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Ads for ads: The ad-supported app bubble

By one estimate (Gartner), about 81% of apps downloaded today are free. The way free apps are able to generate revenue is through advertising. 16 percent of application store markets’ $5.2 billion revenue was generated from advertising.

But advertising what?

It seems that most of the ad dollars spent on in-app ads are spent by developers to promote other apps. I’d like to get hard data to prove this, but assuming it’s true, we have to ask if the apps being promoted through ads in apps are free apps seeking more revenue from ads…from other apps.

To put it bluntly, the $816 million that “comes from advertising” is not coming from consumers but churning around the ecosystem like a hot potato. This figure is said to triple this year.

It’s arguable that this is only logical. App users are pre-qualified as app downloaders so it makes sense to target them through apps for more apps. But where does value actually flow into the ecosystem from consumers? This problem of commerce through apps being nothing but virtual app goods implies that there is a bubble forming. This is more likely to be a problem for Android as the ratio of advertising to purchase of Android apps is higher than on iOS, but it’s a problem for all app advertising.

It’s even more ironic that the developer looking to create revenues through their app is promoting competing apps seeking the same user.

I don’t see how this can end well.

The only way ads really work is for users to transfer cash for underlying value. Aside from paid apps which have entertainment or functional value, how much spending from traditional ad buyers (brands) is targeting apps? Perhaps transitioning ad buyers is what Apple had in mind a year ago with iAd. Signs so far are not encouraging that their approach is working. That may be bad news for Apple, but it’s worse news for AdMob.

  • AlleyGator

    “15.1 billion industry with 16% of it, or $5.2 billion”

    Looks more like 30% than 16%.

    But I think your focus is wrong. The majority of apps for non-app products are based on geolocated data and are essentially local ads for whatever city the user stands in. That’s clearly sustainable.

    Apps for other apps tend to be one of two things: the app developer promoting his own (sometimes free) apps which is free, or an ad for someone else’s paid or subscription app.

    If the ads are for paid apps, the money is coming from the consumer rather than foaming into a bubble and there’s less of a problem.

    • rattyuk

      If they are promoting their own apps then they aren't making money…

      I think being a developer and selling your app actually makes you money…

      The rest is noise.

  • http://www.noisetech-software.com/Perspectives.html Steven Noyes

    I have one ad supported app that I use. Its only adds seem to be for other apps. This repeats a test by one app developer comparing iAds to AddWords and click through rates for iAds were substantially lower…
    http://www.crossforward.com/2010/08/25/iad-for-de

    It would be interesting to see a comprehensive study on the idea of buying ads to sell free ad supported apps.

    I would much rather pay a buck for an app instead of getting ads.

  • http://twitter.com/johnhugg @johnhugg

    Are the ads for other free apps, or for paid apps? It seems like it's more of a buble if the ad-supported apps are supported by other ad-supported apps. Being ad-supported by paid apps *is* a transfer of value from consumers.

  • m4rkusr

    I just checked my the ad situation for games in Finland for Android. Three games 15 ads and none of them were for apps. There was ads for cars, sneakers, banking, operators, phones, restaurants, hosting, web design at least. Is the ads4apps a US or an iPhone thing?

    • asymco

      Having spoken with developers at SXSW, the consensus is that in the US at least most ads in apps are for other apps, typically free, ad supported apps. As turleymuller commented, the purpose may be to drive rankings rather than directly getting ad revenues.

  • http://twitter.com/dotkomblog @dotkomblog

    There are different stats and reports around, but in most of them it seems clear that in-app purchase is becoming at least as important source of revenue for developers as in-app advertising (or at least will become in a few years), letting them give away their apps free. The growth of in-app ads will fade.

  • r00tabega

    Most of the in-app and mobile web ads I seem to see are related to accessories (ie, iPad cases). Perhaps it's because I'm using an iOS device (and don't use a lot of ad-laden apps)?

