TapJoy, founded in 2007, is a fascinating and controversial ad network that is taking on the $2.6 billion mobile ad industry.  Last year the company did $100m in revenues (up from $20 million the year before) and comprised 13% of the Glu Mobile’s (a public mobile gaming company) revenue.  TapJoy is a global business (offices in 5 countries) in a big, growing market.  Currently mobile advertising represents only 2% of overall ad spend, and that is expected to change rapidly as smartphone penetration and usage continues to ramp across the world.

How does TapJoy work?

TapJoy’s ad network is premised on the “value exchange” – in essence, incentivizing users to download apps and interact with advertisers by providing them access to premium content and virtual credits.  Imagine you are playing a popular mobile game, like Farmville, and want to access a new level or purchase some type of virtual good within the game.  TapJoy offers you a way to unlock the new level or earn virtual currency by selecting from a variety of actions.  You can download a different app, you can watch a video ad, or answer a short set of survey questions.  Based on a reading of online news articles, TapJoy seems to derive the majority of their business from incentivizing downloads of different applications.  Incented application downloads also seems to biggest source of controversy as some players (like Apple) think incentivized traffic is “bad” traffic.

Value creator

Former TapJoy CEO, Mihir Shah, argues that TapJoy’s value exchange delivers benefit to all parties involved – publishers, consumers, and app developers (and TapJoy too of course).  Publishers (read: mobile game companies) have trouble monetizing their content in a world where mobile CPM (costs per thousand impressions) for traditional display ads are under $1.00.  TapJoy offers rates at a minimum of $0.10 per ad interaction and in the $0.85 range for many application downloads.  TapJoy makes money as the network by taking a hefty commission (in the ~40% range).  TapJoy argues consumers value the service because they are able to earn premium content and credits without any cash outlay and are able to select the most interesting and relevant ad from a panel of options.  Finally, TapJoy provides real value to developers who are looking to get their apps in front of consumers; without TapJoy they have few good pay per performance options for acquiring users.

Scam-ster

Apple has cracked down hard on TapJoy.  They argue that developers of pretty average applications are able to use TapJoy’s platform to pay their way onto the “Top Apps” listing on Apple’s app store.  Apple would argue the users downloading these apps have no real interest in the content since they are simply undertaking a one-time action to acquire some incentive.  As such, apps of poor or unvalidated quality are able to get high rankings.  Once you hit the top apps chart, you are able to spur a surge of organic downloads.  Unfortunately for Apple, it doesn’t receive any commission for organic app downloads.  As such, if I am a well-funded developer, I can almost guarantee traction as long as I am willing to pay for the cost of using TapJoy’s promotion platform.  Apple shut down TapJoy’s initial offering, a very simple tap procedure which leads to an app download.  In response, TapJoy has moved offers to HTML pages opened within a browser, something Apple can’t yet review and curb.

What do you think?

Mobile ad networks are a new space to me but one I am fascinated by.  I am eager to hear your views on TapJoy and other mobile ad models.

To me, I think TapJoy represents a really unique innovation in mobile that is able to help all constituencies involved in its value exchange.  Admittedly some incentivized traffic may not be of the highest quality, but what is the alternative?  Consumers have suffered “banner blindness” to traditional PC and mobile display ads for a long time.  Despite the ineffectiveness of this form of advertising, billions continue to be spent on this format.  Perhaps incentivized interaction is the way that the mobile ad industry needs to head?

“There’s been way to much focus on [cross-channel] integration. I see the shift from 360 degrees of communication to 365 days of connection.” [1]

- Rei Inamoto, Chief Creative Officer of AKQA (at Cannes Lions 2012)

 Internet and 360 degree marketing campaign
Internet has changed the world of advertising, not only by introducing new types of online ads such as sponsored search, but also by generating a new trend of marketing campaign.  With the capability to store and provide marketing contents interactively, the web site plays a critical role as a “campaign hub” in today’s marketing communication. And with this “campaign hub” in their hand, advertisers are now trying hard to integrate their marketing activities across different media (TV, Newspaper, PR, Event, etc.) in order to maximize the effectiveness and efficiency of the campaign. Marketers call this “360 degree campaign,” and it has been regarded as the most appropriate response from the ad industry to the innovative online technology.

 Further evolution of technology
However, the evolution of technology has not stopped at this point, and therefore, the evolution of advertising/campaign also should go further along with it. Technologies such as big data, cloud computing and ubiquitous devices (smartphone) are especially important. They have been bringing three fundamental changes to the ad industry.

1. Targeting:
The scope of consumer data has been expanding from easy-to-analyze purchase histories to more difficult-to-analyze unstructured data such as emails, posts on Facebook, or even images and pictures on Pinterest.  These “big data” have clear advantages over traditional consumer survey data. First, the volume is huge. Recent technology could add even more detailed “lifelog” of consumers based on sensor data received from electronics. Second, the quality of the data is superior because they are more naturally extracted from consumer’s everyday life and thus less biased than setup surveys. The sensor data, for example, might reveal hidden preferences or behavioral patterns that even consumers themselves do not realize.

