One thought that I can’t seem to shake from my head is that digital advertising is currently in an unstable equilibrium and is ripe for disruption.
A lot of the changes happening in the space might already be obvious to you and consumers like you.
But what I think is less obvious is the role that payments can and may play in the coming years.
Years ago, many apps used to be powered by digital advertising. Digital advertising quickly became the dominant monetization model for mobile apps soon after the iPhone ushered in the mobile app era. This is despite Steve Jobs’ / Apple’s desire to push paid apps. But ultimately, consumers don’t really want to pay for things upfront, especially when you are not sure what you are getting into with every new app you download.
According to this TechCrunch article offering app monetization advice to developers back in 2012, advertising was the dominant and superior model to pursue:
The future of app monetization clearly lies in ad-supported model. A recent study by Cambridge University computer scientists found that 73% of apps in the Android marketplace were free, and of those, 80% relied on advertising as their main business model. Free apps are also far more popular in terms of downloads, the researchers said. Just 20% of paid apps are downloaded more than 100 times and only 0.2% of paid apps are downloaded more than 10,000 times. On the flipside, 20% of free apps get 10,000 or more downloads.Source: TechCrunch
Although ads looked tacky and created poor user experiences, it ultimately paid the bills much more easily than trying to get someone to pay $1-3 (or more) upfront.
However, over time the landscape evolved.
Some categories like games started to move away from advertising towards in-app purchases.
Other categories like media found increasing success with subscriptions such as Netflix, Spotify, and Match / Tinder.
Ultimately, today, the advertising garden is dominated by just Google and Facebook with a few smattering of other smaller players mostly in the social media space (e.g. Snapchat, but these other players tend to gravitate towards brand advertising rather than direct response advertising).
The evolution away from direct response advertising for many apps and concentration of advertising dollars within Google and Facebook is ultimately a result of the nature of advertising.
For any advertising platform to be successful, three key elements are necessary: 1/ Traffic, 2/ Data, and 3/ Context.
Without traffic, advertisers clearly would have no incentive to advertise. The ads would be seen by no one. The average long-tailed app with a couple of thousand users face this exact problem.
Some apps can generate decent amount of traffic. However, unless you have relevant data on users, you might not be able to put a relevant ad in front of them. Without relevant ads, the users are unlikely to click on them and convert (make a purchase). This is the problem that news companies have. They have a lot readers but may not have enough relevant data to put anything appealing in front of you. A news company may know you love reading about Trump, but that doesn’t necessarily translate into any useful commercial advertising data.
And, then lastly, context. Some apps have high traffic and can generate a decent amount of data, but the context is not right. The use case of the app may be very different from the context that is necessary for people to feel “in the mood” to transact. For example, many of Twitter’s power users are exactly in this camp. They are on Twitter all the time. Twitter might have a lot of data on them, but most Twitter power users just aren’t in the mood to be clicking on ads while trying to thought-lead. Clicking on an ad would take them away from what they really are focused on – growing their thought leadership, influence, and clout.
Google search, on the other hand, is the perfect example of the right context. Not all searches are commercial, but for those that are, Google search is the perfect medium for ads. By searching for something, you effectively tell Google you are in the mood to transact.
As it turns out, apps don’t need to have all three elements on their own. This is because Google and Facebook have created advertising ecosystems that expand across the internet.
Have traffic but no data? Well, you can sign up for Google and Facebook’s advertising networks, and let them place their ads on your property based on their data.
But if you have all 3, then you are destined to have a very large advertising business. Google and Facebook have all 3. They have traffic. They have data. And they have specific apps / use cases where the context is just right for ads.
At the end of the day, direct response advertising ultimately serves a very specific purpose – to get you to do (usually buy) something. (Brand advertising is also geared towards getting you to buy something in the long run, but getting you to buy something takes a back seat since brand advertising is first and foremost about communicating a brand message rather than asking you to immediately make a purchase.)
Because of this specific purpose, Google and Facebook are currently starting to see some advertising market share impact from the shift of direct response advertising to the natural home for that advertising – on e-commerce websites.
For any product ad spend, it increasingly makes sense for that ad dollar to be spent on Amazon (or other relevant e-commerce websites). Amazon has a lot of traffic. Amazon likely has more relevant data with respect to your product wants and purchase history. And Amazon is tailored, specifically, to e-commerce and commercial transactions. The context is perfect.
