Much is remarkable of Facebook devouring Whatsapp for an eye-popping $19 Billion but I’m singularly obsessed with this simple fact: a social network solely monetizing on advertising is buying a company that will likely never sell advertising.
I find this interesting not for whimsical writing but because I’m supposed to be an expert in mobile advertising. I used to lead mobile advertising as a business for a top-40 US ad agency. I won AdWeek’s Media Plan of the Year for mobile in 2011 and emerging media in 2012. From my experience signing onto Apple’s inaugural iAd partnership to being the market/fit validator for hot mobile startups to spending millions of brand dollars on every conceivable form of mobile advertising, I’m convinced there is a distinct and utterly real possibility that much of mobile advertising will fail.
Whatsapp isn’t just the tip of the spear. For a company that has intentionally avoided mobile advertising, its the biggest hurricane hitting land yet that isn’t a mobile game. 24 hours before Whatsapp and its half-billion users shocked everyone with $30M in 2013 revenue, ‘Candy Crush’ maker King stunned everyone with it’s IPO news based on half-billion users, $1.9 billion in 2013 revenue and 0 dollars in ad revenue.
A funny but overlooked thing happened in Q2 2013 when King “discontinued selling such advertising space, and we do not expect to derive any significant portion of our revenue from the sale of advertising space in the foreseeable future.” [SEC]
So imagine the look on an ad agency exec’s face (this happened to a friend) when the ad sales rep from King said he was getting laid off after months of hard negotiating for the brand’s millions and it wouldn’t amount to anything.
Regardless of what you think of Candy Crush, this episode at King, reveals something remarkable about their management. Initial thinking was that a revenue bonanza in mobile advertising could be had by having the number one game on the App Store and Google Play markets, but after experiencing ad-sales negotiations for a few million, management decided it wasn’t worth upsetting the gameplay experience. (HA) In fact, we now know that King banked $328M in Q2 2013 of mobile non-advertising revenue, as disclosed in the SEC IPO filings and bet against deriving a single penny from mobile advertising.
The Forbes story about WhatsApp reveals an even more mature and cynical attitude, while typical venture capitalists talking to WhatsApp were interested in creating advertising models, only Sequoia partner Jim Goetz seemed to agree with co-founder Brian Acton’s remark about advertising: “You don’t make anyone’s life better by making advertisements work better.”
For current tech and startup leaders, this is a deeply unorthodox view because nearly everything we have grown with in the social web (YouTube, Facebook, Twitter, Instagram, Pinterest, etc.) have been monetized through advertising. But generating revenue from advertising isn’t a law, it’s a necessary evil used to quell investors while maintaining a positive consumer experience. While users today might tolerate ads on social networks, there is absolutely no reason to believe they will tolerate ads on the future communication platforms of tomorrow. Path has made a valiant effort at this but WhatsApp has done far better adhering the same ideal with a near half-billion users. And as I see it, Mark Zuckerberg hasn’t just acquired WhatsApp, he’s made an incredibly shrewd and sizable bet that mobile advertising might fail.
At $19 Billion, this is nothing short of a visionary bet, and while Facebook might have a long, long, long way to go before their revenue is diversified from advertising, it should be regarded as an acknowledgement that being a media company dependent on mobile advertising revenue isn’t the place Zuckerberg wants to be. This is a massive contrast from the other companies scrounging about for mobile ad dollars, Google surely comes to mind but so does the mobile desperation at AOL and Yahoo. Yahoo’s Weather and News Digest apps might be beautiful, but to me, betting solely on mobile advertising seems to be even crazier than spending $19 billion on a near half-billion users.
On South Korea’s KakaoTalk messaging platform, the majority of it’s $200M 2013 revenue came from diversifying mobile revenue rather than making bigger bets on advertising. In one of the most hyper connected countries in the world, where 93% of the South Korean smartphone users using Kakao(!), only a quarter of 2012 revenue came from advertising. With 130M+ users across Asia (Korea’s population is 50M), Kakao is proof that a messaging platform can generate sizable revenue and doesn’t necessarily need advertisers unless it want them. Ultralab wrote an incredibly thorough explanation as to how Kakao’s model works and there is every reason to think it would work anywhere in the world.
While some publishers like Quartz and Buzzfeed are undoubtedly successful at making mobile advertising work, there are no guarantees, all or even most, publishers will be able to emulate their integrated publishing technology, ad-sales with content in harmony to turn profits. Plus with what we now know from Supercell, King, KakaoTalk and Whatsapp, it’s clear a huge gap exists between mobile advertising success and other forms of generating mobile revenue.
Recent articles in Adage and Bloomberg have breathlessly cheered on mobile advertising with individuals enormously vested in mobile advertising but while mobile advertising will have a future (+videos, +natives /-incentives, - - -banners) some tech giants are making bets mobile advertising will fail.
This is undoubtedly a great thing for consumers but startups, venture capitalists, tech giants, publishers, ad agencies and brands should avoid the hype around mobile advertising and be singularly obsessed on consumers over all other priorities. It’s what has defined Apple and Amazon and now, possibly Facebook.
next week: The Real Mobile Advertising Economy Amongst Apple, Google and Games