Adtechs Can Optimise Profitability by Leveraging Currencies
The Coronavirus pandemic is creating widespread disruption across the media industry. While Facebook’s and Google’s ad business shows signs of relative stability, the economic volatility created by the pandemic is deflating advertising spending across the world and hurting the prospects of smaller players in the industry. Agencies, Ad exchanges, Demand-Side Platforms (DSPs), Supply-Side Platforms (SSPs) and other participants are scrambling to adjust to a scenario where short-term cash flow issues take centre stage.
While liquidity management remains the key concern, foreign exchange (FX) volatility is a matter that requires urgent attention. As discussed in a recent webinar organised by Kantox, the Covid-19 crisis provides a good opportunity to raise awareness about the role played by currencies in the industry. Currencies can and should be seen as a source of competitive advantage—not as something to be feared or wished away. Properly managed, they can help the modern AdTech company to increase profit margins and become more competitive, while keeping currency risk at bay.
Currencies as a source of competitive advantage
In an industry as dynamic as AdTech, every source of competitive advantage should be a priority concern for business managers. Here’s where currencies can play a key role. AdTech firms that use local currencies when buying or selling inventory can enhance their clients’ ROI by circumventing markups charged by other interconnected platform operators who seek to protect themselves from FX risk when forced to deal in a foreign currency. For instance, demand-side players who force an SSP to price their inventory in a foreign currency will potentially buy at inflated prices.
Avoiding these markups allows participants in the AdTech space to increase selling prices and margins or, alternatively, to gain competitiveness and expand sales in promising new markets. In the low profit margin world of middle-chain operators, this can be a decisive factor. Besides, dealing in multiple currencies creates additional benefits by enhancing clients’ visibility in terms of their expected revenues or payouts, and in terms of the performance of their targeting or monetisation strategies – a point that is of particular relevance to AdTech companies.
How to handle currency risk
While a number of industry participants are waking up to the advantages of currencies, not everyone seems to have a clear grasp of the underlying FX risk. The recent volatility in currency rates serves as a stark reminder of the impact that currency gyrations can have on profit margins. Take the case of a Europe-based SSP that sells ad impressions in USD to a US-based ad exchange. Given the time lapse between the moment the sale is concluded and the moment it is settled, a sharp dollar depreciation would quickly wreak havoc on margins and render any ‘markup’ irrelevant as a risk management tool.
Regardless of their position in the digital advertising value chain, AdTech companies willing to take full ownership of their own currency risk need to draw a detailed risk map. This will show how economic risk arises from the moment the ad space is bought/sold and continues right until the transaction is finally settled. By using forward contracts, currency risk can be virtually eliminated. Depending on their goals, some participants may instead choose to hedge from the moment the invoice is issued (in order to minimize FX gains and losses on their P/L).
Currency hedging can provide more benefits still. Since many auctions take place in USD, hedging the corresponding exposure allows DSPs to capture additional margin whenever forward points —the difference between forward and spot currency rates— are in their favour. For SSPs who sell in USD and buy in currencies that trade at a forward discount to the dollar, the recent fall in USD short-term interest rates (to 0.25%) also creates an opportunity to profit from forward points. All in all, forward points are still a largely untapped source of revenue for many AdTech players.
In light of these advantages, it seems odd that currencies are still feared by many participants. This fear is largely motivated by the perception that FX risk management is an impossibly daunting task. Thankfully, this is not the case. Thanks to FX automation —which can be scaled up to any number of transactions and currencies— firms in the AdTech space can take full ownership of currency risk and use FX to their advantage by becoming more competitive and/or increasing profit margins.
This article was co-authored by Alexia Danan, Kantox FX Solutions Director and company AdTech expert.