What Mobile Advertising Needs

By Christof Wittig, CEO, LiquidM — November 30, 2013

The market shift to mobile is transforming every sector it touches, but the fact remains: Mobile not only continues to remain a roughly 10% fraction of the $30 billion annual digital ad marketplace, Magna Global's most recent forecast finds it lagging far behind “old media” like radio.  
 
Unless a sudden, massive wave of ad spending begins to materialize, mobile threatens to stagnate. The main reason advertisers are so resistant to embrace this fast-growing platform is simple: The companies that are considered the main drivers in mobile advertising – e.g., Google and Facebook – aren’t actually innovating on the technical side.  Nor are they offering advertisers a dynamic, cost-effective, enterprise-based solution.

Here’s what I mean:

Mobile advertising companies are media traders - not tech companies.
Mobile advertising companies are great at serving massive inventory to mobile, but aren’t tech companies per se: They trade with a digital product, so they need technology tools like an ad server or a mediation layer. Most ad companies build these in-house, which is why they often think of themselves as tech companies. But in the end, really, they’re basically just buying and reselling media. Their business model is to charge a markup on these media sales. Which connects us to another part of the problem:

Since mobile ad companies mainly make money from buying and reselling media, they desire scale -- mostly on the top line -- as revenue multiples are the way the industry values these companies. So access to inventory (ideally exclusive) at a large scale becomes essential to growing the business. As a result, nearly all players in mobile advertising have started to sell to one another. Often, media dollars change hands several times between the publisher and advertiser, without adding much value through the supply chain -- while dramatically increasing the price of goods.
 
So while mobile development in general is being driven by tech companies who specialize in cloud services, SaaS, and so on, mobile advertising is largely powered by inventory resellers which don’t add technical innovation to the overall ecosystem. Tech solutions shouldn’t add more middlemen to an existing supply chain -- they should disrupt supply chains and eliminate middlemen!
 
I don’t mean to blame mobile ad companies for this lack of disruption. After all, they have little incentive to innovate when they can sell basic products at large scale. However, every dollar in additional revenue requires additional sales, which leaves very little room for innovation. A leading ad tech company I’m familiar with actually spends just 15% of its profits on R&D. (Google, by contrast, spends 40%.) This underinvestment in technology is typical for mobile advertising, and is a fundamental reason why it lags behind the rest of mobile.
 
Google and Facebook to mobile advertising’s rescue? Not really.
Google and Facebook are often touted as the saviors of mobile advertising, and while they’re clearly innovation-focused companies with very smart, very large development teams, they haven’t done much to improve that ecosystem. In the advertising space, to be sure, the two Internet giants are mega-publishers, and Google also runs the largest exchanges, and is a hegemon bringing automated real-time bidding (RTB) to the industry. Both companies command a large share of the mobile advertising market -- particularly Facebook in mobile display.
 
But from a technology innovation standpoint, what are they really doing in mobile advertising?  Not much.
 
Google executives will privately (but willingly) admit that their mobile platform from the 2009 AdMob acquisition is still not fully integrated, nor are other properties like DoubleClick (2007). If you see their mobile revenues growing strong, it’s mostly stemming from a business proposition to advertisers: that they can target audiences in a channel-agnostic way. What it really means is that advertisers likely overpay for mobile, as they have less transparency into the performance of their mobile display ad dollars.

Facebook is similar. They redirect a lot of the online dollars into mobile, apparently driven by the demands of the stock markets for a mobile revenue story. But little of their mobile advertising is really mobile: It’s a sale of their mobile inventory based on the audience criteria they collected online. This is smart mobile advertising business through intransparent bundling -- but not a mobile ad tech solution that would help grow the industry.

Mobile advertising’s move from media to enterprise.
In my view, mobile advertising’s relatively poor performance can’t be changed until there’s a great unbundling of the media business from the tech business. And the business sorely needs to be driven by an enterprise model that can efficiently and effectively procure media directly from the source, offer data-driven ad delivery processes, and most importantly, bring serious innovation to native ad formats and data-driven targeting.

For this, we need to see more growth of  B2B software companies building ad tech, either as projects or as platforms-as-a-service. They should charge software fees, project fees, and site or seat licenses, but not bundle or derive fees from the media trading done with their technologies. This move to an enterprise model will benefit advertisers, too. For instance, Salesforce charges a monthly seat license, not a 5% cut on every opportunity created in its CRM. So does Quickbooks, rather than a 2% fee off the top line of each P&L; a nice idea for the vendor but utterly unsustainable for its customers.

Once the business model changes to a software licensing model, once the go-to-market model changes from media trading to enterprise software sales, and once the culture changes to a software developer culture, I believe we will see real, substantial evolution in mobile advertising which can sustain and power the mobile revolution -- and not coincidentally, grow an early $1B market into a $25B industry.

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