Analysis: Is AT&T's potential divestment of Xandr an inevitable outcome?

AT&T made the headlines recently for allegedly considering selling its adtech unit Xandr, two years after launching it. While the discussions are still in the early stages and might not necessarily lead to a sale, this signals a possible departure from its aspiration of becoming one of the leading players in the online ad space, competing with companies such as Alphabet. 

Xandr was launched in 2018, months after AT&T acquired software company AppNexus for US$1.6 billion, and has offices in countries including Singapore, Japan, Australia, India, Germany, Canada, US, UK and Italy, among others.  According to Gartner's Magic Quadrant published in September 2019, Xandr has over 1,400 publisher relationships, including 270 sources of connected TV inventory. The adtech firm's credibility in TV "runs deep", Gartner said, and its platform ranges from household addressable, OTT and connected TV to national and local linear. Its strong audience data foundation can also be attributed to AT&T's base of consumer subscribers.

That said, the research report added that there might be delivery bumps for clients and uncertainty around its product roadmap since it has been operational only since late 2018. There might be integration challenges for Xandr too, according to Gartner, given that it draws on AT&T's people and assets, as well as those from acquisitions such as AppNexus and DirecTV.

"Integration challenges include culture and product, as well as strategy that encompasses advertising, content and distribution across both digital and traditional TV. These challenges may translate to trade-offs in product development and customer service," Gartner added.

Factors which led to the potential divestment

A sign that Xandr might have hit choppy waters was when AT&T folded Xandr under WarnerMedia in April this year, shortly after CEO Brian Lesser departed the business. The telco previously said the merger aims to create a better advertising value proposition for brands, publishers and consumers alike. More recently, AT&T has also been facing headwinds, being pressured to sell DirecTV and anime streaming platform Crunchyroll, according to Bloomberg.

According to an industry player who spoke to Marketing on the condition of anonymity, culture, coverage, technology and neutrality were the four factors which led to the reconsideration of the Xandr business. He explained that AT&T historically is a consumer-centric business and the DNA was largely to build products which drive large scale consumer adoption. Meanwhile, Xandr is an adtech company working closely with B2B entities building for businesses.

"Marrying the two DNAs is difficult unless there is commitment to adapt structures which are poles apart. Using the consumer data prowess AT&T owns to power Xandr’s targeted advertising ability requires clearing hoops of compliance, technology integration and access to right inventory sources. All sizeable challenges on their own, unless top brass of both companies committed to invest for the long term, the solution would never work," the industry player said.

He added that most adtech companies  have ambitions to play on the global stage with assets deployed across continents. Xandr’s technology had footprint which was across geographies, while AT&T was heavily US-centric in terms of its immediate vision for integration. Both visions would have collided, with priorities of building technology and coverage for solutions at opposing ends of focus

On the area of technology, the industry player explained that Xandr was built for the display-centric advertising Internet and was being asked to move into a TV-centric one. This required working with technologies which were built for the linear TV world to ones which work on IP delivered Internet on smart TVs and OTT devices. Plumbing these pipes itself requires huge infrastructure investments and trade-offs which need to be made, he said, adding:

AT&T certainly did not want to fund redeployment of new technology for old school players so that large inventory pool remained distant from access.

"Also, having a supply and demand business sitting under one roof clearly raises eyebrows on inherent biases. While Google and other large players can get away with it, challenger companies come under the scanner much more for those biases. You can to clearly play on one side and choosing that is a difficult one as both have revenue impact immediately. Lack of clarity on positioning surely plagued this joint venture since its inception," the industry player said.

Separately, president and COO of AT&T and CEO of WarnerMedia, John Stankey, also said during the earnings call in April that COVID-19 has impacted the company on the theatrical and TV side, with production studios and the theater shut down and less advertising revenues with the postponement or cancellation of sporting events. The company also expected its pay TV business to be impacted by the economic headwinds.

