We are in the post-PC era, and soon billions of consumers will be carrying around Internet-connected mobile devices for up to 16 hours a day.
Mobile audiences have exploded as a result.
According to the U.K.’s Association of Online Publishers, mobile accounts for at least 20 percent of traffic for 87 percent of publishers.
It follows then that mobile advertising should be a bonanza, similar to online advertising a decade ago. However, it has been a bit slow off the ground, and its growth trajectory is not clear cut.
That said, U.S. mobile ad revenue was $1.2 billion last year, according to the IAB, and is on track to hit $3.2 billion this year.
In this report, we attempt to demystify the mobile ad industry’s many moving parts.
Here’s what we learned:
- The mobile ad ecosystem is fractured and more complex than its desktop counterpart.
- Mobile ad networks occupy a central position in the ecosystem, but are coming under threat.
- Demand side platforms and mobile ad exchanges are streamlining the market.
- Real-time bidding will play a growing role.
- Agencies are coming around on mobile, but major brands still haven’t fully caught on.
- New companies are emerging that hope to upend the traditional banner ad.
The Mobile Ad Ecosystem
The mobile ad ecosystem is not as strictly delineated as the desktop ecosystem.
«The cake is smaller on mobile,» says Krishna Subramanian, chief marketing officer of mobile advertising and marketing firm Velti. «[Companies] will try to do multiple things to see what gains traction.»
Another factor adding to complexity is the multiple industry layers advertisers must sift through.
In mobile advertising, the rules of the road change with different combinations of device, wireless operator, and operating system. There are few shared protocols and standards, so mobile lacks the technical consensus that enables ad targeting, delivery, and measurement to work fairly seamlessly across the desktop world.
As the mobile ad industry matures it will likely become more streamlined and simple, but for now there are innumerable actors interacting with one another and attempting to find a niche.
Google does utterly dominate the paid search category, which was responsible for 62 percent of mobile global ad spend last year. In this report, we focus on the display ad category, which isn’t nearly as consolidated and thus presents a more complicated picture.
Mobile Ad Networks
Mobile ad networks aggregate advertising inventory and match it with advertisers, much as online ad networks do.
Google’s mobile ad network, AdMob, is the largest player in this business. Millennial Media was the first pure-play mobile ad network to go public (read their prospectus here).
Networks soak up ad inventory, analyze its potential, and sell it by matching it to advertisers’ needs.
«Ad networks play an important role in mobile [because the] audience is fragmented across a large number of devices and publishers,» says Michael Collins, CEO of mobile ad agency Joule. «The role of the network is that they are able to aggregate audience at scale. There are many [networks] all at different stages of their evolution, some stronger and more robust, but still a good amount of innovation is going on in the market.»
The open secret, according to Collins, is that «networks all have the same inventory,» which they buy from wholesalers aggregating publisher supply.
Subramanian, CMO at Velti, echoes this sentiment: «If you are running on three ad networks, you could effectively be bidding against [yourself]» for inventory and impressions.
Where networks differentiate is in value-added services, such as aggregating buying power to strike better deals, or improve targeting.
The largest ad networks have their own sales forces reaching out to advertisers, as well as their own campaign optimization technology.
«Our belief is that the number one thing you have to do is understand the audience better than anyone else,» says George Bell, CEO of mobile ad network Jumptap. «That’s value-add between the publisher and the advertiser.”
Several people we talked to mentioned that mobile ad networks face challenges as the mobile ad market matures and scales.
Victor Milligan, chief marketing officer at Nexage, says networks’ dependency on direct sales «is not going to grow with the market,» but will remain part of the ecosystem. He notes some ad networks are starting to embrace online real-time bidding (as ad exchanges already have done; see below) in order to sell ad inventory at the larger scale enabled by automation.
Demand Side Platforms
Mobile ad networks also face pressure from demand-side platforms (DSPs) like StrikeAd. These function similarly to ad networks, in the sense that they help match advertisers with inventory, but tend to work hand-in-glove with brands.
