“Lemons” and Antitrust: Why Facebook and MZ Are AdTech Frenemies — DSP Cognant

(Postscript: July 11, 2018)

Adexchanger reported that MZ has shut down its independent DSP business Cognant and laid off all 125 employees as well as half of its in-house media buyers.

(Published: March 1, 2018)


Facebook has deflected the antitrust case against it by assisting independent demand side platforms (DSPs) like MZ’s (Machine Zone’s) Cognant ® to build strong countervailing platforms.

Facebook is signaling that it does not intend on being “the Microsoft of the 1990s” by throttling competition on the demand side of the ad impression market.

Furthermore,  this cooperation makes sense from a pure business perspective as Facebook is “shifting up the demand curve” of advertisers by working with independent DSPs to improve ROI on ad buys resulting in a willingness to pay higher prices.

Facebook wants to reduce information asymmetry in the ad impression market. It is in its own interest to help make it a market of “peaches” not “lemons” ala George Akerlof’s iconic economics paper “A Market for Lemons”

Indeed, we see the current digital ad impression market as the “mother of all markets for lemons”  accompanied by  a whole new lexicon — clickbait, click farms, fake news,  brand safety, and walled gardens.

The Intermediate Market for Digital Ad Impressions

The intermediate market for digital ad impressions is now dominated by the Google – Facebook duopoly.  In 2017, the duopoly’s total share of ad impression sales was estimated at 60.4% (see below) .

In the fast growing digital native ad subset market, the duopoly’s share rose to 91.9%.

On the extreme demand-side of the digital ad impression market are advertisers wishing to buy ad impressions and on the extreme sell-side are content publishers selling ad impressions.  In between  is a complex web of software intermediaries that would dumbfound (and still does) Madison Avenue.

The data above largely reflects ads embedded in mobile and PC content.  The market for real time ad impressions embedded in ad-supported streaming TV — as opposed to subscription-supported Netflix and Amazon Prime — is just beginning.

The value of the impressions to advertisers is a function of viewer eyeballs, associated data, and engagement as measured by time spent on the site.  Sheer eyeballs without data is of little value to advertisers as exemplified by Twitter.  Facebook and Google Search/YouTube dominate because of all three — eyeballs, data, and engagement.

If you ask people in the tech world what is the business of Facebook and Google, they would not say social networking or internet search or video delivery.  They would say the two dominate the performance marketing business — selling ads with quantifiable (as opposed to estimable ala Nielsen) results as in costs per click or impression.

Between advertisers and publishers is an adtech intermediate market. It consists of supply-side platforms (SSPs) also dominated by Google and Facebook with Amazon being a fast riser in the SSP space.

Next comes ad exchanges where transactions and pricing takes place increasingly via real-time auctions.  Google dominates with DoubleClick AdExchange.  Facebook launched its own FBX in 2011 but let it slowly die over the next three years.

Next comes demand side platforms (DSPs), which is the most competitive segment.  Google has its own internal DSP called DoubleClick Bid Manager which dominates ad buying both on Google’s “walled garden” of search and on its own subsidiary YouTube.

Facebook has an internal DSP called Facebook Ad Manager useful to small and medium business wishing to buy ads within its eponymous “walled garden.” But, Facebook seems to be holding back from customizing its internal DSP to cater to large advertisers with unique needs.

Because of the publicity surrounding Cambridge Analytica, Facebook is under enormous pressure to pull back all the ways its allows third parties to access its user data.  We think it would be “throwing out the baby with the bathwater” if Facebook were to  pullback of all adtech — SSP, AdEx, and DSP — within its “walled garden”.

Rather, it needs all the help it can in filtering out “lemons”.  It is in Facebook’s own interest to foster independent DSP’s with “clean room” access (see below) to data.

