What the Market Missed About Mobile

It’s not news that more and more people are accessing the Web from their mobile devices. Hardware players are winning big with the newest devices, the app market is flourishing with incredible innovation and success stories, and of course, marketers are salivating at the enormous opportunity these markets create.

To set the context on just how big the mobile market is, according to IDC’s Worldwide Quarterly Mobile Phone Tracker, in 2012 we saw 44.1% more smartphones shipped globally than we did in 2011. What’s more, according to Flurry Analytics, the average American consumer spends 2 hours and 38 minutes of their day “glued” (Flurry’s words) to their smartphones, tablets and the applications therein. Of the 1 billion devices that Flurry tracks, they found that the average U.S. consumer spends 80% of their time within apps, while 20% is spent on the mobile web. However gaming apps takes a rather impressive 32% slice of the app pie.



All of this incredible growth of both devices in use and time spent on the devices means one thing for the advertising industry: there is a huge opportunity for mobile advertisers and the mobile platforms that move quickly – and intelligently – to support them.  Yet, with all the wide-eyed enthusiasm and early innovation, there’s also tremendous confusion about the mobile advertising opportunity in relation to the confidence analysts have in the overall Web advertising market (which is expected to reach $100 billion this year). The one company that knows this mix of excitement and fear all too well is Facebook.

Facebook’s IPO performance last summer epitomized this mobile monetization anxiety. After a bumpy market entrance where analysts lowered projections citing the faster than anticipated traffic shift to mobile, Facebook shares dropped slightly to $38 per share (vs. the $40-42 per share in private trading pre-IPO), which many felt was too high. Eventually the price settled at the $18-20 range after the market realized that Facebook hadn’t yet figured out how to deal with the shift of time spent to the mobile world. So, instead of the roughly $90 billion valuation that investors had been hoping for, Facebook’s valuation plummeted and media labeled the IPO a failure (basically a $40 billion black eye) thanks largely to the uncertainty of mobile monetization.

Here’s what analysts got wrong and why it matters: they overlooked several important aspects of mobile that make it a fundamentally compelling monetization medium, potentially surpassing the monetization capabilities of the desktop Web.

Like all new media, it takes time for entrepreneurs (and perhaps a few incumbents) to identify the winning elements of a new medium and to develop monetization models that take advantage of them. Case and point: the early days of television. Radio had been around for decades and so the first TV ads were basically filmed radio ads. Years later, advertising executives figured out more compelling formats for the new medium. The same applies for mobile. To date, we’ve largely ported desktop Web ads to the smartphone but I’m certain that very soon we’ll figure out the formats, targeting methods and performance metrics that are native to the mobile platform. One this is solved, the marketing dollars will start to follow.

What the analysts missed about mobile

I strongly suspect that the monetization rates and the winning players in mobile marketing will soon surprise the hand-wringing analysts who have been hesitant to get excited about the mobile ad market. Here’s why: in essence, the smartphone is a Swiss Army Knife for the digital world. Book a table for Saturday night on OpenTable. Check email. Make a bank account deposit. Check the weather. Find your next meeting location on Google Maps. Even for entertainment activities – largely social newsfeeds, games and video – it’s usually a “quick fix” during a few minutes of downtime.

Another important attribute of the smartphone ad opportunity is that users are not stuck with the pre-packaged tools. Rather, they have the freedom to download whatever apps they choose. Given the ease of the iTunes App Store, users experience little friction when purchasing and downloading new apps since their credit card is on file. This is a huge difference from the desktop Web where more barriers exist. This matters because it shows that smartphone users are willing to pay for useful or entertaining apps, and are doing so enthusiastically. According to Bloomberg and App Annie, from June to December in 2012, iPhone users spent $333 million per month on apps and in-store virtual goods. As a result, apps with high user-pay monetization have seen the largest returns in early mobile advertising, even within the currently crude smartphone ad environments.

The Birth of Ambient Context

With the possible exception of our wallets, nothing is with us more during the day than our smartphone. Unlike our wallets, it has the intelligence to understand where we are. This new combination of app data, time and geo-location context – which we call “ambient” context – has the potential to dramatically improve relevance for monetization services in several meaningful ways.

I’d bet Proctor & Gamble or Coco-Cola would be interested in spending premium CPMs to send me a notification or an offer while I’m in the grocery store – particularly if they knew from my virtual Safeway Card on my phone whether or not I was a loyal customer of their brands (or their competitors’). I also bet my fourth favorite take-out restaurant would be interested in moving up to number one by pushing me a notification for a deal on my drive home from work. Both of these are examples of incredibly premium smartphone ad “placements” that leverage the potential of ambient context.

Who will win the mobile ad game first?

As for the possibility of a Web incumbent becoming a dominant player in the mobile monetization space, my money is on (surprise) Facebook.  Facebook will continue to prove those analyst naysayers wrong. They’ve created the first truly native mobile format with Sponsored Stories and coupled it with a marketplace of advertisers.  You can see the potential of this model with the first few quarters of performance in addition to their installed based that have incorporated Facebook Connect to streamline sign-on identity management. With Facebook Connect, the social networking giant has effectively built a proprietary cross-app tracking platform that would enable their monetization platform to understand user behavior across most of the popular apps on phones today, solving the biggest problem in the smartphone medium.

The Facebook stock has returned to the $27 range, and the company is just beginning to exercise their mobile monetization muscles. Mark Zuckerberg is now describing the social networking company as a “mobile company” and announced that its mobile ad business brought in almost $300 million in revenue in Q4 2012 alone, accounting for 23% of total ad revenue. According to Flurry Analytics, of the 80% time spent in apps, a good 18% of that time is spent on Facebook.

However, there is still plenty of room for winners from the more nimble start-up space. With the mobile advertisement market expected to reach $11.4 billion this year, there is most definitely room for innovation, and the players who do it right will make it big. Very big.