“Demand-side platforms give media buyers a platform providing visibility into ad inventory, letting them optimize campaigns on a real-time basis and buy into real-time inventory cross-publisher,» Collins of Joule was quoted as saying in an interview with Mobile Marketer. «In some ways, it is an evolution of an ad network model.»
In plain English, DSPs give advertisers deeper insights into mobile audiences in a real-time environment.
Bell, of Jumptap, says DSPs are complementary to the ad network business because they more richly describe mobile audiences.
But once DSPs start hiring their own staff to sell ad inventory, the complementarity could end, and DSPs would compete more head-on with ad networks. In case you were wondering, StrikeAd is currently hiring account executives.
Mobile Ad Exchanges
Exchanges automate many parts of the mobile ad process, and can connect publishers with multiple ad networks.
Ad exchanges are primarily supply-facing at the moment, and have relatively few interactions with mobile ad agencies (even less so with brands). Agencies are disincentivized from using exchanges because they threaten their lucrative role as the brands’ media buyers, according to Bell, Jumptap’s CEO.
If exchanges gain a certain level of scale, like Google did in online advertising, brand money could start to directly flow into their businesses, and that would threaten agencies’ media buy margins.
But Bell thinks that the «people spending the money have ambivalence about whether algorithms should be in control of [media buying].»
From publishers’ perspective, the main advantage of exchanges is their efficiency. Generally speaking, they provide greater price transparency, scalability, and liquidity.
It is important to note that mobile ad networks and exchanges aren’t playing a zero sum game. The rise of one doesn’t necessarily preclude the other’s existence. For example, exchanges sometimes act as «aggregators» of publisher inventory, which they then wholesale on to the networks, according to Collins of Joule. That’s why many ad networks have the same inventory.
Bell thinks that exchanges will phase out the prevalence of software development kits (SDKs), which have been the focus of the mobile ad industry for the past three to four years. The SDKs are lines of code that developers and publishers drop into their apps in order to plug into ad networks’ systems.
Large mobile ad networks, like Millennial Media, have garnered large install bases for their SDKs. However, if publishers want to pit multiple ad networks against each other, they need to install multiple SDKs. Additionally, many publishers opt to include the SDK of an independent app analytics company, like Flurry. Supporting multiple SDKs can quickly become an engineering headache.
Exchanges can vastly simplify this process by offering a single SDK. Through an exchange’s SDK, publishers are able to offer ad impressions to multiple networks simultaneously. Bell’s hope is that this streamlined process will convince developers not to view the mobile ad ecosystem as cumbersome.
There are two types of formats for exchanges, often working in tandem: mediation and real-time bidding (RTB).
Mobile advertising mediation combines human and technical considerations. The publisher and the exchange work together to tweak goals and set the framework for how ads are placed on their site.
For example, they can set parameters by price, ad format, number of ads, location, what kind of advertiser they want, etc. They can parse out a certain percentage of impressions to various networks, block off inventory for their own promotions, or auction impressions on a sequential basis, where the high bidder gets first crack at the next impression.
Velti’s mobile ad exchange, brought over with the Mobclix acquisition, is an example of an exchange that uses mediation to work with publishers and developers (it also has a real-time bidding platform).
Velti gives clients an SDK they drop into their apps, which connects them into analytics and plugs them into 60 ad networks. Currently, over 35,000 apps use the SDK.
Nexage is an example of a real-time bidding (RTB) mobile ad exchange. RTB allows market participants to instantaneously bid on individual impressions targeted by location, platform, device, or other criteria. Milligan, CMO at Nexage, says there can be as many as 500 million auctions per day on Nexage’s exchange.
Jumptap’s Bell says real-time bidding — also called algorithmic buying — will rush into mobile at some point, but it is still reasonably small. He estimates that it is currently no greater than five or 10 percent of the bidded mobile advertising market, but added he wouldn’t be surprised if it grew to 30 percent or more in a few years time.
Mobile Ad Agencies and Mobile Marketing
One of the gripes you often hear around the mobile ad industry is that agencies don’t get it. According to the U.K.’s Association of Online Publishers, 55 percent of publishers blamed «agencies’ attitude» for low mobile ad revenues.
