How confusing tech, GDPR, and a shifting consumer climate killed the once huge promise of location-based ads
- A number of location-based tech firms are trying to ditch their advertising businesses that target ads based on someone's whereabouts to focus on data instead.
- GDPR and privacy questions have cut back on investor interest, but a couple of companies that don't focus on advertising have recently gotten new funding.
- Agencies say they want to use location data in more ways than tech firms offer - like being able to mash it up with their own email and app data.
Marketers have long been intrigued by the potential to zap ads at consumers' phones with precise targeting based on the stores they routinely visit.
It's become a tired ad industry cliche: "Someday, you'll be walking by a Starbucks and you'll get a coupon for your favorite drink."
But the hype hasn't worked out the way that industry veterans once expected. It's still safe to walk by Starbucks.
In fact, explaining to advertisers the complex ways that ads are served to someone from GPS technology built into phones, as well as mounting consumer privacy concerns, is causing tech firms to rework their businesses.
Over the past few years, a number of location tech firms have tried to shift their business models from advertising into software that brands use to track foot-traffic patterns. Firms are also under growing scrutiny from the European Union's General Data Protection Regulation that puts strict regulations around how businesses can explicitly use data to serve and measure ads without explicit permission from consumers, causing investors to cool.
Just this week, The Washington Post reported that Google's practice of collecting location data is under investigation in Arizona.
"It has definitely been morphing over the years and as far as investor interest, I would say that it has probably waned a bit if it is focused on advertising exclusively," said Brian Andersen, cofounder and head of digital marketing investment banking at Luma Partners. "But with things like data-focused companies, there's still definitely interest."
Case in point: Two of the most recent companies to receive funding in this space don't sell ads.
Venture capital money is moving away from location ad companies to newer models
Hyp3r is a startup that plugs into Salesforce and Adobe's marketing clouds and matches up location data with CRM data from email, apps, and websites for brands like Marriott and 24 Hour Fitness. The company has attracted $17 million in Series A funding that CEO and cofounder Carlos Garcia said will go to growing a team to partner with other enterprise companies.
And last week, Factual raised $42 million to expand its Asia-Pacific business, bringing its total funding to $104 million. The firm's business is split between an arm that helps advertisers analyze and measure location data and a non-advertising arm that pipes location stats into apps like Uber and Apple Maps.
"Because we're a data company, we don't sell any media - we primarily work with brands and agencies to help them understand how to use location data but they access it through a network of ad-tech platforms across the ecosystem," said Factual CMO Brian Czarny.
"Today there's a lot more companies calling themselves location data companies than there probably were 12 or 24 months ago. You're starting to see companies change the way they position themselves like a data company but yet still sell media."
Location-based firms are rapidly trying to shed their media businesses
Firms like PlaceIQ, GroundTruth, and NinthDecimal built businesses years ago latched onto the rise in mobile advertising by amassing pools of location data and then tying the data to ad networks and media campaigns that promised advertisers superb ad targeting.
"It's relatively easy to build some level of scale by having a media business, but it's one that the markets or acquirers haven't valued as much because it's not predictable and stable," said Dick Filippini, partner and head of mobile investment banking at Luma Partners.
But over time as margins on digital ads get squeezed, and the duopoly of Facebook and Google continue to eat up ad budgets, location companies are quickly trying to move away from media businesses and spin their data into software, analytics, and subscription-based models more akin to the business models of enterprise companies.
According to eMarketer, US mobile advertising will make up $75 billion this year. Google will bring in more than $23 billion of that money while Facebook is expected to generate $19 billion. A separate report from BIA/Kelsey found that all location-targeted mobile advertising spend - including ads sold by tech companies and publishers - will reach $22.1 billion this year.
"They're just arbitraging digital media with their data layered on," said JC Uva, managing director at MediaLink. "There's not enough money moving through the pipeline to make it a business with massive scale when you can do all that on Facebook, Google, and the big platforms."
While firms are trying to pivot, media still makes up the bulk of revenue for location-based firms, according to Uva.
"They're in this transitional phase - they're trying to do two things at once," he said. "The lights stay on because the media business is there - they're trying to move into SAS revenue as fast as possible but they can't totally ditch what they've got because it pays the bills."
Most location firms offer some form of software tools that package location stats into a dashboard that is sold to either agencies or increasingly directly to brands to analyze their specific stats.
For example, ad-tech firm GroundTruth sells its location platform as software to brands that they can use to zero in on foot traffic data for their stores and competitors' stores. The company also provides targeting tools that brands can use to make location-based audiences for serving ads - like people who regularly shop at a particular store.
GroundTruth CMO Eric Hadley declined to explain how the firm's revenue is broken out but said that it's self-serve business launched in February and "it's an exciting new business for us."
A PlaceIQ spokesman also declined to break out its media and data revenue but said that the company is profitable and that media makes up the larger portion of revenue.
The problem with dashboards is that location companies only have a sliver of data that brands are looking for and marketers often have to work with multiple partners to extrapolate and package data the way they want to.
"We're looking for a consolidated view of our marketing," said Jeff Ratner, chief media officer at iCrossing. "I don't want three dashboards - I want one dashboard."
GDPR isn't helping already wary investors
On top of more competition, investors and advertisers are spooked by GDPR and similar regulation in the US that will require companies to collect consumers' permission before using their data for ad targeting. For ad-tech firms that already struggle to explain how location-based technology works, they now have to answer more pressing questions about privacy like:
- Do consumers know that you're tracking their location?
- Where is your data from and is it safe?
- How long do you keep your data?
While those may seem like basic questions for ad-tech veterans, "the questions that need to be answered multiple times are around privacy, consent, and the quality and safety of the data," Medialink's Uva said.