The Focus of Antitrust Concerns

The sheer scale of the Google – Facebook duopoly is the current focus of antitrust concerns. But, the extent of the duopoly’s vertical integration —  owning the full vertical stack of businesses from content publishing to a SSP to an ad exchange to a DSP — needs to be analyzed in much greater detail by adtech experts for potential antitrust violations.

Antitrust concerns so far has focused on the supply side with the most recent flare-up being Facebook’s decision to limit third-party news feeds inserted into the social graphs of Facebook users.

This supply-side focus on content is understandable as such developments hurt the job prospects of the very paid  tech and business writers [ not us 😉 ] who write about Google and Facebook.

In contrast, this paper focuses on the demand-side and DSPs.  We think a recent development on the demand-side  deserves more attention. This is because it signals that Facebook is seeking to deflect antitrust concerns by actively assisting in the development of strong, independent DSPs.

Facebook’s Effort to Foster Strong Independent DSPs

In December 2017, Tech Crunch published an article describing how an internal Facebook team of 100 engineers has been working with big advertisers to develop their own customized DSPs.

Right off the bat, this revelation is a clear sign that Facebook today does not intend on repeating the anticompetitive tactics used by Microsoft in the mid 1990s.  Back then, Microsoft used its control over the dominant Windows PC operating system to throttle the ability of users to replace Microsoft’s own default browser with a popular third-party browser developed by Netscape.

Notwithstanding the antitrust motivation for supporting independent DSPs, Facebook’s initiative is good from a pure business perspective.  Facebook realizes that improving ROI on purchased ad impressions via reduced information asymmetry translates into a willingness by advertisers to make higher bids for “peaches” instead of “lemons” ala George Akerlof’s iconic economics paper “The Market for Lemons”.

Indeed, we see the current digital ad impression market as the “mother of all markets for lemons”  including the following list of extreme conditions for markets with information asymmetry between sellers and buyers:

  • zero marginal cost on both sides creating lemons and traps
  • dueling artificial intelligence (AI) on both sides morphing sell-side lemons and buy-side traps
  • real-time auctions
  • low latency rendering and fill of ad after purchase of impression
  • double interrelated information asymmetry (see below)

Facebook recognizes that its supply of ad impressions has reached a ceiling due to user annoyance of ads in their feeds.  With supply now inelastic within Facebook, there are three options open to increasing revenue — quantity times unit price.

  • Get into selling impressions outside its “walled garden” which it has done through a retargeting business.
  • Assert its pricing power as a duopolist and just “shift up the supply curve” (i.e. limit ad impressions) which it in effect has done by limiting outside news feeds.

Facebook Option 2: Shift up the Supply Curve

  • Work to “shift up the demand curve” of advertisers by working with independent DSPs to improve ad buy ROI resulting in a willingness to pay higher prices.

Facebook Option 3: Shift up the Demand Curve

Facebook is signaling that it is giving option 3 a try.

Here is a great quote from an April 2017 adExchanger article on digital ad prices as a reflection of quality and the opportunity for Facebook to receive higher prices — shift up the demand curve  — from advertisers and agencies using more discriminating DSPs.

“We buy it cheaper” used to be the lead differentiator in a pitch. Today, agencies that lead with “We can buy digital cheaper” have a sign taped to their back that says, “We buy lots of fraud.” Low prices in digital media are not only no longer a badge of honor, they’re a warning sign.

Here is a quote from the Tech Crunch article on the ROI improvement coming from DSPs built with the assistance of the Facebook engineering team:

Facebook says that on average, clients working with the solutions engineering team see their return on ad spend improve by 100 percent.

The article mentioned that after working with the Facebook team to improve the performance of its own internal DSP,  the mobile game company MZ (formerly Machine Zone),  has spun off its internal DSP as an independent business called Cognant ®.

It should be noted that even before the spin-off, MZ was already the largest “direct response” advertiser in the world and likely on Facebook itself.