However, that is changing. Several people we talked to said agencies are doubling down on mobile, and competency is improving.
For example, Joule, a subsidiary of WPP, is a full-service mobile marketing and ad agency. Other mobile ad agencies include Airwave (an OMD subsidiary), and Mobext.
Joule CEO Collins says the world’s largest advertisers have only just made the transition to online advertising and now face a new medium with its own quirks and challenges.
Consequently, there are «still a large percentage of brands … that don’t have the mobile destinations — either a site or application — that they can use to engage users in the mobile space.»
The basic difference between mobile advertising and mobile marketing is pretty straightforward.
«Mobile advertising,» Krishna Subramanian, Velti CMO told us, «is everything happens before the click. Mobile marketing is everything after the click.»
Mobile advertising is the process that gets the ad before a consumer’s eyeballs. Mobile marketing is the more long-term process of driving value from mobile customers, which can include loyalty rewards or contests. The two are irrevocably interlinked and there are a number of companies that straddle the fence.
Subramanian says 80 percent of Velti’s revenues come from mobile marketing.
Other companies are emerging that don’t neatly fit the established categories. They resemble ad networks in that they connect advertisers with publishers’ inventory, but they express disdain for the traditional mobile advertising model.
Chris Cunningham, co-founder and CEO of adtivity by appssavvy, says mobile ad networks are «focused on spraying users» and «took the same approach as with the Web, which is focused on banners.»
Such criticisms feed skeptics’ perception that mobile ads are ineffective and that consumers find them intrusive.
Skeptics may have a point. According to Nielsen, only 19 percent of U.S. smartphone owners thought mobile advertising was acceptable and another 16 percent don’t mind it as long as it’s not intrusive.
Some ad companies are trying to find a native approach to mobile advertising that will break through consumers’ apparent disdain for mobile ads. For lack of a better term, we have grouped them as «the natives.»
Adtivity by appssavvy is focused on delivering relevant ads during natural breaks in consumer’s mobile content consumption. For example, they ran a Coca-Cola campaign tied to «giving happiness.» When a consumer shared a piece of content from one of the publishers, they were shown an ad tied to the theme.
Cunningham wants fewer ads, but to make them front and center during these breaks rather than relying on the status quo of placing mobile ads adjacent to content.
SessionM induces consumers to opt-in to rich media ads. Consumers are rewarded for reaching certain milestones on a publisher’s app or website with «mpoints,» which can be redeemed for gift certificates and other goods. Consumers earn more points the more they interact with sponsors’ rich media ads, typically video-based, mini-games, or social polls.
«Digital consumers switch screens 27 times in an hour,» says Lars Albright, CEO of SessionM. «You have to think of ways that you can capture their attention.»
Albright says between 75 and 85 percent of consumers opt-in to SessionM ads.
There are also major publishers pursuing interesting mobile advertising strategies, such as Pandora, Twitter, and Facebook. As we discussed in our Future Of Mobile Ads presentation, Pandora mixes display, audio, and video ads, which now account for two-thirds of its ad revenue. Twitter and Facebook have opted for sponsored stories, which are ads that are integrated seamlessly into a user’s feed. Twitter’s mobile revenues now shoot past the traditional web’s on many days. Facebook was taking in $500,000 a day in mobile ads only a few weeks after their introduction.
However, it should also be pointed out that the vast majority of publishers don’t have nearly the scale or size to pursue these sort of strategies on their own.
THE BOTTOM LINE
- Mobile ad networks are being squeezed by ad exchanges and DSPs (demand-side platforms), but can maintain their central position if they keep an edge in audience targeting and measurement.
- Many brands lack the mobile destinations necessary for an effective mobile ad campaign.
- Mobile marketing can produce as much or more revenue for agencies as mobile advertising alone.
- Mobile native ad formats are finding success with TV-style content break ads, and opt-in reward schemes.
- Only the largest publishers have the size and scale to go it alone in mobile advertising.
Click here to download a PDF version of this report→