There was a decent amount of discussion about the virtual goods vs advertising numbers that Flurry released. Awesome set of numbers they put together there, thanks for sharing them!
I think it’s probably worth digging a little bit at how numbers in these marketplaces break down. I’ve worked at a bunch of advertising related startups in the past, and there are some basics of market sizing that I don’t run across as often as I would expect to. Basic market sizing is important for anyone starting up a new venture. Especially if you’re looking to raise some money. Even if you don’t run these numbers the people who you’re talking to definitely will.
The first important point to recognize is that your income as an advertiser is someone else’s cost of doing business. With the relationship abstracted through advertising networks it’s often easy to forget the simple relationship that exists. Take the App Store for example. Just to use round numbers lets say that the App Store is generating a billion dollars in raw revenue. That’s the total market size, and you need to work backward from there to figure out how much value you can capture running advertising. First you need to take out Apples share, so you end up with $700M going to third party publishers.
This is where most folks stop, but that $700M number has nothing to do with how much money you can get out of running advertising on mobile. If $700M is the amount of raw revenue that app developers are making with both direct sales and in-app purchases, it’s some percentage of that which they should be willing to spend on advertising. Cause in a rational market people will spend less on advertising than they make in revenue. Otherwise the marketplace as a whole isn’t working.
Because of that I’m not surprised at all that virtual goods would outpace advertising as the major source of revenue. Currently most folks are making money off direct sales or in-app purchases, so they’re spending less to get users than they’re making off those users. That’s good news actually, pretty healthy. During the initial land grab for a new marketplace you might see more ad revenue coming out of a system than sales revenue, but that’s not a long term sustainable position. The way the ad marketplaces crashed in 2000 is a good example there.
The way to really open up the advertising marketplace in mobile is to get folks who aren’t selling mobile goods and services to advertise on mobile. It would be great if we could size the advertising market for mobile not based off the revenue numbers from the App Store, but based on other offline revenue streams. The numbers get a lot bigger a lot faster if the advertisers and the inventory providers aren’t the same people. If the only people spending money in mobile advertising are people making money directly off mobile you end up with an unsustainable marketplace. Literally the equations don’t balance. I make X off my mobile service, so I’m willing to spend 10% of X to market my service. If the only way I make money is advertising then the amount of money being put into the system needs to equal the amount of money coming out of the system (at a macro level). So X = X * 1/10. That equation only works out when X = 0, which is what folks mean when they say “the market is unsustainable”.
Right now we’re getting a decent amount of lift in the system as a whole because there are large numbers of new users coming online and a lot of speculative investment going into attempting to capture large user bases. At some point that won’t be the case however. And the smart money is looking to spread out the model some, looking for folks who have significant chunks of their revenue streams from something other than advertising. That way if the market in mobile crashes out the way the online advertising market did in 2000 you don’t have to fold up your business and go home.
I agree with the Flurry folks though that the streams on all ends should keep growing. I think the shift from direct sales to virtual goods is a good intermediate step to help mobile advertising through the real step it needs to take – which is getting offline commerce transacted through mobile devices. When you take a look at chunks of revenue like like the $1.5B that eBay is making through their mobile service you get to numbers that look like game changers pretty quickly. I think the long term potential of this shift is why there’s so much activity going on in mobile payments (even if just being a mobile payment system for online desktop offers, that still opens up a large pool of money relatively speaking) and local advertising (which is the one area of advertising where a large healthy mix of the spend comes from physical merchants looking to drive foot traffic). I’m happy to see things shifting pretty smoothly too. If the progress keeps up hopefully we won’t have to struggle through yet another painful “correction” in mobile as a whole.