It may be that teenagers are deserting Facebook and that their future prospects aren’t as rosy as they were maybe a year ago, but the chart above makes it clear that Facebook is in a much stronger competitor than any of it’s competitors. LinkedIn, Pinterest, Twitter and Instagram are all great businesses that either have their use as marketing channels or soon will do, but Facebook remains the grand-daddy of them all. With the exception of LinkedIn these are all advertising based businesses so think of it this way – if you are targeting all US online adults you will find 70% of your target market on Facebook, and only around 20% on each of the other sites.
I love this picture which was a finalist in the ‘Spirit’ category at the Red Bull Illume Image Quest photo competition. The contrast between the obvious power of the wave and the relaxed surfer paddling on top is mind wrenching. The surfer is Sean Woolnough, the wave was in Namoto Island, Fiji, and the photo was taken by Stuart Gibson.
I also love that Red Bull and other great brands are funding this type of content by sponsoring competitions. One of the great things about the internet is that it facilitates the distribution of amazing free content (like this photo), but that creates a knock on problem of figuring out how artists get paid. One of the other great things about the internet is that ready access to reviews and social media has made it impossible for companies to compensate for bad products with big marketing budgets. Today’s winners have great products and further build trust with consumers by further enriching their lives by sponsoring and creating cool events and experiences. It’s somehow satisfying that with competitions like this these two trends are coming together and top brands are now offering at least a partial solution to the main problem of free content by paying artists to create.
I’m rather late to this, but this morning I was pointed towards an eMarketer projection of Twitter revenues from March this year which has them hitting $950m in 2014, up from $583m this year.
That’s some growth given the scale they are at and explains why people are talking more and more often about Twitter’s IPO. eMarketer puts the growth down to Google and Facebook focusing on mobile, Twitter’s ads API, and the fact that its ads are truly native (i.e. a genuine part of the native user experience).
Two other interesting facts:
- Twitter has 550m active users, so their ARPU is about $1. The takeaway: it takes a lot of users to build a substantial ad based business. I can’t find any information on profits so it’s hard to know what this means for their valuation. Clearly they will need very high net margins to reach the mooted $10bn IPO value.
- Only 17% of their revenues come from outside of the US. The takeaway: there’s an opportunity to help European advertisers spend more money on Twitter.
With all the press and analyst speculation last year that the transition to mobile might undermine Facebook’s revenues this isn’t new news but reading an FT article this morning titled Digital cinders spark mobile forest fire the penny finally dropped for me that after the transition to digital shrank many industries, the transition to mobile will now shrink them further.
For those unfamiliar with the ‘digital shrinks businesses’ argument my favourite example is encyclopedias which went from a circa £700m book industry dominated by Britannica, to a c£70m CD Rom industry dominated by Encarta, to a £0 industry dominated by Wikipedia. This is the most extreme example I know, but there are many other good ones, particularly from the music and newspaper industries.
The fact that mobile is shrinking industries doesn’t mean that mobile businesses aren’t viable of course, they just have to find another way to make revenues or get by with lower advertising revenues per user. For startups looking to build long term sustainable businesses I think that leaves three broad options – selling stuff, a subscription model, or shooting for massive scale and relying 100% on advertising.
One of the lessons most investors learned from the web2.0 era was that whilst success pays out big really huge scale is required to make social media pay and the odds of any given startup getting there are slim. That’s why investment dollars chase the few that are breaking out so aggressively. That same lesson applies twice over for ad based mobile models.
Mobile adtech businesses like our portfolio StrikeAd are still in good shape though – largely because mobile media consumption and mobile ad spend continue to grow quickly. If CPMs are low these businesses can make the same revenues by simply selling more ads, and the inventory is there.
That said, if somebody could find a mobile ad format that monetises better then the whole ecosystem would be better off. There are a number of companies working on this now, including Loopme in the UK. I hope they succeed.
Amazon has been slowly building an adtech business for the past few years now. Back in 2008 I wrote about the launch of their advertising network and since then there has been a steady trickle of announcements and hires that show they are getting more and more serious about becoming a player in the adtech market. The pace of announcements seems to have picked up a bit recently and this morning the FT ran an article entitled Amazon opens up new advertising front.
Their big hope, of course, is that the proprietary data they have about shoppers on Amazon will allow them to target ads much better than their competition. I hope they are successful, because right now Google stands pretty much unchallenged as the only major tech player in the adtech space, which limits partnership and exit options for startups. When we invested in buy.at back in 2006 AOL, Microsoft, Yahoo and Google were all credible potential acquirers, and we spoke to all of them before ultimately selling to AOL, and I’m sure that the existence of those other players as alternative suitors helped us complete the AOL deal quickly and at a better valuation. Fast forward to today and Google is the only player left on that list that makes regular adtech acquisitions, which is why I hope that Amazon will enjoy enough success with their advertising products to want to step up and provide some competition for them in M&A.
There is also a sliver of good news on this front from Yahoo today. Their Q4 results showed an improvement in their search advertising business and Marissa Mayer has said that she wants to take back some market share in search from Google. I have nothing against Google, but once again, I hope they succeed.
Gartner have just released revised mobile advertising projections, showing a total market of $11.4bn for 2013, up 19% from last year. The numbers are up from their November forecast due to faster than predicted take up of tablets and smartphones, and the growth has come at the expense of print advertising.
