Why would The Trade Desk secretly build a TV operating system?

Last week, Janko Roettgers dropped a massive scoop on the LowPass newsletter that The Trade Desk is secretly developing an operating system for smart TVs.

While the revelation is yet to be confirmed by a traditional media outlet, I thought it would be an interesting thought exercise to dig into the possibility of The Trade Desk undertaking this endeavor.

This effort would put The Trade Desk in direct competition with smart TV platform operators like Roku, Amazon, Google, and Apple, as well as TV manufacturers that own operating systems like Samsung (Tizen), LG (WebOS), Vizio (SmartCast), and many more.

From the LowPass newsletter:

The Trade Desk allegedly went to great lengths to source talent and keep this project a secret — more thoughts on that detail later. Roettgers continues:

So there you have it — The Trade Desk might be working on a new operating system for smart TVs, according to "five sources with knowledge of the company's plans." But why would TTD want to enter this crowded and highly competitive space?

Why is The Trade Desk building a CTV operating system?

The Trade Desk would want to develop a smart TV operating system for various reasons. Most of these motivations stem from fear of current operating system owners exerting too much control and implementing strategies counter to TTD's goals.

Let's take a look at all the reasons why The Trade Desk may want to develop a connected TV operating system:

Diminishing market power

Apple popularized the concept of taking a cut of revenue from paid apps distributed through its app store or digital goods sold in those apps. However, free CTV apps typically earn much of their revenue through advertising, so CTV platforms require publishers to fork over a % of their ad inventory for the platform to monetize.

From Roku developer documentation:

It's a crappy deal, but publishers have to do it to get their app in front of the 6.4% of users streaming on Roku. The publisher gets its app in front of millions of Roku users for the "small" price of 30% of all ad inventory.

As you can imagine, slicing off 30% of every app's inventory adds up to a sizeable portion of CTV supply. With this strategy, Roku and other platform operators control a massive chunk of all CTV avails.

The Trade Desk inadvertently helps these platform operators grow in size and power by assisting advertisers to place ads on the carved-out inventory shares. The more ad revenue CTV platforms bring in, the more powerful they become.

As platforms grow in size and influence, they gain more power to exert their will on publishers and the advertising ecosystem. The Trade Desk and its advertisers must work under the constraints imposed by these platforms, and they have little leverage to push back.

If TTD developed a platform/operating system, it could make the rules and ensure that no OS-level changes hinder advertising performance.

We have seen abrupt operating system changes hurt advertising prospects on both Web and mobile, so The Trade Desk may be determined not to let this happen on CTV — especially when it represents a "high-40's percentage share" of TTD's business, according to their CFO.

So what are the strategies of current operating system owners The Trade Desk may want to counter or circumvent?

Maintaining Identity

The Trade Desk developed Unified ID 2.0 to combat the looming threat of losing traditional identifiers like cookies and device IDs.

While Google's recent announcement indicates cookies may not be going entirely extinct, their availability will decline and make web advertising more difficult.

Apple wrecked advertising on iOS after introducing an opt-out mechanism to withhold a user's IDFA. Google may soon do the same and destroy device IDs on Android — all critical for targeting and measurement.

These are examples of large platform operators making sweeping changes to identity that can materially hurt The Trade Desk's ability to target and measure ads.

If they owned a TV operating system, The Trade Desk could systematically weave UID2 into the fabric of its OS and ensure that device IDs are never deprecated. TTD could guarantee perennial identity availability for advertising use cases.

TTD could also require publishers on the new OS to integrate its OpenPass single-sign-on solution as a login option to help OpenPass gain traction on CTV. If a publisher integrated OpenPass, they would also seamlessly gain access to UID2s to help with programmatic monetization.

ACR Data

The Trade Desk recently inked deals with Roku and Nexxen to license their automatic content recognition (ACR) data. While the deals' terms are unclear, advertisers are most likely on the hook with an additional CPM if they layer on this third-party data.

If The Trade Desk directly integrated software into an OEM's (Original Equipment Manufacturer) hardware, it could start building its own treasure trove of ACR data to make available for its advertisers in The Trade Desk DSP.

This ACR strategy is not dissimilar from a theory I put forward when unpacking Walmart's reasons for acquiring Vizio: Walmart may want proprietary Vizio ACR data for its own DSP (powered by The Trade Desk).

TTD can offer this theoretical ACR data gleaned from its operating system for free as a value-add to gain more DSP market share or at a competitive rate to open up a new ACR data licensing business line.

Shortening the supply path

The Trade Desk has been fighting an ongoing crusade to shorten the path between its DSP and supply sources. Owning a CTV operating system could allow TTD to create the most direct path to CTV supply possible.

