The Mobile AdScape

With all the talk of mobile ad “platforms,” SSPs, and DSPs, it can be a bit trying to tell mobile adtech companies apart and decipher what they really do (or claim to do). Wouldn’t it be nice to have at hand a neat visualization of the market (e.g., LUMAscapes) whenever the lines started blurring and your head started spinning? Cue mobyaffiliates and its market map of mobile advertising.

The infographic isn’t always 100% accurate or detailed enough for an advertiser or investor trying to dig deeper into a particular adtech solution. For example, Chartboost, which recently raised $19M in funding, appears in the “App Promotion” category. The company also provides ad serving tools and essentially functions as an ad network for developers/publishers with excess inventory. So there is much more overlap than portrayed by the market map below. Regardless, it’s a useful reference tool and a helpful start for anyone looking to learn more about mobile advertising.

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Facebook is to Zynga as a Clownfish is to a Sea Anemone?

The days leading up to the highly anticipated Facebook IPO have been met with market excitement.  Comparisons of Facebook to Google and speculation about whether the company is over- or under-valued have been rife for some time.  Facebook has convincingly overcome concerns about negative cash flows and lack of a monetization plan that plagued it in the media a few years ago.  However, concerns about Facebook’s business model seemed to have revivified as investors struggle to identify the company’s bread and butter and more importantly, to understand its relationship with social gaming behemoth, Zynga.

I remember hearing estimates in 2009 that Zynga made up 40% of Facebook’s revenue.  That is why I was taken aback by the market’s surprised reaction when it traded up shares of Zynga upon finding out the company composes 12% of Facebook’s total revenue.

A breakdown of Facebook’s revenues from Zynga shows that Zuckerberg’s company derives its revenue from the gaming company through the sale of virtual goods and other add-on features in games (Payments) and through ads that Zynga buys to cross promote its own games to captive Facebookers (Ads).  Moreover, an increasing proportion of this revenue comes from Payments revenue.

 

In some ways, the Payments model is not very different from the way Apple charges iPhone application developers a cut of the revenues made from the Apple App Store.  Facebook’s cut of Zynga’s Payments revenues is reported to be 30%.  Facebook’s relationship with Zynga deviates from Apple’s relationship with its app developers in at least one key respect—Facebook also reaps ongoing benefits from Zynga’s success in the form of advertising revenue.  The larger Zynga’s customer base grows, the more it is willing to invest in advertising and the more people that fall into the target audience Zynga wants to reach.  Increased advertising by Zynga benefits Facebook.  Additionally, while iPhone app users pay once for an app (say $0.99), Zynga users may keep buying add-ons within the same game (say $0.99 per virtual good).  Finally, while I have not searched Apple’s financials to confirm, I seriously doubt any one app developer makes up 12% of Apple’s app store revenues, let alone 12% of the diversified company’s total revenue.

Thus, Facebook’s near-term future is highly levered to Zynga’s success.  This leverage presents problems in the eyes of some for several reasons.  First, sustaining revenues from gaming alone is not Google-esque.  Google effortlessly fused the worlds of media and technology in a revolutionary way.  It was able to use its technology to appeal to advertisers very broadly.  A dependence on gaming leaves Facebook less diversified, less appealing to advertisers universally, and potentially vulnerable.  This factor doesn’t bother me much because other apps will fit into the Facebook ecosystem as the social networks becomes increasingly ingrained into the way we think about the Internet and computing.  Plus, there is a trend in various sectors to solve problems through gaming anyway.

The bigger problem is a more general business issue.  Dependence on one company can become unhealthy if the equilibrium is rattled.  Right now Facebook and Zynga have symbiotic interests.  Both businesses align well with each other.  However, if Facebook were to decide to invade Zynga’s turf and start competing with the game developer, or if Zynga can successfully create its own network of users outside of the Facebook platform, the relationship won’t be quite as hunky dory.

Some have countered that Facebook has an exclusive arrangement with Zynga whereby Zynga agrees to use Facebook currency and develop certain games only for use on Facebook.   I don’t really see this arrangement mitigating the concern.  Prohibiting development on other social networks is a useless demand since Facebook has won the day as far as general interest social networks go, and gaming is not a fit with other popular social networks such as Twitter, LinkedIn, and foursquare.

More significantly, Zynga has always had a disconnect between its mobile apps and its games on Facebook.  I once tried playing Mafia Wars to get a better idea of what the craze was behind Zynga’s games ahead of an interview with the company.  My profiles on Facebook and the iPhone app could not be synced.  Whether this incompatibility is still an issue with Zynga’s games, I do not know.  However, the recent success of Words With Friends at the very least shows that Zynga is capable of finding success outside of Facebook even with an exclusivity agreement in place.

The fact that the ads portion of Facebook’s revenue from Zynga is decreasing is reassuring, but it still raises issues about Facebook’s ad monetization strategy.  Google found a direct way to relate ads to subjects that directly interests users.  When searching for a person’s profile on Facebook, it is less obvious which ads should pop up than if someone conducts searches about an upcoming vacation on Google.  (This explains why so many people complain about dating advertisements on Facebook.)  The display ads on Facebook are commoditized, and the company’s current advertising strategy is just as shaky as a non-premium online ad network.

