Evolution in the mobile ad space

Mobile app companies facing issues of distribution rely on spending money on mobile ads to sustain the flow of new users to their app. These ads range from those provided via banner ad networks - such as Millennial Media - to incentivized app downloads via companies that offer them like TapJoy.

Mobile apps and games face a huge problem of standing apart from the noise and realize the odds of getting to the top 20 of mobile charts has an extremely low probability without paid user acquisition. Companies are paying around per-user figures ranging from $1.50 to $6. Such high expenditures make up the bulk of mobile media buying budgets. Those willing to pay such high user acquisition costs also have to make the return on these investments - and the type of apps that garner such monetization rates tend to be games as they monetize at a higher rate than most mobile apps. With paying users in high demand, games and apps are constantly swapping users using ad exchanges like Chartboost and Burstly.

Incentivized app downloads have been the focus of most players in the space as a sure way to boost downloads. Apple, especially, has been locking down app discovery via incentivized downloads, causing uproars when it banned the offering of in-game currency to users for downloading other apps in 2011. Apple also updated its App Store terms and conditions in October of 2012 to clamp down on apps which promote titles from a different developer. Apple did this to protect the legitimacy of the App Store chart rankings which were being gamed by high traffic enabled ad-funded free apps.

With this approach changed, companies had to start actually promoting apps that are valuable to users and promoting them cleanly. Incentivized CPI companies are loaded with issues such as:

• driving fake installs
• users not being interested in the app
• users who quickly delete the app
• users known for leaving negative reviews
• sometimes an install may not be delivered but you would be charged anyways.

Mihir Shah, ex CEO of TapJoy did release stats in 2011 showing that level of engagements from incentivized installs isn't too bad, with roughly 30% of users still interacting with an incentivized install app one month after downloading it to their device.

Incentivized installs tend to be cheaper than non-incentivized, with a comparison rate of about $0.30 to $0.65-$1.00. Regardless, Apple's not going to turn the blind eye and ultimately developers will have to go with non-incentivized installs which will deliver greater engagements factors, higher ARPU and LTV. Many companies have in the past used a combination of incentivized and non-incentivized, doing burst campaigns that get them visibility by delivering a lot of downloads, since so much inventory is only available with incentivized, and then doing non-incentivized to help keep the rankings high.

Other players have entered the space and are offering good substitutes to incentivized installs. Facebook, for example, has been offering native mobile app install ads that have been giving certain developers a good bang for their buck but doesn't charge on a CPI basis (for that you have to use the optimized CPM option). Compared to Tapjoy and others' abysmal install rates of 0.5% and 5%, Facebook had a near 25% install rate.

Real time bidding mobile ad exchanges are also hot, with players like Flurry moving in this space. Using the wealth of data available, companies can use segmentation to target ads as discussed in our previous blog post. This process fits especially well with programmatic ad buying which is about defining placement triggers in advance. Oversupply of ad inventory has undervalued ads. Higher demand big pressure could change this, along with sources of premium ad inventory.

Regardless of what happens, localized ad campaigns and marketplaces are going to see an increasing amount of attention and investment. These highly relevant local ads are going to show greater performance and ROI for advertisers and in turn increase demand and demand-driven ad rates. Mobile's heightened user engagement, relative to other ad supported media, will create premium inventory that will boost advertiser demand and ad rates and one of the key source of this inventory will be location targeted ads.