Better yet, for the handful of brands that truly resonate with consumers, the brands increasingly don’t even need to advertise to their consumers via 3rd parties at all. These brands are likely able to convince a meaningful number of their consumers to download their app. Instead of advertising to you via 3rd party, they can directly push an advertising to you via your phone’s app notification system.
For example, Nike:
Strong brands can effectively “go direct” to consumers in the app era. And the best part is…it’s free.
This was hard to do even just 15 years ago when the internet was confined purely to the browser. 15 years ago, before the smartphone era came along, you might have frequented Nike.com, but there was no way for Nike.com to push an ad to you. Now that has changed.
I believe this is why it makes sense for Facebook to make a strong push into e-commerce. I believe this is why it makes sense for Google to make a push into e-commerce even if Google Shopping looks half-baked to me.
Both players likely understand the evolving nature of the advertising industry and are making concerted efforts to ensure they remain relevant. (Non-product advertising such as local services still seem fairly safe at the moment, but if China’s advertising market is any indication, it’s going to come under pressure, too, especially if Google and Facebook do not response appropriately.)
As a consumer, you probably already understand and see some of this happening right before your eyes. You probably go to Amazon first when you want to buy something these days. And you probably have noticed the growing number of “sponsored products” (e.g. advertised products) on Amazon. And you probably notice the growing number of notification ads. All of this is kind of bad for Google and Facebook. And all of this is likely pressuring them to adjust, such as developing their own e-commerce efforts.
There is another blindspot, though…and it’s payments.
If we go back and consider the three things that are necessary to build a large dominant advertising platform, payments could check all 3 boxes.
You have Facebook apps on your phone. You have Google apps on your phone. I’m very willing to bet that you have or will have a (or many) payment app on your phone. Perhaps Venmo or Cash app or Apple Pay / Apple Wallet. You may not use it all the time, but your usage is likely to increase in the coming years as digital payments penetration grows.
Payment apps also have the potential to gather meaningful data. This is because payment players / apps directly capture relevant data around your purchases, whereas Google and Facebook and others have to infer this. In addition, you likely are increasingly using digital payments in the offline world, whereas the internet giants likely have much less data on your offline habits. Currently, the data captured by payment players is still quite limited but is likely to grow over time.
And lastly, context. You might spend a lot of time on Facebook, but you’re probably not usually in the mood to buy things. You probably scroll past most of the ads. Sometimes something might catch your eye, but not always. Google search has much better context, but you’re not on it all the time.
Payments, on the other hand, has a unique positioning with respect to context – It can see exactly when you are in the mood to buy something because your transaction directly runs through it. A payment app may see that you’ve bought one thing and can use that data and context to push relevant ads directly to you via push notifications. For example, perhaps you book an airline ticket and pay for it with your digital wallet. In the future, it’s not inconceivable that the digital wallet can use that airline purchase info to recommend hotels or travel activities to you.
What’s interesting is that if you look at Asia, these converging battlegrounds are already hotly contested. Alipay and PayTM (both payment apps) not only use their data and presence to push advertising but to also actively engage in e-commerce as well via a converged “super app” model.
For example, Coke collaborated with Alipay to do a special AR advertising campaign:
Coca-Cola kicked off a mobile campaign to celebrate Chinese New Year that lets consumers win money on their smartphones. Scanning QR codes on Coke ads and packaging unlocks augmented reality (AR) features on Alipay, the mobile payments app by Alibaba Group with more than 520 million users, according to Ad Age.
Mobile users who unlock the AR features will see two cartoon folk-art dolls that Coke has showcased in its Chinese New Year ad campaigns for several years. The dolls appear as digital animations overlaid on a real background seen through the smartphone camera, similar to Pokemon Go, and they throw snowballs or hug, then deliver holiday wishes to users.
After the animation plays, users are served a “red envelope” of virtual cash to mirror a Chinese tradition. The cash gifts, which range from 1 cent to $15.50, can be spent on anything on Alipay, not just Coke products. More than 6.6 million people have watched the AR animation in the past two weeks and received small amounts of gift money through the Alipay app.Source: Mobile Marketer
It’s not clear, yet, whether the “super app” model will be that prevalent in the US / Western markets, but either way payments and advertising seems to be on a collision course.
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