Mobile Ads Took Just Six Years to Beat the PC and Become Digital Advertising's Main Act. What Happened to the Ad Market? ①

Advertising is going through a "structural" change, and "going mobile" is the force behind it. In three articles we will explain what the change is, and how the roles and the balance of power along the industry's chain are shifting. This first piece looks at where the mobile ad market stands now.

Seven years ago, Apple released the iPhone 4 and Google launched the Nexus One. Many people in advertising only realized later that this was the year the mobile internet began its headlong rush. Information exploded across a device that everyone now carried, and with it was born a mobile ad market that would one day be worth $100 billion.

Over the past two years, anyone who works in advertising, or who reads about it, has seen the same headlines again and again: Google's mobile search passed desktop search; Baidu's mobile revenue passed its PC revenue; Procter & Gamble cut $2 billion in ad spending but promised to keep raising its mobile budget. Even if none of it touches you, you can feel that the screen in your hand is worth more every year.

500,000 iOS apps, 10,000 WeChat official accounts, 21,000 news and information sites and apps, hundreds of video apps — these numbers, refreshed constantly, are all fighting for today's attention. In 2016, people around the world spent longer with media than the year before: total media time per person rose by 9 minutes, to 8 hours, and time with online media rose by 14 minutes. Think how much of that you squeeze out of a subway ride to watch another episode.

On April 26, the Interactive Advertising Bureau (IAB) in the United States reported that U.S. digital ad revenue reached $72.5 billion in 2016, and that mobile ads took more than half of that for the first time. eMarketer, another internet research firm, had earlier forecast global mobile ad revenue of $101.3 billion for 2016, or 16.5% of all ad spending.

"Brand money follows the consumer, and you find that marketers today are mobile first, or even mobile only," said David Doty, executive vice president and chief marketing officer of the IAB. Mobile, he said, is what has driven advertising's recent growth.

In six years, mobile became the undisputed star of digital advertising. Its predecessor, online advertising, took 23 years to pass television, whose share of revenue has settled in recent years at 41% to 44%. The comparison is not strict, but the gap in years tells you something anyway: mobile has changed the ad market faster and harder than the PC ever did.

The first internet ads appeared in the United States, on Hotwired.com, on October 27, 1994: banners for AT&T, IBM, Volvo, Zima and others. They ran for 12 weeks, cost $30,000 each, and were clicked by as many as 30% of the people who saw them.

By 1998 the online ad market was worth $1 billion; two years later it had jumped to $8.2 billion. China's first internet ad appeared in March 1997, when IBM, Intel and others bought $3,000 worth of space on ChinaByte.

Twenty years on, the rate card for a single splash-screen ad on a mainstream news app on your phone has another zero on it. The rise of the super app has funneled mobile ad money toward a very small number of hands.

Who counts as a big player in mobile advertising?

Google, Facebook, Alibaba, Baidu, Tencent. These five split 74.6% of mobile ad revenue between them, and the first two alone take more than half the market. According to the latest Top Thirty Global Media Owners report from the media agency Zenith, Google and Facebook accounted for 64% of all growth in global ad spending between 2012 and 2016.

Any creative, media buyer or advertiser at the 2016 Cannes Lions festival could sense that Facebook and Google owned the whole beach. Martin Sorrell, chief executive of WPP, called the sprawling tech-company stands that had taken it over the "duopoly beach."

The duopoly will hold through 2017. Fred Wilson, founder of Union Square Ventures, predicts that "in 2017, internet advertising will mostly take the form of search, social and mobile... Google and Facebook will win."

Google controls seven global platforms with more than a billion users each; Facebook's 1.6 billion users are more than any other social platform has. What frightens marketers is not only the data these two companies keep to themselves — it is also the useless ads the marketers themselves are throwing together for a new environment.

Both companies say they understand consumers better than anyone: Google puts a brand in front of a customer at the moment of intent, Facebook helps a brand find its core audience. "The ad agencies are the most likely to be cut out," a senior advertising executive told the Financial Times last year. "If buying [ads] is as easy as going to Facebook and Google, and you can target particular audiences, why do we still need media agencies?"

