In today’s article from around the web we visit Business Insider where author Jim Edwards explores evidence that mobile advertising isn’t creating any profits for those who are major players in it. As always, read, comment, share and enjoy!
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Right now it costs Millennial more to serve ads than it makes selling them.
This, of course, is a classic example of the debate between scale and profits in the mobile ad world. Lots of companies, like Millennial, Nexage, and Crisp, believe that it is much more important to “scale up” now and grab as much of the market as possible. Later, when the category has consolidated and solidified, companies can wean themselves from investor capital and think about operating profits.
Critics—like me—note that scale does not necessarily lead to profits, and that venture funds and shareholders may be throwing cash at companies whose business models are actually dysfunctional.
If the latter case proves to be true, it would suggest we’re in an ad-fueled bubble.
Pretty much everyone in mobile advertising agrees that the business feels a lot like the web ad business did back in 1997, right before the dot com crash.
These are the spooky parallels:
- There’s a lot of money rushing in to a category that isn’t yet very effective or pretty to look at when it comes to ROI.
- There are a lot of small companies with silly, misspelled names (Kiip? Fiksu? Ipsh?).
- There are a lot of companies whose business models are unproven (Pandora, Millennial, Velti).
- The mantra in the ’90s was, “we’ll get the audience first and figure out how to monetize it later.” Today, it’s “we’ll scale up first and get the profits later.”
- And then there are the visuals: I’m seeing a lot of vanity real estate rentals (does everyone need to be in Manhattan?), a lot of overly designed business cards (someone handed me a circular one once) and a lot of parties with open bars.
These were the ides of the apocalypse in the late 1990s, too.
There are also too many companies.
Look at those insane Lumascape charts of the social media marketing landscape and the mobile advertising landscape. They can’t all survive. If the “scale” people are correct, then by definition a lot of these companies have been created with the sole purpose of being sold and consolidated into larger companies.
The main difference between then and now is that many of these companies do have real revenues with real clients. But unless they can eventually show real profits they are ultimately doomed.
It’s not clear that scale does equal profits. Millennial is one of the larger mobile ad providers. Here are its revenues vs. its expenses:
(Note: For a technical accounting reason, Millennial’s “gross profits” are its actual revenues once the pass-through costs have been extracted. Basically, “gross profits” = “revenues” at Millennial.)
If scale was a friend to Millennial, then the green line should be keeping pace with, and eventually overtaking, the red line. But the opposite is happening. To get those revenues, Millennial had to double both its sales and marketing force, to 100 people, and its tech staff, to 61 people in Q2.
The same thing is going on at Pandora
Pandora booked $100 million in mobile ads sales last year:
So the real question is, just how big do these companies have to get before some sort of profitability emerges?Certainly, small startups get a free pass. Granted, agreed. All brand new startups need investor funding.
But the big guys need to start proving that they’re not simply destroying value.
Its operating profit is razor thin, and it has yet to make an actual net profit on the bottom line after taxes and other items. (It reports Q2 earnings on Monday, and may yet prove me wrong.)
So the skeptical case is this: If you can’t get to profitability in a mobile ad business when your company is taking in $2 billion a year in revenues, just when is this scale advantage going to kick in?
And if it were to become widely agreed upon that mobile advertising is simply too small for companies to operate profitably in, then there’s only one fate for this bubble: Pop!