Venture Bytes #1 – Ad Supported: The Future or a Fantasy?

Ad Supported: The Future or a Fantasy?

Across the tech landscape are literally thousands of startups, and app companies, at various evolutionary points building on a presumed ad supported future. This has been a facet of Web 2.0 space for many years now. Of course, there are many firms building on mobile commerce, payments, deliveries, subscription and other models as well. The number of firms betting on serving ads, particularly mobile ads, is clearly larger than the mobile ads spend of the foreseeable future.

US and global audience has and is migrating to digital content. Mobile/tablet leads the growth. Digital spend is surging. E-Marketer expects mobile Internet ad spending in North America to touch $47 billion in 2014 (or 33% of total worldwide digital ad spending) from $25 billion (or 21% of ww spend) and expected to approach $69 billion in 2015 (or 43% of ww spend).

Even the brisk pace of digital ad spending growth pales in comparison to mobile and smartphone usage. Dollars are following the audiences on smaller screens at a brisk pace in absolute and relative terms. This is a global reality and is often more pronounced outside the developed world. For many, mobile and personal web engagement, are synonymous. Smart devices are often the leading and only way that many get online. Thusly, we fully recognize the enormous migration of eyes, hearts, minds and dollars. Our question is, how many businesses are betting on this revenue? We note a clear lack of careful discounting of eyes in markets where payments technologies are challenged and consumers have disposable incomes under $1,500 per annum.

It is clear that every Dollar of present and future advertising has been claimed and forecast by at least a dozen emerging businesses. There is likely to be more than a little disappointment coming for the ad-supported futures planned. We are surprised and dismayed by the uncritical assumption that all the ads are likely to hit their mark, concerning consumer behavior. The impulse to give it away, build audience and then add ads makes sense. However, it is a response to an underlying reality that questions the validity of the business model itself.

Everyone wants and needs to be ad supported because young consumers, global emerging middle classes and expectations demand it. The young in developed countries are cash strapped and were raised on web freebies. In many cases, certainly the US, this generation will be less economically secure and likely less affluent than their parents. We see why it needs to be free, we are less sure of the long-term value of these “customers.” The emerging market middle classes seem a reasonable investment but will not have or deploy anywhere near developed world spending patterns in the foreseeable future. This leaves us with the expectations issue that troubles us the most.

Yes, it is faster and easier to build audience, for the fortunate few, than at almost any other time. That said, audience conversion to dollars is always slower, harder and more fraught than hoped. As more and more businesses grow up on ad supported models it gets harder to win and keep precious ad dollars. Too many folks competing to serve ads, in a life or death struggle, also does little to support digital advertising pricing power.

It is also true that the relative dearth of compelling mobile ad content made previous served ads more powerful. Given the migration of monies and the vast and impressive creative teaming being focused on mobile, this will be less true as time passes. Thusly, it may cost more to deliver better content to over exposed and desensitized target audiences just as waves of venture funded firms need to monetize ad supported models. We think it is time to look through ad supported revenue claims toward different monetization futures. Of course there will be huge spend and growth. Many great businesses, established and new will be built off of mobile ad platforms. There will also be many disappointments. We are simply raising a caution flag as the funding rounds go screaming around the track.

Also featured in this edition is our news section containing articles from The Wall Street Journal, Techcrunch, and PaymentWeek.