As Facebook’s largest direct response advertiser, MZ was the likely first recipient of access to Facebook user data located in “clean rooms” on Facebook servers.  Here is a February 28, 2017 description by AdExchanger of the linkage:

Google and Facebook are each responding to advertiser demands for more data. Facebook does data-sharing deals on the DL with large marketers that push for it.

In so-called “clean rooms,” for example, advertisers can compare their first-party data with impression-level Facebook campaign delivery data using laptops that have never touched the internet. Facebook also allows certain large advertisers to create a private instance on its server to run advanced analytics.

MZ’ DSP is also likely an early adopter of the Unicorn startup Sprinklr for CRM and Martech:

Sprinklr is the most complete social media management system for the enterprise. We help the world’s largest brands do marketing, advertising, care, sales, research, and commerce on Facebook, Twitter, LinkedIn, and 21 other channels globally – all on one integrated platform.

A tight integration of Sprinklr + MZ’s Cognant, especially around real-time brand management (e.g., seeing the impact of localized Facebook ads for McDonald’s garlic fries on purchases at local outlets in real-time)  would certainly be a threat to an earlier generation of cloud-based CRM,  like salesforce.com and Oracle, that draws on dated information.

MZ’s DSP very likely has benefited from face-to-face meetings with the Facebook team located in Menlo Park not more than a 20 minute drive from the MZ’s headquarters in Palo Alto.  Indeed, MZ’s current HQ in Palo Alto on Page Mill Road across from Stanford was the former HQ of Facebook.

It should be noted that MZ is also located close to Google’s HQ  in Mountain View. It will be interesting to see if Google might offer similar assistance.

We would expect Google to lag behind Facebook as Google’s supply of ad impressions is more elastic.  Google can increase revenue via increasing the supply of impressions especially on its YouTube subsidiary.

Facebook has no room in its “wall-garden” for more ad impressions. It will be interesting to see how much Facebook derives revenue from its retargeting business outside its “walled garden.”  Otherwise, the only way Facebook can increase revenue is by working to improve ROI on the demand side and “shift up the demand curve.”

The question is can MZ’s DSP Cognant and maybe a few other DSPs scale sufficiently and demonstrate enough independence to be called true countervailing powers to the Facebook – Google duopoly?

Or will Cognant become a “front” of  independence “playing nice” with Facebook?  Will Cognant become some fake sign of competition to be trotted out by Facebook lawyers in some antitrust lawsuit down the road?

Such an antitrust lawsuit will inevitably dwell on ad price trends as measured by cost-per-click (CPC).  Consider the following graph showing that Facebook’s CPC  rose 136% in the first six months of 2017.

How much of the above trend was due to Facebook asserting it’s pricing power and how much of that trend was due to other factors?

For example, the upward trend could be due in part to a secular improvement in ad ROI delivered by independent DSPs with help of Facebook supplied application programming interfaces (APIs), thus reducing information asymmetry on the part of buyers.

Of course, it takes more than API hooks for a DSP to deliver significant improvements in ad ROI.  It takes a DSP that can build a sophisticated real-time programmatic bid engine and a real-time predictive analytics platform that feeds off Facebook-supplied user data and spits out bids with improved click-through rates.

Right now, we believe that the only independent DSP that has this capability is MZ ‘s Cognant.

In sum, Facebook has deflected the antitrust case against it by assisting independent demand side platforms (DSPs) like MZ’s (Machine Zone’s) Cognant ® to build strong countervailing platforms.

An Idea For A Millennials Investment Vehicle: A Big Tech HQ2 REIT

There have been a number of recent surveys asking millennials with substantial cash savings — predominantly young professions in tech and creative positions — what kinds of investments are they interested in.  

As if they were disciples of the late great fund manager Peter Lynch, whom they probably never heard of,  they say the are interested in investing in what they use and understand.

Plus, the added benefit of such investments is being able to talk about them to friends who are familiar with the names.  Really, how fun it talking about how great your S&P 500 index fund is doing?

