the champions of the open internet uniting to provide alternatives to walled gardens but, poetry aside, this seems unlikely unless we’re talking about a scenario where Xandr is further chopped up.
That leaves us with only the PE scenario as a likely outcome. There’s another longshot: a SPAC with media assets, going for the same media+tech play we’ve outlined above. Given the likely asking price, the SPAC would have to be on the larger side; possible candidates and usual suspects would probably hail from the ‘> 500MM TMT’ and ‘Horizontal’ buckets on the SPAC Lumascape. (Don’t get us started on how awful SPAC branding is – we’ll be here for days.)
Thus we’ve reached the end of another cycle of telecom-media-entertainment repackaging. The question remains whether advertising technology is an integral part of that shuffle. In this current cycle, the answer from telcos seems to be quite a loud no. Meanwhile, Xandr remains stuck in a peculiar type of purgatory, where it has lost significant market momentum over the past several years. Competitors can make an easy argument that they’re better resourced and committed to roadmaps, while Xandr’s fate seems to change weekly. From a hiring and retention perspective, it’s hard to imagine top talent sticking around (or joining) given this uncertainty in direction. Whatever happens over the coming months, we’re likely to be back in this stage of the cycle in a few years’ time when telcos inevitably start eyeing media (and advertising) assets again.
One question
What would AppNexus’ path have looked like had it remained independent in 2018?
Dig deeper
Programming note: Sparrow One will move to a summer schedule next week – and we hope many of you will get to take a well-deserved break too. Over the course of June, July, and August, we’ll shift to a monthly cadence and publish on the second Friday of each month. We plan to alternate between pieces that are company specific and that examine industry connective tissue and context, which we so love to explore. We may also throw in an ad-hoc issue here or there, but mainly we want to make sure that our stellar little team has some more open bandwidth over the summer on top of client work and non-work pursuits. And if you happen to be reading One on a beach somewhere, please do send in photos of said beach.
Thanks for reading,
Ana, Maja, and the Sparrow team
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