the evolutionary shift to mobile

7/29/2019 The Evolutionary Shift to Mobile

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The Evolutionary Shift to MobileAugust 2012


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The Evolutionary Shift to Mobile

Contents

Introduction .................................................................................................................................................................. 2

Current Mobile Landscape ........................................................................................................................................... 3

6.1 Billion Mobile Subscriptions .............................................................................................................................. 3

Huge Potential in Emerging Markets ........................................................................................................................ 4

The Coming of Age of Smartphones and Tablets ..................................................................................................... 5

Mobile Players .............................................................................................................................................................. 5

Android and Apple Emerge as the Two Powerhouses .............................................................................................. 5

Who Will Hold the Top Spot? .................................................................................................................................. 6

Looking Ahead ......................................................................................................................................................... 7

Migration to Mobile ..................................................................................................................................................... 7

Media and Devices Converging to One .................................................................................................................... 7

Internet Going Mobile .............................................................................................................................................. 8

Mobile Advertising ....................................................................................................................................................... 9

Mobile Ad Spend ...................................................................................................................................................... 9

Video and Rich Media Mobile Ads Proving to Be Most Effective ......................................................................... 11

A Shift Away from the Browser ............................................................................................................................. 12

Mobile Ad Targeting .............................................................................................................................................. 12

Picture of the Future ................................................................................................................................................... 13

Digital Capital Advisors ............................................................................................................................................. 14


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Introduction

Digital Capital Advisors inaugural white paper, Serial Cross-Border M&A Excels in the Digital Media Landscape,

predicted an increase of cross-border M&A within the digital space over the next few years as acquirers look to

expand geographically. DCA anticipates that one of the most active M&A sectors within the digital world will

involve mobile-focused companies. This paper aims to uncover the key drivers of the mobile industry and the

leading trends that will impact and shape the highly active space.

As demonstrated in Exhibit 1, the lifecycle of each technological revolution has four distinct stages: Irruption,

Frenzy, Synergy and Maturity. The first two stages (the Installation Period) are separated from the last two (the

Deployment Period) by a turning point brought on by a crash. The theory states that new technologies are

introduced, become overhyped and then over capitalized, until the market adjusts to determine the eventual winner.

After this crash, modifications are made and a refined version of that technology or idea emerges in the Synergy

phase or Golden Age.

When this theory is applied to the current technological revolution, commonly referred to as the Information or

Digital Age, it is evident that this technology is currently entering its Golden Age. The irruption of computingtechnology during the 1980s, coupled with the over capitalization and investment frenzy of the Internet a decade

later, resulted in the crash or dotcom bubble of 2000. Since then, many advancements have been made to these

technologies, the result being high-powered mobile Internet-connected devices such as smartphones and tablets.

These devices incorporate computing technology that previously existed as stand-alone products and allow users to

access the Internet at rapid speeds from almost any corner of the planet without the need for an actual computer.

Exhibit 1: Mobile InternetThe Golden Age of the Information and Digital Revolution

Source: Carlota Perez


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Additionally, these technologies are available at a price point that makes them widely accessible to developed and

emerging economies, thereby allowing the global population to participate in and shape the current era of computing.

Current Mobile Landscape

6.1 Billion Mobile Subscriptions

Currently, over 90% of the world has mobile phone coverage. Consequently, the adoption of mobile phone usage

has also expanded to 76% of the global population or 5.3 billion users, with a total of 6.1 billion mobile subscriptions

at the end of 2011, as highlighted in Exhibit 2 (where penetration figures exceeding 100% represent multiple devices

per person.) This is up from 4.1 billion subscriptions in 2009, as reported by Mocom2020. This unprecedented

global growth has been driven by reduced usage friction, higher processing power, improved user interface, lower

prices and expanded services of these devices.

Exhibit 2: Percent of Mobile Penetration by Country

Source: Jana Research 2011


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Huge Potential in Emerging Markets

Of the 5.3 billion phone users, the majority of those users

3.8 billion or 73% of the group lives in emerging

economies and utilizes feature phones. A region by region

breakdown of smartphone vs. feature phone usage is shown

in Exhibit 3. Smartphones, in this case, are defined as

having the ability to access the Internet from a mobile

browser whereas feature phones do not. As technology

improves, smartphones and tablets will continue to grow

more advanced and affordable, providing for extreme

growth into these regions. The low penetration of fixed-line

telephones and the vast infrastructure in place and being

further developed for mobile data transmission is resulting

in the Internet being a solely mobile phenomenon in

emerging economies. As a result, many emerging countries are skipping the step of desktops and laptops and going

straight to smartphones and tablets, as seen in Exhibit 4. Various geographies are already exhibiting this trend as

demonstrated by a selection of countries where 70% of Internet users in Egypt, 59% in India, 57% in South Africa,

55% in Ghana and 54% in Kenya get online exclusively via mobile phones.