These data and the technologies of analyzing them dramatically increase the accuracy of targeting, almost to the extent that advertisers can firmly grab each one of individuals. While Traditional advertising uses segmentation methods in order to shoot the bullets as close to the targets as possible (and thus inevitably wasted some bullets), future advertising could directly reach out to the individual consumers with almost perfect accuracy.

2. Customer Relationship Management:
Until recently, the relationship between companies and customers had not been truly interactive, or at least, not interactive in a real-time basis. However, big data, cloud computing and ubiquitous devices realize this real-time interaction and thus change the way of managing customer relationship. Advertisers now can technically track every behavioral step that customers take from attention to purchase, and contact customers whenever they want.

 Traditional campaigns are basically one-shot and one-way, even though some marketing contents could be stored in the web site. Future campaign, on the other hand, should be continuous and truly interactive. Through smartphone, for example, advertisers can send customized messages to specific individuals on specific timing and situation. The relationship between companies and customers becomes more equal, and the communication between them becomes more conversational.

 3. Measurement of advertising effectiveness:
You can now imagine how accurately advertisers could evaluate the effectiveness of their marketing communication with recent technology. The quality of analysis on the causal relationship between customers’ behaviors and advertising exposures would be enhanced exponentially along with the accumulation of big data. Moreover, in addition to now prevailing action-based effectiveness analysis (based on click, search, purchase, etc.), increasing efforts are being made to find out subconscious effects of advertising on customers. For example, neuromarketing has been developing its analysis on the measurable emotional effects of the ads on consumers, based on the knowledge of neuroscience. [2] This would further broaden the portfolio of big data, and thus increase the accuracy of the measurement of advertising effectiveness.

 Implications for future online advertising/campaign
So, what are the implications of these three trends for future advertising/campaign?

First, the ad spending should be treated as an investment, rather than expense. Yes, I know that there are a lot of ad agencies that have been claiming this at a conceptual level for more than decades (just in order to increase the ad budget from clients), but this time, it is more at structural level. With their accurate targeting and data tracking capability, advertisers can now reasonably calculate its ROI and predict how many customers they would acquire for specific ad spending. In order to be considered as an investment, the ad campaign should be integrated not only across the different media, but also across the timeline. It should focus on the long-term, continuous maintenance of the company’s asset; its customers.

Second, the initiative of the communication should be shifted from advertisers to individual customers. Yes, I know that all the marketers have been saying “customers first” for more than decades, but again, this time the importance of customers is far higher than ever. Traditional marketing planning might start from individual customers, but end up with developing one-size-fits-all 4P strategy, which is delivered unilaterally to the anonymous customer segment. With continuous and real-time updates of individual data, the priority of future campaign should be shifted from “providing” anonymous customers with one-size-fit-all information to “following” individual customers and “connecting” with them through customized information. Delegation, rather than manipulation, is the key.

Overall, advertisers should shift from 360 degree to 365 days campaign, as the quote on the top says. Instead of surrounding customers and firing at them from 360 degree, advertisers should follow individual customers 365 days and develop the long-term collaborative relationship with them.

There is already a bunch of successful campaigns that reflect this strategy, but the recent IBM campaign called “Chief Executive Customer” seems to me as a symbol of major transition of the trend. Starting with a narration, “Meet the new boss, your customer,” the TV commercial emphasizes the importance of deep analysis of customers’ voice. [3]

 Well, advertising has long been relying on magical creativity to capture and manipulate customers. But if customers are no longer “target” and should be treated as allies, colleagues or boss, the most important skill in ad industry would be the solid management skills to listen, follow, support and delegate. Therefore, in a couple of years, the most sophisticated ad campaign could be developed by MBA graduates instead of creative genius. Yes, I mean YOU could be a next Don Draper if you want! Just keep your eyes on the ongoing evolution of the ad industry…

Sources:

[1] http://www.adexchanger.com/agencies/akqa-sale-to-wpp-cannes/

[2] http://www.adelaidenow.com.au/ipad/advertisers-trial-neuromarketing-to-measure-emotional-responses/story-fn6bqvxz-1226308617246

[3] http://www.youtube.com/watch?v=phvMEsLs-Hg

In my search for a potential home to purchase, I found myself on Zillow.com conducting most of my research.  Zillow is a data aggregation website that seeks to provide a wealth of data on the housing market in the US and connects buyers and sellers- take a look if you’re in the market for a home or if you’re just curious about how much the large house down the road is worth. In an attempt to see if I was using the best resource for housing research, I began exploring the various online real estate search websites and came across a TechCrunch video interview with Spencer Rascoff, CEO of Zillow, in which he talked about their growth.[1] In his interview, Rascoff praised Google for finding the “holy grail” of advertising- the ability to have advertisements seem like an enhancement to the user experience rather than a distracter.  Are Google ads an enhancement to my search experience? I’m not so sure.   Currently Zillow charges a subscription to brokers to provide their contact information, in the form of ads, next to the property details.  Rascoff believes that the future of Zillow is to replicate the path of Google.  To be fair, Google’s success is pretty impressive – owning almost 70% of the search market in the US – but I’m not convinced that Zillow will become the next “Google” of real estate search. [2] More importantly, if they could, I don’t believe they should.

