Last week, we called on the FTC to clear the acquisition of AdMob by Google. We believe that even though Google has a dominant position in search advertising, the mobile market has become so competitive that blocking this acquisition makes no sense.
In fact, it could hamper competitiveness in the mobile ad market by tying Google’s hands when it needs to compete with very strong players like Apple.
Then, with great timing, Bloomberg came out with a story that FTC staffers are still keen on blocking the deal. We still disagree. Only a few months ago, AdMob (and by implication Google when it closed the acquisition deal) looked like it dominated mobile advertising. Now all bets are off.
Before the iPhone came along, the mobile application ecosystem was dominated by the carriers, and was thus very limited. The browsing experience was poor.
There was some advertising, through SMS or the carriers' mobile portals for things like ringtones, but the market was small and not very active.
Fotochatter (apparently it's still around) was a service that allowed you to snap and share pictures from your cell phone. A great idea, but since the mobile app ecosystem was so closed, it never took off. In particular, the founder, Omar Hamoui, was distressed by the lack of opportunities to advertise his service.
AdMob was all the rage starting in 2009 when the app store blew up, but it got started looong, looong ago, in January of 2006. Omar Hamoui started it after his experience with Fotochatter, realising there was an opportunity for a thriving mobile ad network.
A former app developer himself, Hamoui had the then-innovative vision that the winning ad network would be the one that reached out to app developers and helped app developers the most. That was the vision that would make AdMob the leader in its space, but not before...
The iPhone isn't a phone so much as a mobile, web-aware computer. Coupled with the app store, the iPhone allowed a completely new mobile app ecosystem to thrive.
People's reluctance to pay for digital stuff and competition drove the prices of apps down, often to free, leaving developers to turn to advertising to monetise.
AdMob was there, ready to pounce.
Rival ad networks pop up, including #2 Quattro Wireless. All developers want to put ads on their apps. With first-mover and scale advantages, AdMob keeps its head above the fray.
But the booming supply of ad opportunities and the lack of commerce intent in mobile browsing sends CPMs crashing down. This is no big deal since all the players in the space have oodles of VC cash. Still, some iPhone apps could make $500 to $5,000 per day with ads.
AdWhirl started out as a mobile ad exchange. This was a logical move for the market as similar ad exchanges appeared on the web. AdWhirl allowed developers to switch between ad networks on the fly to display the ads that gave them the most money.
This was a huge strategic threat for AdMob, because it can commoditize their platform and cut them out of their crucial developer relationships. But then again ad exchanges seem to be inevitable in the long run.
So AdMob bought the tiny AdWhirl for a song. They then open-sourced it to guard against fears that they would skew the platform in their favour.
Buying a mobile ad network seemed like a weird move for Apple to make. It's not a business they know and they have a poor record running large sales forces. The margins are not big.
There were several reasons why Apple did get into mobile ads, though:
- It's still a huge business opportunity.
- Apple wants to own/control the most valuable parts of their ecosystem.
- Most mobile ads are ugly, and Apple cares a lot about the user experience on their platform ; making sure the inevitably-omnipresent ads on the iPhone are pleasant is motivation enough.
- And of course, Apple and Google are increasingly locked in cutthroat competition, and getting into ads allows Apple to strike directly at Google.
Ka-ching! There are several possible reasons why we think AdMob went to Google and not Apple:
- Steve Jobs just didn't want to pay so much for what remains a relatively small company (albeit one with huge potential).
- AdMob was backed by Sequoia Capital, which has backed both Apple and Google, but is much closer to Google when it comes to M&A deals. Google seems more willing to shell out the cash for Sequoia companies -- remember a small startup called YouTube?
- Apple has much less experience than Google in M&A; at the time of the deal Apple had no full time M&A person and deals were done ad hoc by the executive team; so Google was much more nimble in negotiating and making counter-offers.
- Being an advertising company that had already skillfully integrated a huge network (DoubleClick), maybe AdMob's founders felt that their company would thrive better at Google than at Apple, which still has no experience running an ad network.
After losing out on the AdMob deal, and realising that Apple would have to complete its product portfolio in part through acquisitions, Apple hired a key M&A guy.
Apple's man you want to talk to to get your company bought is a West Point and MIT graduate, a former spy and a former Goldman banker. Seriously. Is that not exactly the kind of person Apple would hire for such a position?