TTD could require a header-style integration that gives them a first crack at publisher inventory. TTD wouldn't have to worry about requests routed through multiple systems that can manipulate price and metadata before landing on their DSP.

The Trade Desk implements the same strategy with OpenPath. While launching OpenPath on the Web for a publisher is as straightforward as integrating a TTD Prebid adapter, it's more complex to implement on CTV.

The Trade Desk may introduce a more seamless way to integrate OpenPath into a CTV publisher's ad stack while bypassing an SSP to help save on potential intermediary fees.

Being closer to the supply source would also create advantages over bidding on OEM inventory today. Publishers often add hops between themselves and the demand source (DSP) to satisfy a required inventory split as part of a distribution deal. A transaction could have to flow through the following steps before reaching TTD:

1. CTV App

2. Publisher's ad server

3. Publisher's SSP

4. OEM ad server

5. OEM SSP

6. Resseller's SSP

7. DSP (TTD)

Contrast this with the potential ideal scenario for TTD on its OS:

1. CTV App on TTD OS

2. Publisher's ad server

3. DSP (TTD)

Not only does a shorter supply path eliminate the possibility of funny business occurring on price + metadata and eliminate intermediary fees, but it also dramatically decreases latency, which is becoming more crucial as the monetization of live events programmatically continues to grow and requires minimal bid response times.

Playing both sides

After watching platforms siphon off vast percentages of publisher inventory for years, The Trade Desk may think, "I want a piece of that."

TTD could require an inventory share requirement similar to the other CTV platforms. However, they may initially lower the % to entice publishers to make their apps available at launch.

Gaining access to an exclusive premium CTV supply pool will allow TTD to earn revenue on both the supply and demand side.

TTD may also want to reduce the market share of other platform operators since its DSP may not see a good chunk of the ~30% share platforms take from publishers.

Roku, Google, and Amazon operate advertising buying platforms in addition to CTV operating systems — so they could prefer their DSPs as the primary demand source to monetize their share of inventory earned from publisher distribution deals — potentially shutting out TTD.

If The Trade Desk managed to gain market share away from the other CTV operating systems, there would be less inventory that The Trade Desk wouldn't have access to monetize.

But can The Trade Desk gain market share?

Can The Trade Desk gain smart TV OS market share?

Building a new smart TV operating system from scratch and reaching a critical mass of an install base is a highly daunting prospect. Take a look at the current market shares of CTV operating systems:

This chart illustrates the extremely crowded landscape of smart TV operating systems, consisting of some very deep-pocketed companies.

Tizen, VIDDA, WebOS, and SmartCast also have the highly advantageous position of being owned by the companies that manufacture TV panels — so that market share is virtually untouchable as there is minimal strategic sense for OEMs to switch from their operating systems to a TTD operating system.

Wedging their way into that pie with a new device is unlikely. Developing a streaming box or building TVs would be an extreme departure from their competency (software) and capital intensive.

The path of least resistance for TTD is to be the operating system for all TV manufacturers that don't own and operate an in-house OS. While this would only gain a small market share, they could cobble together enough usage to at least matter with this strategy.

TTD is almost certainly eyeing TV brands without their own OS, like TCL, Panasonic, Toshiba, Sharp, or Insignia, which currently license operating systems from Roku, Amazon, and Google. As the initial scoop suggested, TTD could woo these brands with favorable terms and more freedom to customize the operating system.

But how could The Trade Desk win over consumers accustomed to operating systems built by Amazon, Roku, and Google? Maybe TTD plans to gain market share by heavily subsidizing the costs of TVs — offsetting those upfront costs with advertising revenue — which is not a revolutionary concept.

There's a reason why TV prices stay somewhat reasonable while the costs of all other goods continue to climb. Manufacturers can continue to earn revenue from advertising and licensing ACR data over the device's lifetime if they control the operating system.

The Trade Desk could take this strategy further to gain market share quickly by working with manufacturers to mark down purchase costs for consumers but making up the difference with ad revenue later. Telly has already taken this approach to the extreme by offering TVs for free by pumping out ads via a secondary screen nested below the main panel.

As for the last remaining question: Why did they keep this whole thing a secret?First, it could have been to keep Roku, Amazon, and Google from embedding themselves deeper into their partners' hardware.

With TTD as a looming threat, Google, Amazon, and Roku would be incentivized to offer more lucrative terms to OEMs with longer exclusive commitment periods to stave off a potential land grab by The Trade Desk.

Second, TTD still must work with these frenemies in varying capacities — so they wouldn't want to reveal any potential competitive conflicts when dealing with them.

Now, whenever The Trade Desk works or talks with a company operating a TV operating system, both sides will have this newfound competitive threat in their minds.