The Peter Lynch approach to investing is wise in some ways, but foolish in other ways as it tends toward undiversified, trendy, high risk investments as opposed to diversified, value-based investments.

At the top of the list of investments of interest to millenials is own home ownership.  Next comes stocks in the big tech companies they use and understand: Apple, Facebook, Apple, Amazon, and Google.  Next comes smaller, consumer-facing tech companies like Tesla, Netflix, and Snapchat.

And within the last two months, cryptocurrencies have captured their interest.

But, with the bust of crypto and the dim prospect of ever saving enough for a down payment on a “starter” home of $1+ Million in tech heavy areas like the San Francisco Bay Area,  there is an opportunity to come up with new investment vehicles  composed of a diversified portfolio of assets that millennials use and understand.

One recent innovation is something called an eREIT  (electronic Real Estate Investment Trust) like Fundrise — a trendy looking online website for investing as little as $1,000 in a professionally managed portfolio of property REITs.  

But there are multiple problems with eREITs.  This includes a double layer of fees charged by the managers of the eREIT on top of the fees charged by  individual REITs.

It also includes evidence that long term rates of returns (ROI) on actively managed real estate REITs are less than ROIs on low fee, passively managed S&P 500 index funds.

As an alternative to eREITs, we would like to propose a new straight-up REIT that both should appeals to millenials and should outperform existing REITs.  Obviously, the increased expected ROI comes with the increase risk as of a concentrated portfolio of properties concentrated in about 8 metropolitan areas.

We call this new millenial investment vehicle an HQ2 REIT.

We identify below 8 metropolitan areas  as most likely to be named a future location of  secondary headquarters — know as HQ2 — of big tech companies.

The includes the already announced intent of Amazon to name one city out of 20 finalists for its HQ2 in 2018 plus Apple’s recent announcement that it has plans for its own smaller HQ2.   

While unannounced,  it is highly likely that Google and Microsoft will also need to plan for an HQ2 in the next 5 years.    Assuming that it is unlikely that the four companies — Amazon, Apple, Google, and Microsoft — will pick the same metropolitan area, this means that 50% of our 8 most likely choices for an HQ2 will actually get an HQ2.

In terms of arriving at this list, we start with Amazon’s recently narrowed down list of 20 metropolitan areas in the running for its HQ2 that is projected to employ ultimately around 50,000 people.    

We next apply a Business Insider assessment of the likelihood (a simple linear ranking 1-20)  of each city being chosen.  We also make an additional division into two group based on median housing prices and proximity to a University with a top 20 Graduate School Computer Science Department in Artificial Intelligence   


Business Insider Ranking of Finalists for Amazon’s HQ2

Median Home Prices in Top Metro Areas — 2015

US News Ranking of Graduate AI Departments

Here is the more extended version of list

Roblox Corporation: A Slow Climb To the Top of the App Store Charts

Two days after Christmas Day 2017,  we checked out App Annie to see which paid and which free-to-play mobile game (f2p) with in-app purchases (IAP) spiked into Top 10 revenue rank.

You see Christmas Day is #1 day of the year for paid mobile game purchases and IAP for f2p games.

This is because pre-teens, teens, heck everyone, receives  app store gift cards from Gramps and Grandma.   Gamers use the gift cards THAT DAY to make game purchases from the app stores.  Not just spur of the moment purchases.  But, “wish list” purchases they had been thinking about for the past several months knowing full well they would be receiving app store gift cards for Christmas.

Our thesis is that game that spikes in revenue rank to the Top 10 on Christmas is the best game of the year.

We have been using App Annie to value mobile game startups since 2013.  Just after Christmas 2014, we noticed that the paid game “Five Nights at Freddy’s” by indie developer Scott Cawthon spiked to #10 on Christmas Day.  

