A recent quote of mine in AdAge in a graphic about the state of adtech funding,
“The winners have been picked,” said Mr. Davidson. “How do you compete with one of the major DSPs? I don’t see it.”
Which I believe is true, but only for the moment. We’re at the cusp of a major shift in consumer behavior that will create many new opportunities for adtech startups. If you want to figure out the future of adtech, look to where consumer technology is going. For example, let’s talk about mobile messaging.
In 2004 an estimated 600 million people worldwide used instant messenger (IM) apps. 40% of US Internet users, or 53 million people, used at least one IM app. While talking using text was the dominant use case, it wasn’t the only use. 45% used their away messages to tell people where they were, what they were doing, or publicize a favorite story or line. 31% of US IM users traded links, and 30% passed along photos or other documents to their IM friends. These users were split across proprietary IM networks owned by AOL, Yahoo, MSN, and others that prevented people from talking across networks, driving many people to use multiple applications simultaneously.
Friendster, launched in 2002, had over 5 million users early in 2004. MySpace, launched in 2003, had over 5 million users by the end of 2004, and Facebook, launched in 2004, ended the year with with 1 million users.
Today, it’s a different world. While Friendster and MySpace have been supplanted, Facebook has over 1.2 billion users and accounts for nearly 10% of the Internet traffic around the world.
But while the IM networks faded away, the basic need they served has been fulfilled by a new set of mobile over-the-top (OTT) messaging apps that provide a similar functionality. WhatsApp, perhaps the largest as of November 2013, has 350 million monthly active users worldwide. Line has nearly 300 MM registered users in Japan, Korea, Spain and other countries. WeChat has over 300 million users (100 MM from outside China). Snapchat hasn’t disclosed users but reports 350MM images are shared per day. KakaoTalk, Kik, MessageMe, Viber, Pinger, Moped, and others each have hundreds of millions of users in their own digital diasporas, and newer apps like Context and Emu are showing the the potential for innovation in the space.
The numbers are huge because the number of Internet users are huge; with 2.5 billion Internet-connected users in the world (over 1/3 of the global population) with computers, tablets and phones, the opportunities for mobile messaging apps are huge and growing fast. The current spate of mobile messaging clients have benefited from a couple factors that aid rapid adoption: easy to download (open-ish app stores around the world), easy to find people by importing the phone’s contact list, easy to spread via established distribution platforms such as Facebook and Twitter, and easy to use in during the many “snackable moments” that occur throughout the day through nearly ubiquitous data access via Wifi or cell networks.
Looking back at 2004, the instant messenger space was becoming competitive quickly. Although each product wasn’t profitable on its own, they were seen as key proprietary bulwarks to support other community strategies by the portals. Business models hindered interoperability, and it took an investment from Google into AOL to open up AIM to Gtalk. Yahoo and MSN move to start integrating in 2006 as a competitive response.
What supplanted them? Social networks, led by MySpace, Facebook, and a range of forgotten others (Orkut, Friendster, Bebo, Hi5, and many more) pulled the attention away from simple private communication to a range of public and private communication, link and photo sharing activities. The richer platforms allowed for more complex interactions, and the advent of the public page changed the way people (and brands and advertisers) used the Internet.
But the recent shift in attention to the mobile messaging apps is yet another example of the age-old maxim that what’s old is new again. And not only is it a worrisome signal for the dominant owners of website inventory / people’s attention today, Google, Facebook, Twitter, Tencent, Sina and others will have to quickly consider not only the direct competition from the messaging apps, but also whatever new attention-grabbing paradigm comes next. IM spawned social networks, which spawned mobile messaging, so what’s next?
One thought: Communication is the killer app driving the “look-down” paradigm of the mobile revolution. Just as the living room has been through the conflicts between the lean-back and the lean-forward methods for passive and active modes of content consumption, at some point the “look-down” active paradigm of mobile will be challenged by a “look-up” passive paradigm. Wearable devices, smart contextual notifications, real-world sensors and iBeacon, here we come?
Why does this matter for brands and advertisers?
##1. If you want to figure out the future of adtech, look to where consumer technology is going.
The reason is simple: people define the nature of the ads they see by the platforms they use, because brands follow attention. Consumers “choose” what’s popular based on where they direct their attention, and brands find ways to tap into that attention to market their products and services. Brands are forced to adopt to new platforms and new attention norms because if they aren’t, their messages won’t resonate and their advertisements won’t perform.
While platforms need massive scale to draw real advertiser dollars, scale isn’t enough: they need advertising products, audience metrics, performance analytics, targeting, and easy (read: inexpensive) ways to buy scale. That’s why it takes time for new consumer platforms to create advertising products for brands and agencies, because it takes time for the companies to grow up to serve the needs of advertisers. Nailing the product and user experience is priority #1, because you have to get eyeballs before you can sell eyeballs.
Usually that initial consumer product doesn’t have an obvious advertising product. Snapchat, for one is getting a lot of attention currently because their rejected acquisition offer has spawned a lot of armchair quarterbacking for people trying to justify the valuation. Brands and advertisers are wary of Snapchat, but I would argue that’s because they’re looking at Snapchat now, not Snapchat in the future. There’s a built-in business model and a range of potential products for brands and advertisers to buy at scale once Snapchat decides to dedicate resources to building those products. Remember that Snapchat has less than 30 employees. Give them time.
##2. Proprietary inventory and proprietary data still rules.
