Newly trading Rocket Fuel (NASDAQ:FUEL) is making waves in the advertising industry. The innovative technology company developed an automated platform that enables its customers to utilize vast amounts of data and programmatic ad buying to decrease their marketing efforts while increasing their bottom line. Investors flocked to buy the new tech firm; after its second day of trading, it closed 93% above its listed IPO price. But, even with the great news, two factors could hold the company back from soaring.
Big players are making moves
Since taking the helm in July of 2012, Marissa Mayer, CEO of Yahoo! (NASDAQ:YHOO), has been making waves. The company's stock appreciation is evidence that investors think she's leading the company in the right direction.
Her strategy is simple: Focus on people, products, traffic, and revenue. This value chain makes sense. Great people (employees) build the products that attract the users who generate revenue for Yahoo!. Her platform is producing results. Earlier this month, Mayer announced that web traffic is up 20% since her appointment.
And even with second-quarter revenue growth of 46% compared to the prior year’s quarter, she's turning more aggressively to address its declining online advertising revenue, a primary money maker for the firm. For example, Yahoo!'s display ads decreased 12% in the second quarter, compared to 2012, while revenue from search dropped 9%. Mayer hopes that her acquisitions of heavily-trafficked Tumblr and Flickr will help reverse the trend. But just in case, Yahoo! is looking to partner with other firms to stay abreast in online advertising.
AOL, Microsoft, and Yahoo! are all in agreement about the future of online advertising. Like Rocket Fuel, these firms believe that ads should be bought and sold via automated processes. So, the three tech giants are working toward an agreement to develop an unique application programming interface (API) that will automate the online advertising purchasing system, thereby decreasing human labor costs.
So, while Rocket Fuel is the major first mover in this area, it will likely be facing major competitors soon.
Cookies are the meat and potatoes of online advertising
Cookies are data sent from a website that’s stored on people's Internet browser while the users search the web. Each time users load a website, the web browser sends the cookie back to the server from which it was originally sent. The catch: The cookie contains data revealing the web users' activity.
Rocket Fuel and its third-party partners "receive and record information using cookies and similar technologies." But, as evidenced in the culinary world, bakers won't make cookies if patrons like pastries.
Rocket Fuel's greatest nightmare
Online advertisers look to tech giant Google (NASDAQ:GOOGL) for how to adjust to industry shifts. This makes sense given that Google boasts around 67% of U.S. search engine market share. If Google changes its playbook, advertisers need to respond or they will miss the opportunity to be exposed to two-thirds of the market. Like advertisers, Rocket Fuel should be on alert, too.
As stated by various media sources, Google is considering replacing the existing cookie structure with a new technology. The "anonymous identifier," as the new term has been coined, is expected to be an easier way for users to determine how much they want to be tracked by third party cookies. Because Google holds about 33% of the global online advertisement revenue, we can be sure that its move in this arena will be to secure, and even grow, that percentage.
Regarding the new technology, Google's spokesperson Rob Shilkin said:
"Technological enhancements can improve users' security while ensuring the Web remains economically viable. We and others have a number of concepts in this area, but they're all at very early stages."
Interestingly, Microsoft's Internet Explorer already has capabilities that limits users' tracking by cookies, thereby limiting the information marketing companies can learn from users' search practices.
So, what does all this mean for Rocket Fuel?
Undoubtedly, Rocket Fuel is generating investor buzz. But, if it doesn't adapt its cookie system to shifting industry demands, its IPO success story will quickly become a bad memory of the past. And in the meantime, it is up against entrenched players who are positioning themselves as partners in the online advertising industry.
Brendan Marasco has no position in any stocks mentioned. The Motley Fool recommends Google and Yahoo!. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.