"The stakes are high enough that [advertisers] have to have a very high degree of confidence that what you're being told is actually in compliance," he said. "It seems like there is enough general confusion about what will ultimately constitute a violation that people are taking a broad approach to this until you can get precise about what compliance looks like."
Concerns over GDPR have already caused location firms like Verve and Drawbridge to shut down their European operations.
Meanwhile companies like Factual are scrapping their European databases completely to rebuild them from scratch and temporarily cutting down services available to European marketers. The company has stopped offering audience and measurement products to European advertisers until "we're sure that we have the ability to get proper consent and have a sizable enough pool to make them meaningful," Czarny said.
According to Luma Partners' Andersen, GDPR could help investors' interest in location-based ad firms in the long term because firms will be forced to clean up how they collect data.
"You're weaning out unreliable data sources and making sure that you're getting clean data sets from consumers who have opted in from quality sources," he said. "I would imagine that the signals are getting more accurate - we're too early to see if that's the case but theoretically it absolutely could be."
Companies aren't as innovative as they were a few years ago
There's also a lack of innovation among location companies, Jessica Peltz-Zatulove, partner at MDC Ventures, the corporate venture capital arm of agency holding company MDC Partners, said.
MDC Ventures is an investor in location-based firm PlaceIQ, which has gone through six rounds of funding since it was founded in 2011. Peltz-Zatulove said that MDC Ventures isn't fishing around for other location-based firms to add to its portfolio, partly because it hasn't seen much innovation in location when it comes to granular analytics and measurement.
"We haven't made any new investments in that category because we always want to understand what the white space is in our portfolio when we make an investment," Peltz-Zatulove said. "I've seen different solutions in that space [but] nothing that I believe is so differentiated or any incremental improvement versus solving an entirely new way of thinking about the category."
Agencies want to roll up location data and use it elsewhere
Agencies want location data but not in the way that location firms can provide.
Agencies are increasingly asking tech firms for the ability to take their data and use it in a completely different way than it may have been originally intended, Peltz-Zatulove said.
Instead of tying location to specific ad campaigns, advertisers instead want to roll up location data and mesh it with first-party data collected from email or loyalty cards, for example. Or an advertiser might want to combine location stats with purchase data stats from a survey to estimate how many people bought something after going into a store.
Both of those scenarios are hard to do when a location-based firm is only looking at data through the lens of serving advertising, she said.
"If you look at the history of how location data has evolved, the secret sauce initially was access to a data set but now advertisers and marketers want that data to be more flexible, real-time and they want to mash it up with multiple data sets to create new dimensions of insights," Peltz-Zatulove said. "There's so many different ways to layer on additional data on top of location - location becomes one ingredient into a much robust perspective into the customer's daily life."
Agencies want a deeper look under the hood of ad-tech
WPP's GroupM is currently in the process of auditing a handful of location-based companies specifically for verification. The goal is to understand how often the location of devices that firms report are accurate.
"Very often, the only proof of performance for a data provider is the resulting attribution or conversion tracking that we can generate from a campaign," said Joe Barone, GroupM's managing partner of brand safety in the Americas. "As the location space has matured, we've taken more of a verification-oriented approach to it."
Dentsu Aegis Network-owned Carat also routinely vets partners, starting with a test among 20 companies in 2016. Three of the 20 companies passed the agency's review.
"Every year we've been able to refresh this test because new entrants are coming from a pure data perspective," said Michael Liu, director of mobile and innovation strategy at Carat. "We've done a bunch of tests where we've tried to sift through who is coming into our agency because we have so many uninformed campaigns where people will take the salesperson at face value and believe that their data is the best."
The agency also asks some location companies to dump their data into its own systems and is piloting a data-licensing program that helps retailers and fast-food companies make sense of location data without working through third-party companies.
"We don't want to be so dependent on one person's platform," he said.
Another problem: A lot of location data is the same but packaged up in different ways.
"They'll all tell you that they have the best data and the biggest footprint but at the end of the day, most of them are drawing their location data from the same couple of SDKs (software developer kits) or the same kind of apps," said iCrossing's Ratner. "It again creates a bit of confusion in the market."
Location companies don't want to be known for location
It's no surprise then that some ad-tech companies don't want to be associated with the word location.
"I don't even like to use the term location anymore because I think it's somewhat antiquated," said David Staas, president of NinthDecimal. "We think of it more as offline behavior - it's not just looking at where you go but also what you buy, what you watch, and offline signals."
CMOs, he said, are struggling to grow their brands and are folding location platforms into marketing stacks to follow foot-traffic trends for longer periods of time than a campaign.
"The CMO is saying, 'I don't want you just measuring a couple things here and there. I want you to measure everything all the time across all of my types of media and let's do this on a two-year basis.' We get into that kind of level, which is much more like an enterprise model from a mar-tech versus an ad-tech perspective," Staas said.
Foursquare is another example. The company's roots are in location data collected from its consumer apps but Foursquare wants to use that data to help brands make broader marketing decisions - like how to slice up a budget between social media, television and billboard ads.
"There's a lot of consultative work that we're doing and we want to do more of," said chief revenue officer Liz Ritzcovan. "Putting advertising and monetization on campaigns is really important but it's an output - customers offline and online are discovering new ways that maybe they didn't know about because of data."
Agencies said those are the kinds of talks that get their attention but it can be tough for companies to provide enough data for them to actually make bigger decisions when it comes to ad budgets.
"This has always been an interesting thing," said Carat's Liu. "What [data companies] aren't getting is more nuance - they're trying to understand more about the consumer that can supplement the data."