Impact of Invalid Traffic on Vendor Profitability

Invalid traffic (ad fraud) have not been discussed in the context of vendor profitability before. To do this, we have created a Net Present Value (NPV) framework that allows straightforward modeling of economic impact from Invalid Traffic filtering with outputs such as EBITDA and Present Value provided for 8 years ahead.

We’ve been able to prove using actual financial data from 7 major DSPs, that not only Invalid Traffic filtering has a significant impact on profitability, but can dramatically increase the valuation of the company, while making it more attractive for potential acquirers (or investors).

The basic premise is very simple. If 20% of all traffic is waste, and a trading platform (DSP) has less than 80% demand vs. all available supply, in theory the DSP could filter out 20% without losing any revenue. Instead a DSP taking such action creates the causes for three different kinds of benefits; direct financial gains, indirect financial gains, and other gains.

Direct Financial Gain

– Reduce IT overhead cost

Indirect Financial Gain

– Increase buyer trust
– Avoid penalties (from passing through invalid traffic)
– Avoid lawsuits later (for negligence)

Other Gains

– Have cleaner data for better optimization signals
– In case of being throttled, have more bandwidth for legit bids
– Data warehouse related energy savings

Acme DSP

To make the point clear without highlighting any individual company’s situation, we’ve created Acme DSP as an example company for analysis using the data from 7 DSPs and aggregating it in to one using a simple average.

For the purpose of the example (Acme DSP) we’ve assumed the following:

– There is a significant over supply of inventory available for ACME’s buyers
– In case filtering would result in over-demand, ACME could increase supply
– Roughly 35% of revenue goes to covering traffic related costs
– A daily incoming (from exchanges) bid volume of 50 billion (bids per day)
– For IT cost related to operating Nameless we’ve used average of 3 providers

 

In the actual calculator, which we will later make available through Nameles.org, these settings with many other inputs can be easily changed to accurately reflect the situation of any company.

The results are awe inspiring. In short summary, many currently struggling DSP companies could make their business profitable simply by using Nameles to filter otherwise hard to detect Invalid Traffic. 

As Acme DSP is not struggling, in the 8-year forecast below, we can evidence breaking even 1 year earlier and almost 50% increase in EBIT on the 8th year.

 

We decided to use NPV as the basis for our forecasting as it is widely used and accepted as a “gold standard” for valuation forecasting in corporate finance, investment banking, and other financially savvy practices. Based on the increase in EBIT, we can witness a dramatic change in the valuation of the company with at least single-digit multiple from the first year onwards and a 9x multiple increase by year 8.

Let’s just leave it at that.