How To Monetize Two Million Mobile Apps

forbes.com

(Photographer: Patrick T. Fallon/Bloomberg)

There is no longer much doubt that the Internet is undergoing a swift and irreversible transition from desktop to mobile. This ongoing evolution portends vast changes in the digital ecosystem, from the decline of web browsing and diminution of search advertising to the rise of compelling new messaging and networking technology that is altering the way that people work and interact.

Today, the world’s largest app stores, including Google Play, Apple’s iOS App Store, Amazon, Windows Phone and Blackberry World offer instant access to over two million mobile apps – a stunning but also bewildering range of options. Predictably, as the app universe has grown, so has mobile advertising, the energy that fuels this vibrant ecosystem and a market that is projected to grow to $17 billion by 2018.

As with most emerging markets, the wealth isn’t being distributed evenly. As Paul Kafasis, the CEO of Rogue Amoeba, observed several years ago, “the App Store is very much like the lottery, and very few companies are topping the charts. It’s a hit-based business. Much like music or book sales, there are a few huge winners, a bigger handful of minor successes, and a whole lot of failures.” The lottery analogy is especially apt.According to Comscore, eight of the ten most popular apps were created by Facebook and Google, two giants whose enormous wherewithal and broad distribution channels narrow the odds for everyone else.

If there is as much luck as skill in the app business, it’s also true that smart developers make their own luck. By one estimation, the average app available on Google Play loses 77% of its daily active users within three days of its initial download. Part of the problem is intrinsic to the design and utility of the app, but some of it is surely related to monetization strategy. In a recent survey, AppsFlyer asked users what motivated them to uninstall particular apps from their mobile devices: 29 percent of respondents cited “intrusive ads.”

That’s a considerable problem. Whereas five years ago, almost two-thirds of all apps cost users a small fee to download, today, almost three-quarters of apps are free of charge, reflecting the public’s growing aversion to paying for apps. That means that developers are ever-more reliant on the only other viable monetization strategy: advertising. Equally problematic, mobile advertising is opaque, often inefficient, and costly to app developers, with intermediaries taking margins as high as 25 percent.

These kinds of challenges can’t be resolved overnight, but here are a few steps in the right direction – steps that could help preserve the democratic and entrepreneurial character of the app universe.

Speed matters: One of the most powerful forms of mobile monetization is video advertising. In a recent survey, 72 percent of advertising agencies rated online video at least as effective, if not more effective than, television ads – meaning, it can command a strong price.

But mobile video advertising is bedeviled by latency – the lag time before a video ad loads and plays. For app developers, this challenge is particularly acute. A study by Akamai and The University of Massachusetts, Amherst found that 25 percent of video users will abandon content after a delay of five seconds, and 40 percent will abandon after a delay of ten seconds. In the app world, abandonment is tantamount to death.

Simply put, we’re living in the year 2016, not 1996. There’s no excuse for latency of one second, let alone five seconds. Increasingly, there are solutions in market that cut latency by factors of 100 or even 1000. There is simply no reason for developers to take their chances with slower units.

Drive Yield: Until recently, the prevailing monetization model for in-app advertising compelled developers to rely on a single demand channel. It was an easy, plug-and-play method of powering in-app advertising, but it sharply limited the amount of demand – and, by extension, the amount of monetization – that an app developer could command. To use a real-world (and non-digital) example: if you were auctioning off a valuable piece of art, why would you restrict yourself only to bidders whose last names began with the letter A? Doing so leaves 25 letters, and a lot of higher bids, on the table.

Today, developers can employ pre-bid (aka “mobile header bidding”), a light-weight method that enables an app to call multiple demand sources at once and thereby achieve higher bids for its advertising inventory. When deployed correctly – and asynchronously – mobile header bidding has no downside latency effect. Any developer who is not using pre-bid is leaving money on the table, and given the challenges facing the industry, few people can afford to do that.

Don’t lose on margin. In the grand scheme of Internet history, mobile apps are still relatively young. Because they are a comparatively recent innovation, their monetization infrastructure is patchwork and inefficient.

Many developers are paying enormous margin – sometimes 25 percent, perhaps even more – to intermediaries who specialize in packaging and selling mobile inventory. This system was once prevalent in desktop display advertising, as well, but as the industry has consolidated and matured, this very expensive model is becoming unsupportable.

While most intermediaries still charge double-digit “take rates” for ads served on desktop devices, we are entering a period of intense price compression and commoditization. It’s my belief that the days are numbered for opaque, double-digit take rates in desktop display, and it’s also my conviction that mobile app developers need to demand a similar reduction of margin. Here are two simple rules of thumb: (1) if you don’t actually know what margin you’re paying, you should; and (b) if you are paying high double digits, you are being taken advantage of.

The takeaway: Anyone who believes in the importance of a free, open and democratic Internet should be rooting for the heroes of the mobile Internet – the app developers whose products engage, challenge and connect billions of end users each day. Most developers aren’t independently wealthy; they need to monetize their creative output in order to continue innovating, informing and entertaining. Their success is critical to all of us.