Digital advertising's biggest year ever isn't helping smaller firms

Spending on online advertising is taking a bigger share of marketing budgets than ever before–as much as 39 percent of all ad spending in the United States this year, eMarketer estimates–but that new money isn't helping smaller digital-ad firms, such as YuMe, Rocket Fuel and Tremor.

According to a Wall Street Journal report, these newer companies–many of which went public in the past year and a half–are posting increased losses year-over-year, despite notable jumps in revenue.

Rocket Fuel, for example, reported a 70 percent increase in revenue in the second quarter, to $92.6 million, but its losses in the quarter rose to $9.8 million, compared with $3.84 million a year earlier. Tremor reported an even bigger gap: Its revenue climbed 23 percent, but its losses grew year-over-year from $300,000 to $5.4 million.

"Executives from the companies say they are unprofitable because they are investing aggressively for future growth and to ensure they can capitalize on the growing demand for automated, or so-called programmatic, ad solutions," the WSJ reported.

That's in line with an eMarketer report that said that 84 percent of ad executives they surveyed planned to use programmatic services to buy display ads and that over half of those executives planned to buy more digital video ads in the next six months.

YuMe's CEO told investors that research and development, particularly into programmatic services, increased 65 percent year-over-year in the second quarter of 2014. The firm's net loss doubled in that span, to $2.6 million, while its revenue grew 18 percent.

Do those gaps mean investors should shy away from automatic ad-buying companies? Not necessarily. Analysts and executives point out that the online-ad market is still evolving, alongside the online-video market as a whole.

Case in point: WWE's shift to a subscription-based online-video platform. Although subscribers adopted the new service rapidly this spring, with 667,000 joining in the first six weeks after WWE Network's launch, a disappointing licensing deal with NBCUniversal, along with news that the company wouldn't recoup its lost pay-per-view profits for a whole year, sent its stock diving 40 percent in mid-May.

George Barrios, WWE's chief strategy and finance officer, told attendees at an investor conference that hiccups were expected in transitioning the business to a new model.

"Doing that kind of pivot within a public-company construct makes the communication issue a challenge," he said. "We have to be as transparent as possible. You can't underestimate the (impact of) the shift."

For more:
- The Wall Street Journal has this story
- eMarketer has this post

Related articles:
WWE's Barrios: We can't underestimate impact of shift to online video
M&E executives say it's time to grow: report
YouTube's value to advertisers touted by Google execs
Advertising seeing one crazy summer thanks to original content growth

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