Bharad Ramesh, former head of digital for PHD US who also has over a decade of experience in Asia's advertising industry, told Marketing that based on these developments, the efforts to divest Xandr should be seen in this light. Xandr's ambition was to transform advertising, specifically TV advertising, with data and targeting, but according to him, the performance so far "has been underwhelming". Ramesh explained that AppNexus, the engine powering Xandr, never had great adoption in the market and could not scale its video inventory. "A key reason being that competitors in content and distribution, such as TV networks, cable operators, which were needed to support the scale play just stayed away," he added.

Also, as it happens with many mergers and integrations, what looks good on paper is pretty hard to execute. Moreover, the key people such as Lesser and former president Rick Welday who drove this deal left, Ramesh said. 

To expect advertising to pay for the creation of Xandr was honestly too far into the future.

"This latest move by AT&T also indicates that it prefers to redeploy investment into its 5G network and powerhouse TV brands, such as its HBO Max direct-to-consumer service," Ramesh said. At the end of the day, content is still king for the telco. 

Likewise, former CEO of Omnicom Media Group Singapore and Malaysia, Ranga Somanathan, said the potential divestment of Xandr was "an inevitable outcome", only that the pandemic accelerated the process. He added that Xandr did not bring to the table any competitive advantage after its forming - other than the weight of the parent. With the sale, there is an opportunity for Xandr to define its focus, both in terms of its technology and geography to build a meaningful practice.

At a first principle level, the Xandr ambition holds water, and outside of the Facebook and Google walled gardens, it had the potential to compete with The Trade Desk, Somanathan explained. With a strong presence in Europe via AppNexus and backing of a powerhouse in AT&T in US and Latin America, it was Xandr's bidding to win. But while The Trade Desk operates as an independent entity with its own focus growth areas, Somanathan argues that Xandr’s ambition would have been subsumed by the priorities of the parent company, initially reporting directly to AT&T and recently via WarnerMedia. "This further would have curtailed the opportunity outside of AT&T’s own supply ecosystem," he explained.

What does this move mean for AT&T and Xandr?

With debts piling up due to the pandemic and focus on improving cash flow, Somanathan said decoupling "non-core" assets might allow breathing space for AT&T. He believes that the best outcome is for Xandr to become a standalone entity, creating a strong alternative to TTD. "Another parent company will only make the journey to the end slower; death by a thousand cuts," he added.

On the other hand, Ramesh said: "Xandr as we know it is dead. It is worth more piecemeal." He explained that the fact that it is up for sale means that advertisers and agencies will be skittish about making commitments. According to him, platforms such as AppNexus need constant updates and investments, but it remains to seen if that will continue in this current set-up.

That said, Xandr might be a good fit for companies that still want to be in the media space but do not have their own stack yet. One such example is Walmart, which is attempting to build up its Walmart Media Group business. The company, which recently threw its hat into the ring to purchase TikTok, has the consumer reach and data, just not the technology to deliver, he explained.

Likewise, should Xandr eventually find a parent company, Serm Teck Choon, CEO and co-founder of AI-driven martech company Antsomi, said the latter's core business needs to be Internet, media and advertising-related. This would allow Xandr to have greater synergy with the parent company and for its technology to be appreciated and further developed.

"Xandr needs to be continually innovative when it comes to adtech product development, whether it is from buy-side or sell-side platforms. However, its lack of founder-type of leader for now may be a hurdle for the company to achieve such a goal. The adtech space is very competitive while the duopoly and Amazon have conquered huge chunks of digital advertising revenue globally," he explained.

Also weighing in on the issue was, Mike Woosley, COO at Lotame and co-founder of Videology, who added that it will be "a tough sell outside of AT&T". 

Without continued access to the telco's data or the WarnerMedia trove, it becomes just another digital advertising agency without command of any proprietary technology.

Woosley said that the industry recognises and acknowledges that the cellular carriers have one of the most valuable troves of data about their subscribers, bested only by perhaps the likes of Apple and Amazon. "Suddenly, the US$1.6 billion that AT&T paid for AppNexus looks to be under substantial distress. The organisation also lost its cult of personality in June, when Lesser left AT&T, passed over for promotion," he said.

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