We thought nothing of it at the time.  Later, in April 2015, we published an article on the game called Life Lessons From Five Nights at Freddy’s.  In November 2015, we answered the following question posed  by a mobile game developer on Quora:  What’s the best time to release an iOS game to get maximum downloads?  Our answer on Quora was:

In terms of paid games, the absolute best time to launch is before Christmas day.  This is because many kids receive Apple iTunes gift cards for Christmas and spend Christmas day downloading all the paid games on their “wish list”.

Last Christmas Day December 25, 2014 belonged to Scott Cawthon’s Five Nights at Freddy’s  where the  $2.99 paid game shot up to #10 revenue rank on iOS Apple USA according to App Annie analytics.   

Between 2015 and 2017, we did not look for Christmas favorites on the App Store. We were too focused on exposing the bad guys of mobile gaming rather than the good guys:

Kabam and their “talk the talk” culture that lead to their downfall

Kabam: $800 Million Bid Is Both Lifeline And Death Knell

Kabam: A Mobile Game Unicorn No More?

A Unicorn Startup’s Kiss of Death: Kabam Field

And the Korean company, Netmarble, who bought Kabam’s Vancouver studio and then proceeded to wreck two game communities with Patch 12.0 for Marvel: Contest of Champion and Patch 6.3 for Marvel: Future Fight

Netmarble IPO: Priced for Perfection

Netmarble IPO: How Greed Destroyed Its Kabam Acquisition

Netmarble’s Marvel Future Fight: The Boycott is Now Measurable

But, just when we couldn’t get any more depressed about mobile game companies as we witnessed Netmarble’s destruction of the Marvel:Future Fight community,  we just happened to check out the App Annie charts for Christmas.

Low and behold, who did we discover spiking to #3 on Christmas day and #2 on the next day  but


Note: the spikes in revenue rank coincide with Fridays – Sundays.  Unlike “grinder” or “play or be destroyed” mobile games, you can put Roblox down during the week, then go back to it on the weekend without any loss in game assets.

And, we expanded the App Annie chart to discover that Roblex had been building a stronger and stronger community FOR YEARS.


We are so happy for Roblox.  Spiking to #2 on App Annie charts the day after Christmas 2017 is a sign to us that Roblox is the mobile game and company of the year.

Roblox has integrity.  No crass monetization like Netmarble’s  random number generator (RNG)  lockboxes introduced in their Patch 6.3 of Marvel: Future Fight.   No radical nerfing of Champions like what Kabam and Netmarble did with Patch 12.0 for Marvel: Contest of Champions

We are not going to spend much space talking about Roblox the game or Roblox the company.  You can read it here on their website

You should also check out this YouTube video of CEO and founder David Baszucki giving a tour of their studio in downtown San Mateo, California.  Also check out this YouTube video narrated by Baszucki on the company’s beginning.   Totally warped sense of humor that we like.

Speaking of YouTube,  we wonder if the folks at Roblox know that their studio is located right across the street from the 2005 original office of YouTube.       (BTW, San Mateo is happening for startups) 

Roblox  2017 : 69 E. 3rd Street San Mateo, CA


YouTube 2005: 60 E. 3rd Street, San Mateo CA.


Marvel Future Fight Game: The Boycott is Now Measurable

“The revolution will not be televised” per Gil Scott-Heron, but the boycott is now measurable

Keep up the boycott until Netmarble rolls back Patch 3.6

App Annie revenue rank chart as of December 27th – now down from  #38 on 11-29-17 to #127 on 1-5-18  KEEP IT UP

These are the two responsible for Patch 3.6

CEO of Netmarble Games Corp. Bang Joon-hyuk



GM of Netmarble U.S. Shim Chul-Min

Netmarble’s Game a Bust in the USA – Stock Price Target- 103,000 KRW


Our analysis of Netmarble’s IPO was that it was “priced for perfection”.  While the Lineage 2 game releases has been near perfect in Korea and Japan, its release in the USA has been a bust and the release in China is on hold due to geopolitical tensions.