It seems that Zillow is poised to take advantage of some of the same factors that Google was able to benefit from during it’s user acquisition stage, namely strong network effects, but there are still a few factors that the real estate search market is lacking for it to be winner-take-all.

Strong network effects:  Zillow is a classic example of strong network effects; the more users you have on the website, the more advertisers and brokers are willing to pay to gain access.  Zillow has done an incredible job of becoming the de facto market leader in search for real estate.  This is mostly due to their proprietary appraisal of homes called “zestimates”- an added element of transparency in what was historically a very opaque industry.  They seem to be continuing to grow at an impressive rate with 33,474 average unique user visits per month, a 61% growth from 2011.[2] This growth will continue to reinforce the strong network effects.

High-switching costs- Zillow doesn’t seem to be as “sticky” as Google, who has various additional functions like Gmail and Google docs that lock users in.  There doesn’t seem to be many switching costs for users.  Most educated home shoppers and sellers would use various websites available to search for housing information.  In addition, on the advertiser side, there doesn’t seem to be a large cost that limits agents from continuing to market their properties on other websites.  The power remains with the brokers and home-owners to provide the information to Zillow; Zillow cannot officially list properties from the broker database of homes, MLS, on their website without a broker’s approval.  With the exception of being able to use Zillow to get a “zestimate” on a home, which all websites can import to their websites, there are little costs of switching associated with Zillow.

Limited demand for a differentiated product:  As mentioned before, educated users are looking for a complete picture of the real estate market.  In this case, a search result is an individual house- a highly differentiated product.  The ability for a website to have a certain listing, particularly increased numbers of for sale by owners, only on their website will allow users to be forced to search multiple listing sources.  Again, the power resides with the listing agents and sellers.

These factors would suggest to me that it will be very improbable for Zillow, or any real estate search website, for that matter, to become the monopoly player in the real estate search space.

The more interesting question to me is whether or not they should want to replicate Google. I don’t think that Zillow should use Google ads as a model for revenue growth. First, Zillow is now a public company that will have expectations and demands for continued growth.  With that, as you have seen with Google, there will be a temptation to shift away from their core mission- providing superior information and search results.   Google has increased the number of their advertisements that distracts the user- moving away from their original model.  Second, they will continue to be pressured by the very people that pay them to compromise their search results to drive revenue.  This is also seen in Google’s ad “shenanigans”- placing paid advertising within search results in an attempt to confuse users.  Lastly, advertising is a huge market, but there is a lot of uncertainty on how it will be best monetized.  Zillow should maintain focused on actually providing a service that brokers are willing to pay for with a subscription while limiting display ad proliferation- their latest financials show that 70% of revenue comes from agents, not display adds. [4] This is a positive sign. I believe a business model that is centered around providing true value to both user-ends of a network will be the most effective way to be successful in the long run.  They should remain focused on providing superior information to end users and connecting users to brokers.

Sources:

[1] http://techcrunch.com/2012/08/06/zillow-ceo-spencer-rascoff-mobile-video

[2]http://www.comscore.com/Press_Events/Press_Releases/2012/3/comScore_Releases_February_2012_U.S._Search_Engine_Rankings

[3] CapIQ

[4] ibid

The philosophy of many tech companies during Bubble 1.0 was that they could lose money on every click, as long as they made up for it in volume.  Fast forward to 2012 and it seems like we are repeating the mistakes.

Today, many startups have no clear monetization strategy and even after reaching critical mass, are left wondering how to become profitable. Big names like Yelp, Twitter, Digg, Instagram, and DrawSomething come to mind.  These companies provide a free service but willingness to pay is very low.  Some companies were smart enough to be acquired by the “greater fool” such as DrawSomething and Instagram.  The result? Zynga just took a $95 million write off for DrawSomething and Facebook is still trying to figure out how to monetize mobile [1,2].