Gartner also noted four interesting trends at the next level of detail:
- display ads will grow faster than mobile search (including augmented reality and map ads)
- within display web ads will exceed in-app ads from 2015
- inventory is growing faster than mobile ad budgets pushing down yields
- mobile app developers buying ads off each other to drive downloads of their apps might be producing an inflated picture of revenue that may ultimately prove to be a bubble
There was a good round up of Facebook mobile advertising stats on Techcrunch yesterday, culled from a number of different sources. These are the highlights:
- 20% of ad spend on Facebook now goes to mobile, from a standing start last March and up from 14% since October
- 71% of ad spend targeted to phones goes to Android
- 97% of ad spend targeted to tablets goes to iOS
- Facebook mobile ads currently command a 70% premium over desktop ads
These are impressive stats and go a good way to answering critics who thought that Facebook would struggle with mobile – both in transitioning users and from a monetisation perspective. Financial analysts have noticed and the share price is now headed towards $30 – a level not reached since the IPO.
There are some interesting nuggets in the detail too:
- Advertisers are paying a premium for mobile ads because they are performing better – particularly ads promoting Facebook pages and app install campaigns
- But, the improved performance might only be because there are fewer ads per page, and they take up a larger portion of the screen
- And, the improved performance might not last if the mobile feed starts to feel too saturated with ads. Ad formats often perform well when they are new and then performance declines when the novelty wears off.
- The high Android percentage for mobile phones may be because Android offers better tracking than iOS rather than because Android usage is higher
I’m just back from an extended Xmas break and have been enjoying getting back into the news flow and thinking about markets and opportunities. The juiciest titbit this morning is undoubtedly the news that upstart French ISP Free is now shipping ad-blocking software and hardware to its customers with defaults set so all ads are blocked. Free has 5.2m subscribers and is the second biggest ISP in France, making this a significant move.
Free’s motivation for blocking ads is to re-open the debate about ISPs charging content providers to carry their content. Network operators have long been sore that they make slim or no profits because they have to carry so much traffic for Google whose profit margins are huge, but regulators insist that they treat all content the same and won’t allow them to charge content owners for transit or for priority treatment (i.e. they insist on Net Neutrality). Blocking ads throttles the revenues of content owners like Google and might force them to start discussing carriage fees.
My purpose here isn’t to revisit the arguments on favour of net neutrality (I’m in favour) but to observe that ad-blocking might shift the balance of power in the struggle between content owners and ISPs and to note that it is a dangerous game that Free is playing. The interesting thing about ISPs blocking ads is that it can be dressed up as a pro-consumer move, reversing the positioning of the net neutrality debate where content owners were the consumer’s champion offering free services that were threatened by money grabbing ISPs. The reality of course is that for the ecosystem to work everybody needs to make at least a small profit, otherwise they will cease business. In theory the market is the mechanism which determines prices in such a way that everyone earns a fair return on their investment, but in practice there market inefficiencies are commonplace and regulation is often required. Then, once you have regulation, companies are operating in the court of public opinion as well as in the business of providing products and services, which can result in companies like Free taking actions which take money out of the ecosystem overall without any direct benefit to their own financials.
I just checked the NYT for an update and the latest news is that the French government has ordered Free to stop blocking ads. I guess that puts the genie back in the bottle for now, which is a good thing. Without ads the many, many, companies would suffer (including quite a few in our portfolio) and the internet as we know it would disappear. I acknowledge that many people’s privacy concerns aren’t adequately addressed in the current setup, but I don’t think the situation is so bad that we should wreck the entire web and start rebuilding from scratch.
Last week I wrote about Facebook’s partnership with Datalogix to measure ad effectiveness by tracking whether people bought a product in store after seeing a Facebook ad. Since then more detail has been forthcoming about why this is a good idea, doubtless aimed at overcoming the privacy objections. This is the most telling:
Smallwood [Facebook’s Head of Measurements and Insight] said that ad impressions, rather than clicks, drive sales. In fact, in the DataLogix campaigns, 99 percent of sales were from people who saw ads but didn’t interact with them. To back that up, he also also pointed to a Nielsen study showing that there’s virtually no correlation between clicks on ads and either brand metrics or offline sales.
For many companies, particularly startups on a tight budget with a keen eye on customer acquisition costs and customer lifetime value, focusing on clicks is the right thing to do. They can focus on brand and offline sales later, if appropriate. However, what Smallwood is making clear is that for many others to focus on clicks is to miss the bigger part of the picture. Maybe up to 99% of the picture. Moreover, it is big brands with large volumes of offline sales and the largest ad budgets that this applies to. Helping them link online ad impressions to offline sales will help them to bring more of their ad budgets online and to mobile. That is good for all of us.
On Friday I wrote about how privacy advocates will welcome Facebook’s release of their Shared Activity plugin which makes it easier for users to control how their actions on Facebook-connected third party site show up in their Facebook feed. Today’s news points in the other direction. This morning I read of Facebook’s project with Datalogix to measure ad effectiveness by tracking whether people bought a product in a store after seeing a Facebook ad. They are using loyalty card data to make the link.
Predictably, privacy advocates are arguing that if Facebook is to go down this route they should only do it for consumers who explicitly opt-in.
These opt-in vs opt-out arguments are happening all the time now, and in some ways they are a bit of a charade. Very few people change their default settings and so rather than being about personal choice, deciding to make something opt-in is to effectively kill the project – i.e. to regulate so that something is opt-in is to regulate it out of existence, most times at least.
For me the advantages of linking online ads to offline sales far outweigh any risks. Better tracking leads to better targeting, allowing publishers to charge higher rates and show us fewer ads and/or offer us more stuff for free. Additionally, the ads we do see are more likely to be for something we want, and therefore less annoying.
There is a lot to be gained from this type of tracking, which is why Facebook’s advertising customers are pushing them down this route.
And I can’t see that there is much risk. Datalogix anonymises the data it buys from retailers so there is no way that Facebook can tell which of their users are actually buying what. For me, real privacy risks come when people can work out how to access my money or work out where I live, not from high level concerns that if the data is in existence something bad might happen. I’d love for someone to explain if there are any real concerns in this case.