These concerns about Facebook’s advertising revenue is not to say the company won’t eventually get it right.  The rich data Facebook collects is highly valuable.  The challenge of utilizing it in a way that doesn’t sound off alarms about privacy remains.  Personally, I thought Beacon was a promising first step, but it was introduced in such a disastrous way that Facebook has been unable to broach the topic again in a privacy-friendly way.

Still, Facebook has to figure out the ad scheme fast.  Other social networks, though not at all threatening in terms of scale, are carving out niches that are more advertiser-friendly.  Pinterest, for example, can make money on ads in a very direct way not too different from Google, and foursquare can capitalize on location-based audiences and local deals.

Utlimately, Facebook is well . . . Facebook.  I don’t think many can imagine life without it, and it is hard to bet against a company with that type of stickiness.  As long as the Facebook-Zynga symbiotic equilibrium does not shift, the fact that 12% of Facebook’s revenues come from Zynga isn’t too troubling.

I’d also note that while I may have painted a rosy picture about Zynga over the medium term, it too has long term concerns, namely the danger of becoming less data-driven/disciplined and more like a media company.  Additionally, while the exclusive arrangement with Facebook might be a pro for the social network, it displays Zynga’s subjugation to Facebook’s terms and power.

In the meantime, I leave it to you to decide which company is the Clownfish and which the Sea Anemone.  For help and more information, see the epic video below.

The Un-American Game

In the United States soccer has long been the kindergartener whose mom dressed him up in a suit for field day.  As if our country’s disdain for the sport weren’t enough, we decided to call it names.  Known as “football” or “the beautiful game” throughout the rest of the world, we labeled it, “soccer.”

The same game is viewed with incredible fervor globally—as if the stakes were as high as an ancient Mesoamerican ballgame.  It even catalyzed a war in 1969 and paused a civil war in 2006.  Why is it then that we can’t find the same passion for soccer in the United States?

Dave Eggers entertainingly pondered this very question prior to the last World Cup in 2006.  While I don’t completely agree with his rationale, it is not worth getting into all the specific reasons why Americans aren’t passionate about soccer.  There are a multitude.  It might just be that soccer is not a sport we regularly monitor.  Most other countries follow  European or local professional leagues in non-World Cup years, just as we follow our big four (three) team sports.  Yet, while we don’t follow swimming, we still cheered boisterously when Michael Phelps won each of his eight gold medals at the 2008 Olympics.  We watched many sports during those and other Olympics in which we have no interest during the other three years.

Perhaps, that’s the crux of the issue.  The United States is an irrefutable underdog when it comes to soccer.  It is hard to think of many other major sporting events where the United States does not have a legitimate chance of claiming victory.  But as a New York Mets fan, I implore Americans to embrace our national soccer team’s lowly reputation.

The Mets have a history of disappointing their fans, which is especially disheartening when juxtaposed with the success of New York’s other baseball team, the Yankees.  The truth is, though, that I wouldn’t trade positions with a Yankee fan.  Just last year the Yankees won their 27th World Series title.  It should have been a moment of elation for players and fans alike, but it seemed that outside Alex Rodriguez most were only relieved.  The Yankees are expected to win every year, and the burden of that pressure precluded genuine celebration.  On the other hand, while we Mets fans continue to have our hopes dashed each fall, we return each season with renewed optimism to enjoy the process of surviving the season.  Winning it all would be great, but because it is not expected, we take joy in each small success along the way.  If that fateful day does come again, however, we will be found ecstatically blasting off to somewhere just outside the Milky Way Galaxy.

The World Cup provides the same opportunity for Americans to watch a sport for its beauty with little pressure on their team to win. There is little downside, and the upside (serious global bragging rights)if the US squad can improve on their quarterfinal performance in 2002is tremendous. Many of you will probably use the World Cup as an excuse for revelry anyway, so you might as well wholeheartedly immerse yourselves in the games.  In the meantime if this widely shared Nike soccer ad doesn’t get you pumped, you might as well go back to watching golf.

Mac Gets Back

Microsoft has been running an advertising campaign to combat Apple’s popular Mac versus PC commercials. Though not as clever as the Apple ads, as a viewer Microsoft’s commercials at least seem effective. Apple’s latest Mac ad jibed at Microsoft’s increased ad spend but apparent lack of improvement in Vista. Apple, of course, spends its own fair share on mass market advertising, but its dedicated base of fanboys and legions of followers that get excited by the slightest movement by Jobs afford the brand the ability to make this snide commentary against the software giant.

In Apple’s new Mac release last week, the company noted the increased popularity of Macs in colleges, which makes Apple’s swagger justifiable. After all, if a generation of college attendees prefers Macs to PCs, a generation from now, Mac should be the personal computer of choice. In the short run, however, the lack of expected price cuts on the new Macs and gloomy macroeconomy might not bode well for Apple. ChangeWave Research observed  a drop in the number of consumers willing to buy Macs in September. Among consumers that plan to buy a PC in the next 90 days only 26% will consider Apple, and among consumers that plan to buy a laptop in the next 90 days only 29% will go Apple. These numbers are down from 30% and 34% just the month before. Risk aversion in this market will likely lead consumers to buy cheaper Windows driven machines with which they have prior, albeit imperfect, experience. This consumer research does not even factor Apple’s performance in the public (education) and enterprise markets. These markets influence consumer/personal computer preference and are not easily won by typical marketing. No doubt Apple’s past and projected future trajectory is impressive–almost as impressive as its brand management, but as the company’s newest commercial itself notes, advertising alone might not be enough to continue gaining market share.