To hold off the two giants, more and more media companies are forming alliances, hoping that scale and comparatively good content will bring advertisers back. In March, Condé Nast announced an ad sales partnership with Vox Media and NBCUniversal to sell their inventory as a package. The biggest alliance in television is OpenAP, a buying platform built by Viacom, Turner and Fox Networks.

The New York Times's latest television commercial used the line "NYT is safer for brands" — a blunt jab at Google and Facebook over their evasiveness about data and the fake news flooding their platforms.

What tricks are they playing on your phone to win advertisers?

Mobile already makes up a large share of ad revenue at all five of these companies: 70% at Tencent and 92% at Alibaba. At Google and Facebook, which live almost entirely on advertising, it is 60% and 83%.

Mobile advertising is still working out its standards. As apps compete with one another, every one of them is looking for the ad format that pleases both the brand and the consumer.

Facebook's Instagram is the clearest case. Since it opened for advertising in September 2015, Instagram has remade itself to suit advertisers.

It began with still images only, then added 15-second video ads, then stretched those to 60 seconds, which made it easy for advertisers to drop a television commercial straight onto Instagram. On the product side, feed ads gradually gained "Shop Now" and "Learn More" buttons to turn an impression into a sale.

Reordering the timeline by algorithm was another way to raise the odds that an ad is seen. "On average, people miss about 70% of the posts in their Instagram feed," co-founder and chief executive Kevin Systrom said in an interview. "What we're really doing is making sure the 30% you do see is the best 30%."

WeChat Moments ads are being reworked too. Last March they added buttons for following an official account and downloading a mobile app.

But once the basics were in place, they all pointed to the same problem: a platform that carries mobile ads is naturally better at selling digital products, because a marketer can watch app downloads tick up after a single ad.

What about Coca-Cola? Put a 60-second commercial on a phone — how much good does it actually do?

That is the reason for this: "Advertisers who supply 90% of television ad revenue account for only 30% to 40% of the digital giants' ad revenue. The other 70% of the digital giants' revenue comes mostly from small and local businesses, usually ones that sell only digital products or services."

Rob Norman, global chief digital officer at the media agency GroupM, argues in his latest Interaction report that this will not last: "As TV becomes more data-driven and more targetable — more like digital — and as the quality of video on digital platforms keeps rising — more like TV — the split between the kinds of advertisers on each side will narrow."

Mobile video ads are taking a bigger and bigger share

IAB figures show that search fell 2 percentage points within mobile advertising in 2016, to 48%, while mobile video rose from 10% to 13%. Cisco expects video to account for 75% of the world's mobile data traffic by 2020.

The space under the search box is still the most valuable real estate on the internet, but on the phone, video ads are bringing in $4.2 billion a year and growing at 145%.

That money may not be well spent. Research by Moat found that of every 20 video ads served in a feed, only three are watched for three seconds or more, and only one for ten seconds or more. Last September Facebook was caught overstating how long users watched video ads on its platform, which set off yet another argument in the industry about trust.

The truth is that this was probably always so. Television ads were measured by ratings; digital ads can tell you exactly whether someone sat through the whole thing. So advertising people may now have to face a fact for the first time: nobody wants to watch the stuff you make.

In December 2016 the sanitary pad brand Kotex ran a 30-second video ad on Weibo's splash screen — an extreme example of how not to do it. The sound came on by itself, it could not be skipped, and the effect was that of a static magazine page held up on television for 30 seconds.

Google has long held that forcing people to watch a video ad cannot last, and that making them finish it ruins the experience. YouTube therefore charges only when an ad is clicked, watched to the end, or watched for 30 seconds. Yet for all its scale, YouTube is still thought to be short of the inventory advertisers consider "quality."

And in March, The Guardian, Starbucks, Coca-Cola, L'Oréal, HSBC, Marks & Spencer and other large companies pulled their ads from YouTube because they did not want them sitting next to extremist content; the estimated loss was $300 million. On "relevance," this may be an enormous hole.

Facebook, accused of inflating its own numbers, is working on relevance too. It says it makes more than 25 trillion decisions a day about which content and which ads to put in each individual feed.

