May 7 (Bloomberg) -- Demand for Web commercials played alongside video clips is fueling growth at marketing startups, putting such companies as Tremor Video Inc., YuMe Inc. and Adap.tv Inc. on course for initial public offerings this year.
All three have picked bankers or are in discussions to sell shares to the public, according to people familiar with their plans, who asked not to be identified because the information hasn’t been publicly disclosed.
The proliferation of fast connections, whether wireless for smartphones and tablets, or Web access in homes and offices, has enabled blogs and media companies to feature more video on their sites. Amid a boom in online commercials, the video-ad market is projected to more than double to $9.06 billion in 2017 from $4.14 billion this year, according to researcher EMarketer Inc.
“All of a sudden, a regular cellphone subscription and cellphone network can really start to handle video,” Daniel Salmon, a media and Internet analyst at BMO Capital Markets in New York, said in an interview. As online-ad brokers improve their technology, the “buying opportunity for video ads is starting to come to fruition,” he said.
Tremor Video, based in New York, tapped Credit Suisse Group AG to lead its IPO, according to two people with knowledge of the deal. YuMe, based in Redwood City, California, picked Citigroup Inc. and Deutsche Bank AG, another person said, while Bloomberg reported in February that San Mateo, California-based Adap.tv is in discussion with bankers for a potential IPO. The Wall Street Journal previously reported on YuMe’s IPO plans.
Sally O’Dowd, a spokeswoman for Tremor Video, Scott Lahde, a spokesman for YuMe, and Adap.tv Chief Executive Officer Amir Ashkenazi declined to comment. Jack Grone, a spokesman for Credit Suisse, Robert Julavits, a spokesman for Citigroup, and Mayura Hooper, a spokeswoman for Deutsche Bank, all declined to comment.
The offerings are poised to bolster returns for venture investors, who have poured more than $230 million combined into the three companies over the past seven years, wagering that Web-video promotions will become as popular as online text and banner ads.
Video will account for 15 percent of all U.S. digital-ad revenue in 2017, up from 9.7 percent this year, EMarketer estimates. Online publishers like AOL Inc.’s Huffington Post, TMZ.com, MSNBC.com and music site Vevo.com use networks to populate their videos with commercials.
Appealing to public investors won’t be easy. Few online-marketing companies have held IPOs in recent years, mainly because Google Inc. is so dominant, controlling about half of the global digital-ad business. Millennial Media Inc., which sells promotions on smartphones, sold shares to the public in March 2012 and has since lost 47 percent of its value. The stock trades at 1.8 times revenue, compared with a price-to-sales ratio of 5.2 for Mountain View, California-based Google.
Tremor and its peers also compete against Google, which lets content owners sell ads within YouTube clips and operates a network that lets sites embed promotions in videos. And there are other rivals including BrightRoll Inc., Videology Inc. and SpotXchange Inc.
While YouTube has a big business selling ads on user-generated content, smaller companies are doing better at serving commercials in higher-quality programs, according to Ari Paparo, an online-ad industry veteran and former Google product director.
“This market is one where Google has not had a very strong presence,” said Paparo, who is currently senior vice president at e-commerce software company Bazaarvoice Inc. in New York. “This is very much on their radar and they’re looking to aggressively go into the market.”
According to a report last month from ComScore Inc., Google served the most video ads in the month of March in the U.S., followed by BrightRoll and Adap.tv. Tremor is seventh, while YuMe is not among the top 10, according to the report.
Much of the growth is coming from local advertisers like restaurants and retailers that want to target nearby consumers, sometimes by zip code, said Rick Ducey, an analyst at BIA/Kelsey in Chantilly, Virginia. The local online-video market will more than triple to $5 billion by 2017, from $1.6 billion this year, compared with 14 percent growth in the local television ad market, according to Ducey. A big benefit of online ads is they can adjust to real-time conditions, he said.
“If the Midwest is getting hit with 15 inches of snow and you’re running spots there, you may want to recast them around snow shovels and salt for the driveway,” Ducey said.
Some leading providers of video ads may be acquisition fodder. Yahoo! Inc., which failed in its attempt to buy a stake in French video site Dailymotion, may look at Adap.tv or BrightRoll, according to Brian Wieser, an analyst at Pivotal Research Group.
Sara Gorman, a spokeswoman for Sunnyvale, California-based Yahoo, declined to comment on possible acquisitions.
David Steinberg, chief executive of New York-based XL Marketing Corp., predicts there will be even more consolidation within the market.
“If you’re a display network and you plug into hundreds of thousands of sites, why not offer a video product,” Steinberg said. “You’ve got to assume that after these guys get public, a lot of the display networks are going to start buying them.”
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