Wall St. Speaks Out on Mobile Marketing: Still Early Innings for Brands - Pivotal Research

For well over a decade, many pundits and practitioners within the advertising industry would claim that "next year is the year of mobile advertising." Over the past two years a case could be made that the year for mobile advertising finally arrived. As an increasing share of advertisements running on Facebook, Twitter and Google are executed on mobile devices, it is technically true that mobile advertising is growing rapidly, as each of these companies capture a growing share of digital media budgets. But it seems that relatively little of the spending going to these media owners does so because their customers actually have a marketing strategy that is dependent upon a consumer owning a mobile device or a consumer's interaction with a brand outside of the home. For the most part, the advertiser is simply looking for the biggest and/or most efficient seller of media, who then optimizes spending against their inventory and the advertiser's goals, running ads on whatever device the inventory happens to appear on. That's probably not what mobile advertising's earliest evangelists had in mind for the medium.

Mobile media has become much more important than it ever was in the past. In a relatively short period of time, mobile devices have come to account for a substantial – and according to various data sources a significant majority – of digital media consumption. In turn, apps capture a substantial majority of content accessed within mobile devices (88% of minutes of use per comScore data from October of last year) which means that at this point in time a majority of digital media consumption is also occurring within apps.

Few consumers in mature media markets are mobile-only. This means that virtually everyone reached on a mobile device can also be reached via the desktop, while the opposite is less true, which means that we can appreciate a rationale behind budgeting for digital media on a desktop-first basis. However, advertisers are almost certainly under-spending on mobile media and mobile marketing relative to the potential the marketing channels can offer, especially via location-based strategies and apps. For spending, we can point to IAB estimates of mobile advertising spending which include the aforementioned allocations of spending across devices, and note that it amounted to only around a quarter of total digital ad spending during 2014. Given the aforementioned allocations, this figure conveys that only a small share of digital media budgets go to mobile environments with an actual mobile strategy behind it. Anecdotal commentary mirrors the data: we hear from agency executives specializing in mobile advertising who note that even among the minority of marketers who work with mobile specialists might still only spend a minority of their digital budget on mobile media.

The reasons for the desktop-mobile gap are wide-ranging. Spending by digital media tends to concentrate on environments which offer a greater potential for reach (i.e. on the desktop). Best practices in mobile marketing are evolving, and capitalizing on the potential of mobile requires a lot of imagination, too. Establishing KPIs for mobile beyond demographic-based targeting require a lot of internal politicking among brand-focused marketers. At the same time as those goals are established, marketers need to figure out how a consumer's location data and a dimension of "place" can be applied towards marketing strategies. Identifying potential utilities that offer consumers value and provide branding opportunities via apps also require a lot of insight and even more skilled labor.

From our interactions with practitioners, we think that larger marketers are still in the early stages of deploying meaningful resources into mobile marketing, and these efforts are further aided by the development of an efficient mobile advertising eco-system. As marketers develop their mobile strategies, they also need tools which have been developed specifically to help with managing paid media in mobile environments (especially important for brands who need to promote their apps or to otherwise use mobile media to support mobile marketing strategies). Happily for marketers, mobile DMPs, mobile DSPs, mobile SSPs and exchanges, mobile ad servers and owners of inventory are achieving meaningful scale and becoming increasingly important given the very different processes they have established when compared with their historically desktop-focused competitors. On the demand side, the absence of cookies requires different approaches against which to target audiences. On the supply side, ad tech vendors must work primarily in an app-based environment rather than a browser-based environment, requiring different tactics in terms of technologies and business models. As pushing app installations will be a key goal, the most significant beneficiaries will probably be those who facilitate discovery (via app stores) and the media owners who can tie together data for targeting and distribution for ad inventory across owned and operated apps, third party apps and the broader mobile web. Facebook and Google both have powerful positions in this regard, and Twitter is becoming increasingly important too.

Across all of digital media, large brands – those who represent the bulk of TV spending and work with agency holding companies, for example – represent around 30% of spending. Our guess is that few of these companies have much more than a bare-bones mobile strategy at this time, and we presume that they are substantially under-represented in terms of app usage when compared with e-commerce focused companies and game developers. Small businesses – which also probably account for 30-40% of digital media spending – are also likely under-represented in terms of possessing strategies and app usage. Both the large brands and small businesses alike are therefore also probably under-represented when it comes to spending money to promote their apps.

A question that investors often raise in the context of app-installation ads (on Facebook in particular, where these ads have contributed meaningfully to the company's growth) is whether or not this category of advertising is potentially in the eighth inning of a nine-inning game, under the premise that many of the developers who drive spending may not have the most economical of business models. However, based on our observations of the sector, even if some of today's largest app install advertisers went away, there still seems to be so much room for growth from other segments of advertisers. We are inclined to believe that what will probably prove to be a very long game has barely begun, and despite the mobile advertising industry's reported successes of late, the year for mobile advertising to finally and truly arrive is still yet to come.

REPORT INCLUDING DISCLOSURES CAN BE FOUND HERE: Madison and Wall 1-16-15.pdf

Brian Wieser is a Senior Analyst at Pivotal Research Group, where he covers securities which areimpacted by the advertising economy, including Facebook, Google, Yahoo, Interpublic, Omnicom, WPP, Publicis, Nielsen, CBS, Viacom and Discovery Communications. Brian can be reached at brian@pvtl.com.

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