Who, then, is paying for our insatiable need to have up-to-the-minute tweets of our favorite celebrities?  Luckily, in today’s market, advertisers are willing to subsidize these services, which are producing tremendous (comedic) value. Examples:

“No, no, I didn’t go to England; I went to London.” — Paris Hilton

“I work out every day — Monday to Saturday.” — Jessica Biel

But if we take a closer look at the ads-driven monetization strategy, we see that the numbers often don’t work out.  For example, assume we want to generate $100M in revenue/year with a mass market consumer website.  CPMs on these services are particularly low.  For example, CPMs for social networking sites are about $0.25.  Even at a 4x CPM of $1 per 1000 impressions, we would need 100B ($100M = 100B impressions * $1/1000 impressions) impressions per year or about 8B per month.  This means the site’s monthly active users (MAU) will need to be in tens or hundreds of millions and be highly engaged [3].  Obviously, this is no easy task and, moreover, requires significant resources (servers, software, content, marketing).  Indeed, even companies that offer valuable services, like Yelp, are struggling to become profitable. In Yelp’s case, its losses are increasing as it expands. It reported a $9.8 million quarterly loss, which is triple its net loss of $2.7 million in the same period last year [4].

One might try to argue that this really isn’t a problem because the ads market is growing. It’s true that display ad spend did increase at 21% per year; however, CPM rates actually fell by 23% [5].  The upshot is that, even though the overall pie is growing, websites need to have more users for the same revenue, increasing cost of sales and driving profits down even further.

My concluding take away for entrepreneurs, investors, and anyone interested in mobile  and web startups is that consumers vote with their dollars. If consumers are not willing to pay for a service and there is no other clear way to monetize (ie: selling data, consulting/support service, etc), then you should ask yourself if that business is creating and capturing value in a sustainable way.

Sources

[1] Raymand Wong, “Zynga plans to write off up to $95 million over OMGPOP merger flop”, October 5th, 2012, http://www.bgr.com/2012/10/05/zynga-omgpop-95-million-write-off/.

[2] Brant Prewitt, “Facebook And Mobile Monetization: Obstacles And Opportunities”, September 11, 2012, http://seekingalpha.com/article/860061-facebook-and-mobile-monetization-obstacles-and-opportunities

[3] Andrew Chen, “What is considered a significant number of users for a free consumer internet product?”, February 26, 2011, http://andrewchen.co/2011/02/26/quora-what-is-considered-a-significant-number-of-users-for-a-free-consumer-internet-product/.

[4] Julianne Pepitone, “Yelp’s net losses triple on expansion”, May 2, 2012, http://money.cnn.com/2012/05/02/technology/yelp-earnings/index.htm

[5] http://www.crowdscience.com/2011/10/publisher-cpm-rates-down-23-despite-increase-in-online-display-ad-spending/

According to Cisco, in 2011 PCs generated 94 percent¹ of consumer Internet traffic.  This is expected to fall to 81 percent¹ by 2016 as smartphones, tablets, and other devices and their respective networks / wifi connectivity continue to both proliferate and improve.  Progressively the internet experience on these devices is matching and often surpassing the experience of more traditional browser based web viewing.  I know personally as a user, I often find it more convenient to check Facebook on my phone even if I am sitting right in front of my computer.  The same goes for my experience with other content driven apps like ESPN where I often find ScoreCenter a suitable and sometimes superior replacement for the site itself.

Why is this?  It is because apps are designed for perfect user experience on touch screen oriented devices.  So long as typing is not a significant portion of what one is doing, it is simply easier to navigate with a touchscreen than a mouse.  Moreover, apps take us exactly where we want, no scrolling on the page or even inputting an address into a browser.  One final thing makes these experiences better, no ads.  Apps not only can work better than online browsing, they are also more visually appealing and less distracting.

So what does all of this mean?  As app based mobile viewing proliferates this threatens the revenue models of businesses that gain most of their revenue through online advertising.  Being no ad or ad light has been instrumental in allowing apps to be successful.  Moreover, open APIs and development kits have forced official apps of sites to be consumer friendly. 

In terms of types of ad revenue, display ads will ultimately be most affected.  While app use no doubt limits online searching as people no longer type ESPN into the chrome bar to access it, these searches are largely ancillary.  In display, views of the app are often in place of views on the site.

One day app viewing may be the primary way for people to access online channels for Facebook and ESPN.  If an online business is an ancillary revenue channel (ESPN), this will be fine.  However, it will be a problem for Facebook, the U.S. leader in display ad revenue at 16.5%² of the total display market.  Facebook has a much smaller percentage of the mobile display ad market (a much smaller market).  It trails Twitter, Pandora, and others at only 6.6%³.  Facebook may be expected make $2.6 Billion² in online display advertising in 2012 but they are expected to only make $72 Million³ from mobile.  As mobile and tablets become a larger portion of internet use, Facebook and other content companies must figure out ways to properly monetize there apps either through ads or other means.  For now, these applications may be complementary services for customers but in the not so near future they could be the business itself.

Notes

1. Cisco VNI Forecast – May 2012
2. eMarketer – February 2012
3. eMarketer – September 2012