This was an important week for the Adtech industry.  On Monday, Yahoo acquired Interclick for $270MM, Adobe acquired Auditude for $120MM, and AdKnowledge acquired AdParlor for an undisclosed sum.  On Tuesday, Clearspring bought XGraph in another small private-to-private transaction.  These were four warning shots that the adtech industry is consolidating.

The investment community is hoping for a repeat of 2007, when AOL, Yahoo, Google and Microsoft bought Tacoda, Right Media, DoubleClick, and Atlas/Aquantive for billions of dollars.  But I think we will not see that sort of bonanza happen again.  Microsoft might buy a brand/video network or exercise their option to buy Appnexus, but otherwise the publishers appear to be out of the market.

The other potential public acquirers, which include infrastructure companies, cable networks, and advertising agencies also seem to be unlikely candidates for big deals.  Adobe, Akamai, and DG Fastchannel have each nibbled around the edges of adtech, but media services is not in their core DNA.  Cable providers like Comcast are more focused on buying traditional media companies than adtech businesses, and the advertising agencies have a hard time paying technology multiples given their depressed public market caps.

This time around I am betting that acquisitions will be made by private companies rolling up the industry.  Private-to-private sales are much less fulfilling as an investor, although they can work out well if you happen to own the platform making the acquisition.  I see three general areas in adtech that have the potential for “platform status”, which in my mind means predictable revenue and IPO scale ($200MM+ in annual revenue).  The common characteristic is that all these areas are in the direct management of media dollars.  There are good businesses in the middle of the ecosystem – data management, data exchanges, ad verification, yield management, publisher tools, etc – but these segments are measured as a single digit percentage of media spend.  That means they are all too small to reach true platform scale.

The first category to look for platform businesses is the performance space.  Interclick and Valueclick are both examples of public companies in this area.  In the last 12 months almost every “DSP” has transitioned into a performance ad network, and a few long-timers, like Specific Media, X+1, and Revenue Science, are still around.  Many of these companies have revenue quality issues, but there is enough money out there for one or two companies to make it to IPO.  The goal in this segment will be to acquire add-on businesses that reduce the dependency on agency dollars, which can either be technology or media assets (see the Specific acquisition of MySpace).

The second category for platform businesses are the brand networks.  Representative companies in this space are Yume, Tremor, and Collective, as well as the media buying arms of major agency holding companies.  These businesses manage brand dollars across display, rich media, and video.  To build a public quality company in this space you need a suite of tools to buy across channel, as well as in-house creative and proprietary data.  This space is larger than the performance market, although as companies go client-direct they will find downward margin pressure.

The last category are the eCommerce networks.  This is a relatively new segment that provides a specialized media service for online retailers.  The eCommerce industry is now over $180BN/yr, which has created a billion dollar sub industry of client-direct media buyers.  Sample companies here are Criteo, Dotomi, and Steelhouse.  Over the next few years these businesses will likely acquire subscription eCommerce assets, like tag management and data management platforms, which will enable them to have more predictable revenues ahead of an IPO.

The key on all fronts is to have massive scale.  Many VCs are now realizing that they made a mistake by funding certain segments of adtech that are too small to support a major exit.  You can still get out if you have a small amount of capital invested, but there are already a lot of walking dead.  The upside is that acquirers can buy highly engineered products at inexpensive prices.  This means it is a good time to be in the platform business.  I expect this opportunity may not happen again for a long time.