As a result, we predict that Netmarble’s stock will fall 45% from its November 26, 2017 closing price of 188,500 KRW to around 103,378 KRW once the revenue impacts of the USA and China releases are fully understood by investors.

Netmarble’s IPO Valuation: Priced for Perfection

On May 11, 2017, Netmarble Games had an IPO on the Korea KOSPI stock exchange.

Due to an enthusiastic demand by Korean, International, and Sovereign funds, the company was able to price the IPO at the high end range of 157,000 Korean won (KRW) per share, or approximately $138 USD per share based on an exchange rate of .00088 KRW / USD.

Three days before trading began,  analyst Moon Ji-hyun with the Korean brokerage house of Mirae Asset Daewoo predicted that the company would exceed expectations for YoY revenue and profit doubling.  She gave the stock a price target of 200,000 KRW, or a 27% increase from the IPO price.  

Most other financial analysts and business reporters wrote positively about the company and its IPO.

Within the first hour of trading, individual retail investors pushed the price up to 171,500 KRW. The stock closed the day at 162,000 KRW, making the funds, the underwriters, the company and its CEO Bang Jun-hyuk very happy.

We alone differed.  (Disclosure: we have never held a position in the stock and do not intend to initiate one at anytime.  We have not received any remuneration for our articles on Netmarble.)

Three weeks before the IPO, on April 18, 2017 we analysed the offering and estimated that Netmarble’s post-IPO forward price sales ratio would be 4.3.  This was based on FY17 YoY reported sales forecasts of a revenue doubling — largely driven by its newly released game Lineage 2: Revolution.

We found that Netmarble’s post-IPO valuation exceedingly high by both South Korean and Western standards for mobile game companies.  

For example, we calculated the current price sales ratio of the very successful Korean mobile game company Com2uS at only 2.6.  We also calculated the market-derived current price sales ratio of King Digital at only 3.08 based on what Activision Blizzard paid to acquire King in 2015.

Netmarble’s 2017 Performance

Our assessment in April 2017 was that Netmarble’s IPO was “priced for perfection” based on a forward price sales ratio of 4.3.  We wrote another paper in May 2017 predicting that the stock would fall 33% from the IPO price to around 105,000 KRW once investors realized that Netmarble’s 2017 sales would fall short of expectations.

To Netmarble’s credit, its performance has been near perfect in the Korean and Japanese releases of Lineage 2.  After a couple of months of drifting downward,  the stock has recovered 47.8% from a low of 127,500 on August 11, 2017, largely due to the strong Japanese release.

On November 15, 2017, Netmarble released Lineage 2 in United States. Our assessment is that the release is a bust as games destined to be long-lasting hits in the USA usually crack the Top 10 iOS revenue rank on the App Annie charts within weeks of release.  The game has now sits at revenue rank #30 which we estimate translates to an annualized run rate in the neighborhood of $75 Million.

Below is the App Annie USA iOS revenue rank chart for Lineage 2:

The stock market has yet to factor in Lineage 2’s bust in the USA.

Also, the 2017 scheduled release of the game in China has been delayed due to geopolitical tensions between the two countries.

Below is a summary of Netmarble’s game performance in 2017 to date:

While Netmarble’s 4th quarter revenue figures should be at an all time high due to the successes of Lineage 2 in Korea and Japan, we forecast that Netmarble will miss analysts’ full year sales estimate of $2.3 Billion (2.5 Trillion KRW), or a revenue doubling,  by 14.8%.

We do not believe that the revenue impacts of the failed USA release and delayed China release are fully understood by investors.  The realization that Netmarble will fail to meet full FY17 revenue doubling forecasts should cause a compression in Netmarble’s IPO valuation multiple of 4.3 times sales.   

Assuming a more realistic multiple of 3.5, we predict that Netmarble’s stock will fall 45% from its November 26, 2017 closing price of 188,500 KRW to around 103,378 KRW within the next three months.