The deal only made sense. Quattro Wireless is the number two mobile ad network on the iPhone and Apple wasn't going to let one M&A miss stand in the way of its strategy to own mobile advertising and screw Google.
With few other prospective buyers on the horizon (Microsoft and Yahoo! both have other fish to fry), Apple snapped Quattro up for a not-outrageous $275 million.
Apple's iAd unveiling was impressive (and scary for AdMob) for several reasons:
- Apple owns the platform the ads will run on; in particular, the ad serving software will be built into the iPhone OS and presumably have access to resources third-party ads won't.
- Apple wants to fundamentally redefine mobile advertising, by making it immersive, interactive and emotionally powerful; if this works (and can justify the premium they will place on them), AdMob's dinky ads for iFart apps are dead.
Lots of questions are still unanswered about iAd but it's still very scary for Google, even taking AdMob outside the equation. During his iAd speech, Steve Jobs said that on mobile, people don't look for information and interact with things through search; they do so through apps. It's too early to know whether that will be true in the long run, but this could be devastating to Google's mobile strategy as it looks to mobile as its next growth engine.
And speaking of mobile search...
Siri is a fantastic app based on artificial intelligence and natural language processing that is, to our mind, the most impressive example of mobile search so far. Yes, including Google.
Siri isn't a search engine in the traditional sense. You speak into your phone and say something like 'Siri, I want a table for two at a romantic Italian restaurant not far from here.' The app will recognise your speech and your intent, searching for restaurants with the attribute Italian and romantic near your location. Siri's founders described it as a 'do engine' rather than a search engine. It's really very impressive.
Instead of a huge index like Google's Siri plugs into dozens of APIs to do things like make reservations, book flights, call taxis, etc. In this case it would use Yelp to find a restaurant closeby with the attributes 'Italian' and 'romantic' and OpenTable to make reservations. This is also the source of its potential profitability, as many of these services will pay out affiliate fees when you go through them.
Apple acquired Siri for a reported price of more than $200 million. This is a blow directly at the heart of Google's core business, search. Since Google intends to make money on mobile through mobile search advertising, this is also a key competitive development in the mobile advertising market.
Is there still any reason to block the Google/AdMob deal?
We can think of several:
- A bureaucratic turf war between the FTC and the Department of Justice.
- A desire on the part of the Obama administration to not look soft on a company whose CEO was one of his most prominent backers.
- Sheer cluelessness.
- We're missing something.
As we've said last time, we're open to the idea that we're missing something and the Google/AdMob deal would indeed stifle competition in the market, even though it seems that preventing this deal is what seems to be stifling competition (would the FTC have blocked Google/Siri too?). The problem is that the FTC won't say what their take on the situation is, even though the situation has dramatically changed since the ink dried on the Google/AdMob deal.
So what's the hold up?
Ad networks will almost always be commodity businesses. Once sites (or apps) reach a certain scale they will start selling ads directly to remove the middleman, and leave ad networks on their remnant (and less valuable) inventory. And on the supply side, even though ad networks can offer good targetting, most of the ads are of the commodity kind. You can build great commodity businesses, don't get us wrong, but sometimes it means the value is moving elsewhere.
Steve Jobs was right when he unveiled iAd that mobile (and web) ads are interactive but lack the emotional depth of TV ads. But maybe the answer isn't better ads, which iAd offers, but different ads.
We're thinking of two examples here of apps that are basically perfect advertising vehicles: Foursquare and Shopkick. Foursquare is, of course, the gaming and check-in based social network. Shopkick is a Kleiner Perkins-backed app that makes a donation in your name to a nonprofit whenever you use it to check-in at one of their partner stores. We think Foursquare (or another service like it) will be tremendous for local businesses to attract and retain customers. We also think Shopkick can be a great way for big retail brands to attract, retain and monitor foot traffic through their properties.
In technology markets, value often moves up the stack. In computers, the value was in hardware, then in software, now on the web. Maybe in mobile advertising the value is moving up the stack: the value is no longer in the networks but in apps themselves, that manage to wrap advertising around experiences that make them more compelling and offer higher value to both the advertiser and the consumer.
Maybe Apple and Google are only fighting over the least valuable layer of the stack, leaving the most valuable layer to startups, just as Apple and IBM fought to control the hardware standard only to have most of the value captured by Intel and Microsoft.
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