Quickly Unpacking ATT’s Acquisition Of AppNexus

What does a massive telco do to follow up an $85B acquisition of Time Warner? Spend about $1.6-$2.0B on AppNexus, of course. In an age where $7.5B exits like that of GitHub to Microsoft make the big waves, acquisitions like that of AT&T buying AppNexus can feel, relatively speaking, small — but that would be a mistake to perceive it that way.

Founded about a decade ago, NYC-based AppNexus went on to raise well over $300M in private capital. Some of the most recent investments in the company were likely done at a price which is not that far off the final price tag. We don’t know if the most recent investors placed any preferential stacking, but this particular exit is revealing for a number of random reasons:

1/ Mobile Disruption All The Way To The Application Layer – Back in 2010, then TechCrunch contributor Steve Cheney wrote this great post on how video calls and application messaging would render the carriers as dumb pipes. As usual, Cheney’s notes were quite prescient — fast-forward to today and aside from broadband and mobile monthly subscriptions, users are treating them like they’re treating Comcast — as pipes to bring them the content they want. AT&T purchased Time Warner to get more content in the hands of mobile users and to leverage that data for other initiatives. AppNexus makes sense in the aftermath of the TW acquisition as to way to monetize content inventory at scale.

2/ Mega Media Industry Consolidation – Major telecommunications providers are using their cash balances to scoop up more content, whether it’s Verizon (Yahoo, AOL), Comcast (Fox?), or now AT&T. Does this pressure to consolidate move all the way up the chain to HBO or even services like Spotify or Netflix? It’s not a sexy category overall for venture, but against a potential backdrop of massive industrial pressure to consolidate here, perhaps having the next AppNexus in your back-pocket isn’t a bad idea.

3/ Cord-Cutting, Streaming, and Closing A New Loop – In an age of IGTV, future generations aren’t interested in cable and satellite bundles for $200/month that bind them to regularly-scheduled programming; instead, they’re buying Internet service and opting to stream content from services like Spotify and Netflix, among others. AT&T’s logic is that these new generations are mobile-first, so if they buy an AT&T network phone, that is potentially extensible at home into a new service relationship around live and premium television content. Buying a sell-side ad-exchange llike AppNexus helps AT&T close the loop from its network, its content (live, scheduled, and library), and its end-user by putting the right ads (informed by user data) in the right places (including outside the U.S.) at the right time across both broadband and mobile networks.

4/ 2008 Feels Like 3 Decades Ago – This isn’t fair to AppNexus at all, because a $1.6B+ exit is huge stuff, but it is a long time ago, and the way news cycles move today, feels eons ago; additionally, in the wake of $7.5B mega-exits, AppNexus can feel much smaller than it really is. No matter, the company found a way to find a new home, and that is no easy feat. To me, it’s yet another reminder of how long this game takes to play out and how much patience is really required by all participants.

5/ Sobering Reminder on VC Model Mathematics – I feel silly writing this, because again $1.6B+ for an exit is huge! But let’s assume the seed fund here generously owns 7% at exit, and the Series A lead firm owns 16% at exit. On a $2B purchase price tag, the seed fund returns $140M while the Series A fund returns $320M. The catch, of course, is that many of today’s seed funds have grown to around or above $100M in fund size, which wouldn’t really move the needle on their newer funds; and the math is even more severe for Series A firms, as $320M is a great number but often not enough to return a big VC fund. A seed VC once taught me that every investment in his firm has a “RTF Magic Number,” whereby each deal would be assigned a target exit value at which the fund would be made “whole” in that sale — the idea is that you want every potential $B+ outcome to return the fund. Much easier written than done.