  • J Osborne

    What percentage of TV commercials are commercials for other TV shows? Is the percentage of apps showing ads for free apps that show ads higher or lower? (ads for a free app like Kindle shouldn't count as Kindle doesn't make money by selling ad space, it makes money by selling access to books)

    • HTG

      Where I live we have 2 free to air channels owned by one organisation and 2 FTA channels owned by another, plus a 5th FTA channel owned by the dominant pay tv company… they are all constantly cross selling their other channel/s, presumably to keep the viewer from switching away to another company's channels… Its an interesting construct to see a TV company advertising a program on its other channel right just before that program is due to air… sort of switch now to see X or stay here and see Y…

      • Iosweeky

        I presume you are n New Zealand….?

    • yet another steve

      TV ads for other TV shows are called "promotions" They're for shows on the same (of affiliated) network. Except in very rare cases TV networks do not pay each other (nor trade time) to promote their shows. It isn't hot money churning around.

      Since apps are new, it's easy to imagine developers "investing" in promoting their apps through ads in other apps. In the end this is just dissipation of capital… the exact stuff bubbles are made out of.

  • HTG

    All I see on my iPhone is ads promoting other games in the few free games that I have – maybe I don't live in the right places to be served ads based on my geo-location data…

    Maybe as Horace is in Finland he is getting the same thing… I live, lets say, on the nearest liveable land mass to his antipodie… (not Antartica!!) so we are both a long way from the US… maybe no one serves us geo-located ads becuase none of the advertisers things anyone lives here/there….

    • http://twitter.com/m4rkusr @m4rkusr

      Is Apple using AdMob? If so my Finnish Android ads should also be for aps, but definitely is not the case.

      • asymco

        iPhone devs can use AdMob as well as other ad networks. There may be many factors for what ads are shown. My son's game playing seems to attract other game app ads.

  • CndnRschr

    The bigger Ad bubble is with Google AdWords. This model is slowly being eroded by short cuts and alternatives, as well as the increasing contamination of search results (that Google is trying to rectify). Advertising works best when its creative and is put in front of receptive eyeballs. It doesn't work (as well) when obtrusive or irrelevant. So-called intelligent advertising that provides a more targeted audience was the promise of web-based advertisers (with Google and Microsoft being the masters) sounds good but is it as effective as old-style advertising? That's the problem though. Only the ad agencies appear able to assess their own effectiveness and we can trust them, right?

    • capablanca

      "creative … put in front of receptive eyeballs"

      And better yet if informative and/or entertaining. Effective advertising is valuable to both the advertiser and the recipient of the ad.

      -capa

  • http://twitter.com/turleymuller @turleymuller

    I have done some looking into this phenomenon and many of the AdMob ads promote other apps in hopes that it can drive downloads high enough to earn a rank of the "Top" charts. Often, when an app hits the top charts it becomes self-perputating. Then, ad spend can be scaled back or terminated and enjoy the fruits of ad revenue within own apps.

    So, it's basically a shell game, if you will- spending money on advertising to receive money on advertising revenue.

    • asymco

      This sounds very plausible. "Buying" top chart placement seems like a good strategy since that placement, even for a brief time, can really boost revenues (paid or ad). However one still wonders how this self-referential business model pans out. The regular web is grounded in some form of commerce where non-virtual goods are purchased. This is not yet the case for the mobile web.

  • g

    "By 1998, Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in."
    http://www.paulgraham.com/yahoo.html

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  • Per cederberg

    Don't forget that a number of free apps exist only to promote or extend some existing brand or service, such as banks, clothing companies, etc. I guess these free apps are sometimes promoted with ads in other apps as well, since they are pushed very hard from web sites, media, etc.

  • http://mobilenewsindia.blogspot.com Karthik

    False Economy of Vanity Apps: A similar analysis http://mobithinking.com/blog/vanity-apps

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  • http://franksting.net.au Gavin Costello

    "churning around the ecosystem like a hot potato" this sounds familiar. And will fail familiarly, GFC style. Theoretical money, FTL!

  • chandra2

    turleymuller mentioned "it can drive downloads high enough to earn a rank of the "Top" charts"

    This is quite true. And there are some other trends. There is a free texting application that gives you credit for each app you download from their 'featured' app list.

  • Darth Sidious

    That’s why apps like AdFree are so popular and why most android custom roms are ad free!

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