The Credit System is Broken for Ad Networks – But It’s Fixable

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The tremendous growth of the global mobile App Economy — powered by nearly 3 million app developers and 2.5 million apps in the two major app stores, Apple App Store and Google Play, combined — shows no signs of stopping. To the contrary, the full-scale arrival of app component marketplaces, the growing availability of easy-to-use programming tools and the advance of cloud-based support and distribution are making it possible for anyone, anywhere to build an app.

While there is no shortage of supply, the avalanche of apps is creating serious bottlenecks in app discovery.  Popular apps rise to the top ranking, while the others are lost in the heap. Being featured or chosen as the ‘app of the week’ can be a huge boost to app visibility, and hence discoverability, which is why app developers are investing heavily in paid advertising campaigns to reach and activate their target users.

It makes business sense, particularly in view of recent research that reveals users would rather view ads — in all their formats — than pay for apps. Against this backdrop, Juniper Research reports in-app advertising is in fact the fastest growing sector of the mobile advertising market, with spending on in-app advertising is expected to reach $17 billion by 2018, up from just $3.5 billion in 2013.

Connect the dots, and the App Economy is evolving to accommodate —and benefit—an emerging business ecosystem that brings together app developers, publishers, ad networks and brand marketers. However, the boom phase we are experiencing is also stretching app monetization models (and advertising budgets) to their limits.

Pay to play

App companies serious about their app business recognize that paid promotions are the ‘next step’ in a comprehensive strategy to achieve scale, volume and lasting success.

If only it were that simple.

In many ways, app developers, like popular consumer goods brands in a supermarket, are locked in a fight for two scarce resources: consumer attention and shelf space. To win on both counts app developers must spend on advertising campaigns to do more than raise profile. To rocket an app to the top of the charts app developers have to acquire users fast (!). It’s a race against the clock because the rate of app installs is a key factor that influences app rank.

It also doesn’t help that the cost of user acquisition is rising through the roof, driven by a variety of market factors that range from the release of Apple’s new mobile operating system iOS 8 to big brands paying big bucks to buy real estate on a consumer’s smartphone. The outcome, according to a new report from app marketing technology provider Fiksu, the costs associated with retaining a “loyal user” – that is, someone who opens an app three times or more– is now at an all-time high. In fact, this metric has jumped 21% to reach $2.25 in September 2014, up to from  $1.86 in August. Year-over-year, the figure has risen by 34%, and we’re sure to see costs skyrocket during the holiday season ahead — typically the most expensive (and rewarding) time of the year to market apps.

Clearly, achieving top rankings is not what decides the leaders from the also-rans. Winning is about strategy and energy. Apps win big because the developers behind them have invest to achieve real momentum, not fleeting fame.

This approach requires app developers to spend on paid promotion at critical   stages in the app lifecycle, specifically to support the app launch and sustain the level of installs post-launch. Missing a step here can have fatal consequences.

Unfortunately, this is where many app developers, waiting to get paid for their app sales or in-app purchases from the leading app stores, run out of steam. In many cases the lag time between making a sale and getting paid by the app store can be up to 60 days, or more. This is an eternity in the fast-paced App Economy.

Which is why, unable to unlock the revenues they have earned and rapidly reinvest these funds into paid advertising campaigns, many app developers are forced to watch their high tide of sales reduce to a trickle.

In fact our own research at Pollen VC, which we will be releasing later this month, shows that many app companies rise and fall long before the check comes.

A flexible model, one that would allow app developers to reinvest their revenues in user acquisition campaigns, would ultimately permit app developers to prolong their success, not cut it short.

Removing friction ­and risk

But app store payout schedules are just part of the problem. Mobile ad networks also add to the friction — and the frustration.

Designed to accommodate large brands and big budgets, mobile ad networks are geared to serve the big spenders of today.

Unfortunately, this model and mindset forces mobile ad networks to miss many opportunities to meet the needs of the small startups who could well rise to become the big spenders of tomorrow.

And even if they wanted to go after newcomer app developers, the traditional phone-based sales model ­— which struggles to accommodate deals less than $25,000 — severely limits how wide mobile ad networks can cast their net, as all efforts are focused on the top tier developers.

Recognizing the need for a re-think many mobile ad networks now offer automated “self-service” offerings, allowing a long tail of app developers to spend on paid promotion to acquire users at scale. The approach — although a step in the right direction — has a long way to go.

From the perspective of the app developer, self-service is clunky. What’s more it is completely out of step with the requirements of most high-growth app and game companies that have a short trading history but high chances of success.

This is because self-service, which requires customers to pre-pay, forces app developers to use their credit cards (or depend on micro-credit lines) to finance their app advertising campaigns. For app companies with both the app and the ambition to become a blockbuster success, this model is a gross mismatch.

Mutual benefit

The app business is fast-paced, unpredictable and incredibly lucrative.

A popular app can rocket from zero to tens of thousands of dollars of revenue in a single day. App developers, if they have the agility to rapidly reinvest into acquiring more users for their app, can win big.

And that is the catch.

Current models limit both the ability of app developers to spend big and the potential of mobile ad networks to earn big. Very often, developers who have achieved early app store success are not able to secure credit facilities that can fuel their growth. And for ad networks, that is leaving money on the table.

At one level, startups eager to rapidly reinvest their app store sales into paid promotion with mobile ad networks to achieve volume, scale and lasting success for their app — can’t – because app stores don’t pay out quickly enough.

At the other end of the spectrum, mobile ad networks, because their credit approval process is wedded to an old world model of trading histories and free cash flow, deny credit to their potential next big spending customers.

Not that ad networks should be taking credit risk on start-ups. But when start-ups can demonstrate solid app store earnings that they wish to use to fuel their growth, networks should be embracing the opportunity to grow and prosper with this next generation of high-growth app companies.

Clearly, the App Economy requires a new model that will allow app developers to unleash receivables to reinvest in user acquisition campaigns and, at the same time, encourage mobile ad networks to embrace high growth start-ups without incurring undue credit risk

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