Facebook, Twitter, Google, Yahoo and more are all in a battle to own the logged-in user. Each company originated in a desktop-first world, and have been under pressure to adapt their user products and advertising products to an increasing amount of mobile usage. In a world where the relevancy of cookies are coming under pressure from privacy concerns, user pressure, and mobile technology, the logged-in user, owned and tracked by the cross-device service provider, is the key to the new adtech stack built on top of first-party data.
If you want to win in adtech, you need proprietary inventory or proprietary data. Facebook, Twitter and Google are winning the adtech battle because they’ve created products that they control that have consistent experiences across browsers. And in an increasingly closed ecosystem where the supply owns the targeting, tracking and performance metrics, third-party buying, targeting and optimization tools are struggling to differentiate themselves. Not surprisingly, this scares venture capitalists, who get concerned about technology differentiation, competition, and margin compression, and reduced opportunity to “build a moat” against other startups and the incumbents.
The opportunities for DSPs, SSPs, networks and exchanges to emerge in social haven’t emerged as they did in display, and it’s because the social platforms own the supply and interactions with the customer far more than the display portals and publishers did. Building off other people’s platforms has created a lot of aquhires in the social adstack, but we haven’t seen the same exits in social that we saw in display. It’s not hard to wonder why seed adtech financings have decreased to less than 10 in 2013 year-to-date. 
##3. Today’s communication and sharing tools are tomorrow’s platforms.
What’s getting less attention from the advertising world are the potential of the messaging apps. The resurgence of the mobile messaging apps has highlighted the potential of mobile, a way of using that web that’s forced the social networks to retool their user and advertising products to better serve the needs of both.
Facebook and Twitter both started as communication and content sharing tools first and foremost, and found over time that their future business models depended on advertising. It’s not hard to see how their recent product changes are aimed to boost media distribution, content consumption, and their advertising products. Twitter’s product efforts to standardize the feed across desktop and mobile, standardize retweets, auto-display images, and display images and video via Twitter Cards tie to their advertising strategies.
The desktop instant messenger apps of the 00s didn’t go through these shifts because they were products supported by larger corporate business models. But the mobile messenger apps will soon face the pressure to shift usage from communication to distribution as a way to monetize users. 
##4. Monetization in mobile messaging is starting with charging users for interactions, but larger opportunities exist.
The early monetization efforts from the mobile messaging apps have come from outside the US, and they have all been from charging users. Line made $17 MM in Q1 2013 from selling digital stickers that help people communicate. KakaoTalk made $311 MM in the first half of 2013 from gaming, WhatsApp charges annual subscription fees.
WeChat is one of the few to start courting brands. In August 2012 they launched “official” accounts for brands, and more recently updated the core product to create ways for brands to message people through customized rich media and geo-targeted push messages.
Other messaging apps have been pursuing platform strategies for monetization. Kik and Tango both launched app stores for developers to build games that are distributed to their users directly through their applications, taking an approximately 20% cut of revenues. WhatsApp has been working on an API strategy to allow other mobile apps to share content into WhatsApp. In a different vein, App.net is taking a social platform strategy to allow developers to launch a wide variety of applications using a core “personal cloud” powered by App.net.
It’s still early days for mobile messaging monetization, but there’s simply too much consumer use to ignore.
##5. Brands will come to mobile messaging.
While it’s fair to say that many mobile messaging apps will be challenged to attract significant advertising spend with their current products, the opportunity is there for broader monetization strategies with brands. Obviously there are questions about the audience demographic, the interactions, the content and quality of content shared on the platforms, and the brand names of the platforms themselves, but the same doubts existed when social networks first emerged. In the end, user attention has pulled brands into testing and using new platforms to tap into new customer behavior.
The tests have already started. Taco Bell has tested Snapchat, Red Bull, H&M and the Gap have tested Aviary’s photo editing platform across multiple messaging apps. Nike, Starbucks, Cadillac, Panasonic, and others have tested WeChat in China, and many Japanese brands have tested LINE in Japan.
The issue faced by many brands is scale. While each of the apps are large, the problem is that brands must create custom campaigns to fit the unique advertising products used by each app, and there is no standardized way to deploy campaigns across messaging apps. It’s a similar issue that brands argued when native advertising first became a buzzword last year, but we’ve seen native ad networks emerge to help solve that problem.
It’s fair to say we’ll see companies crop up to solve the problem of cross-app campaign management. One of the earliest examples is Aviary, which supplies photo editing infrastructure for many of the largest messaging apps, and in doing so, can also provide at scale a “native” advertising product tied to image sharing over messaging apps.
Think about the major challenges faced by advertisers looking to use mobile: small screens, lack of audience targeting, difficult to measure responses and conversions, lack of scale, and difficulty to tailor marketing message to the wide variety of contexts and attention states where people use their phones.
Mobile messaging apps could address a lot of that. They garner a massive amount of attention on the Internet and generate billions of potential marketing moments a day. They know what people are saying, when they are saying it, who they are talking to, and where they are. And they could deliver marketing messages deeply integrated into the user experiences.
Are the apps doing this now? No. But they could be.
We’ll figure out how to make the ads. We always do.
Two last thoughts to sum it up: from a marketer perspective, would I test these messaging apps today? Only for certain brands in very specific ways. As an investor, would I invest in a mobile messaging app? No, but I would invest in the tech that could bind them together.