Facebook built a good deal of video in 2016, and live video at the top of the app opened a new slot for longer ads. More often, though, people started asking whether longer is better at all. (In the PC era, microfilms several minutes long were briefly the hottest format in advertising.)

YouTube recently introduced a six-second mobile video ad that cannot be skipped — two seconds longer than the four seconds of its current skippable ads. Packing something necessary and effective into that window is the marketer's new problem.

"The future of feed advertising may be an entirely new creative category, one that understands the feed's constraints (time and attention) and its advantages (scale and sharing). Perhaps the focus will be something like a print ad with a bit of animation, rather than a compressed version of 'traditional' video," Rob Norman wrote in his essay on where video advertising is going.

Has "radio" come back?

In 2016, digital audio advertising in the United States — streaming services and podcasts together — brought in more than $1 billion for the first time.

Some researchers argue that streaming, and music above all as the most universal thing people consume, has an advantage no website or platform can match: it tells brands about the mood behind the behavior, which is a new way to sort people into groups.

GroupM's Interaction report puts Spotify at 100 million users worldwide (as of June 2016) and 40 million paying subscribers (as of August 2016). But Spotify takes in roughly $2 billion from subscribers and only $300 million from advertisers. A paying user is worth 15 times an ordinary listener.

Pandora, with far fewer subscribers, is well ahead on ad revenue — $1 billion last year. Chinese music platforms barely monetize through advertising so far. Zhu Yiwen, chief executive of NetEase Cloud Music, told QDaily that advertising makes up a "small" share of revenue.

Set against the whole mobile ad market, though, music streaming and podcasts remain a sliver.

Native advertising will be the mainstream

A term closely tied to feed advertising is native advertising. The IAB coined it in 2012 for articles, videos and other content made specifically for an advertiser, which stay searchable after the paid run ends.

Native advertising looks more like content than like an ad, which is why mobile marketers now use it to get around ad blockers.

Jon Steinberg, president of BuzzFeed, once described it this way: "When you take the form of content and give it the platform's own version, that's native advertising. On Twitter it's a tweet. On Facebook it's a status update. On BuzzFeed it's a news post."

For the digital giants, a creative format no one else has is a competitive weapon. In October 2016 Google bought FameBit, a digital marketing company that helps YouTube stars find brand deals for their original videos. Snapchat's signature native ad is its branded filter; last year it bought Fliter, a San Francisco ad-tech company, to make those ads look better still.

Plenty of old advertising ideas are reappearing on the phone in more "native" dress. If you have watched any Chinese web drama recently, you will remember the little self-contained skits the producers drop into the middle of an episode. Those mid-roll spots, acted by the show's own cast, are television product placement in another form.

In mobile advertising, what advertisers want is conversion

Maybe it is because digital advertising produces data by nature, or maybe because ad platforms preach "precision" every day. Either way, advertisers care about results — conversion — more than they ever have.

Reports show that performance advertising, paid for by sales conversion, has grown steadily over the past decade.

The industry is moving toward precision, and along the way, because every link in the chain is chasing numbers, the many methods of traffic fraud have become an open secret. In 2014 The Wall Street Journal reported that more than 30% of internet traffic was fake. By 2016 the Association of National Advertisers (ANA) said fraudulent traffic ran at 25% to 30% on exchanges with poor reputations and under 10% on reputable ones, while AppsFlyer said 34% of mobile traffic carried a risk of being fake.

Fake does not only mean bots. It also covers what the industry calls non-incentivized ordinary traffic: real people clicking real ads, but usually because something lured them into it — a badly designed page, a coupon or cash-envelope offer, free items in a game — and those clicks convert no better.

On one side, third-party verification has become unavoidable; even Snapchat, whose ads are the least standardized of all, announced as it prepared to go public that it would submit to audits. On the other, now that easy traffic is gone, creative work is still the strongest tool there is for making ads work — and for not producing garbage.

2017 will be the first year mobile takes most of digital advertising, and it is also the iPhone's tenth anniversary. A round of change is about to begin, and "how do you actually advertise on a phone?" is the question every advertising person has to answer.

Because the market has changed, so has the fight for advertisers. In the next piece we will look at that more closely, through the contest between Chinese agencies and the 4As.

Charts: Feng Xiuxia

Cover image from Pexels