Exhibit 3: Global Smartphones vs. Feature Phones

Exhibit 4: Top Global Percentage Breakdown of Mobile-Only Internet Users

Source: WebHostingBuzz 2012

603

149 172

63139

145

15337

10928

0

200

400

600

800

Asia-Pacific Europe Afica

Middle East

Noth

America

Latin

America

Smartphones

Feature Phones

Source: VisionMobile 2011


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The Coming of Age of Smartphones and Tablets

Global penetration of smartphones and tablets has skyrocketed as seen in Exhibit 5. Smartphone shipments are

expected to grow exponentially with an estimated 1 billion+ units shipped in 2015, a 123% increase from 2011, while

tablet shipments are expected to reach 249 million units shipped by 2015. Tablets have penetrated faster than any

other technology product in history, reaching 10% market penetration in only 2.5 years, as demonstrated in Exhibit 6.

This rate is 3 times faster than smartphone adoption and 10 times faster than the standard telephone. As 3G and 4G

capable smartphones and tablets continue to experience unprecedented growth, global Internet traffic from wireless

devices is expected to exceed traffic from wired devices by the end of 2013.

Mobile Players

Android and Apple Emerge as the Two Powerhouses

An examination of the US mobile market shows that Android (Google) and iOS (Apple) operating systems are the

dominant influencers, as seen in Exhibit 7. Android has grown its market share from 15% to 45% over the past 2

years and Apple from 25% to 30% in the same time frame. These trends remain true in the tablet space where Apple

and Android hold significant shares as well, as seen in Exhibit 8.

Exhibit 5: Global Smartphone and Tablet Shipments Exhibit 6: 10% Market Penetration by Technology

1867

249282

470

1,048

-

200

400

600

800

1,000

1,200

1,400

2010 2011 2015Tablets SmartPhones

Source: Transparency Market Research 2012

2.5

8

9

11

9

11

7

30

25

0 5 10 15 20 25 30 35

Tablet

Smartphone

Internet

Mobile

Computer

Television

Radio

Electricity

Telephone

YearsSource: Ovum Estimates, Morgan Stanley 2010

(Figures in $USD millions)


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Who Will Hold the Top Spot?

Android maintains a commanding market share lead over iOS and continues to acquire new users at a faster rate, yet

market share does not tell the whole story. While Android controls the most market share, Apple still reigns supreme

for developers and revenue, as seen in Exhibit 9. Recent statistics show that 69% of developers prefer iOS for new

projects due to the drastic revenue differences between these platforms. For every dollar that a developer earns on

iOS, they can only expect to earn about 24 cents from Android. This differential is due largely to the fragmentation

of the Android platform and Androids limited financial tools. iOS limits developers to half a dozen uniform i

devices that help drive enhanced revenue streams, while Android developers need to support dozens of devices, OS

versions and OS implementations. Further increasing the gap in developer revenue opportunities, Google does not

control a mature payment product like Apple and only has a fraction of the detailed customer database that Apple has

acquired through its iTunes store.

Exhibit 7: US Smartphone Market Share by OS Exhibit 8: Tablet Market Share by OS

Source:ComScore 2011 Source:OPA 2012

0%

25%

50%

75%

100%

Android iOS Windows Mobile Blackberry

8%

8%

9%

10%

13%

28%

8%

22%

31%

RIM Playbook

HP Touchpad

Nook

Other Android

Sansung Galaxy

Kindle Fire

iPad 3

iPad

iPad 2


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Looking Ahead

As Android and Apple continue to battle for dominance,

RIM and Microsoft are making plays to claw back some

market share. Microsoft recently announced the release

of the Windows Phone 8 to bundle with their new tablet,

the Surface. This new tablet is being positioned as a

mobile work device with a removable keyboard, the

ability to run Microsoft Office and a variety of ports

including USB. RIM is also expected to come out with

a new OS, Blackberry 10, and a new enhanced line of

phones; however, after multiple delays there is growing

skepticism around whether this release will actually

happen. It will continue be an uphill battle for both

RIM and Microsoft, but the potential value in the space

is driving both companies to allocate vast resources to

mobile Internet projects.

Migration to Mobile

Media and Devices Converging to One

Smart mobile devices have revolutionized the way people consume media and interact with the world. Not only are

multiple devices such as the digital camera, GPS and MP3 players converging into one device, but many forms of

media are migrating to these devices as well. Movies, television, radio, newspapers, magazines and books are all

increasingly being consumed on tablets and smartphones. Exhibit 10 illustrates how much consumption of each

media or device has migrated to and is being enjoyed by consumers on tablets and/or smartphones. As these trends

continue, mobile devices will become the dominant portal for our media experiences.

Exhibit 9: Developer Projects, iOS vs. Android

63%

73%

75%73% 69%

37%

27%

25%

27%

31%

2

4

6

8

10

12

14

16

18

20

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012

Android iOS

Source: Flurry Analytics 2012


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Internet Going Mobile

Not only have mobile devices revolutionized the way we consume media and interact with the world, but they have

also revolutionized how we interact with the Internet. The Internet is no longer solely experienced from a desktop

with a mouse and keyboard; it is increasingly a mobile experience. As previously noted, many emerging markets

will skip the wired desktop stage entirely and the only Internet these markets will experience, en masse, will be

exclusively via mobile connections. Due to this, Internet traffic from mobile devices is expected to overtake traffic

Exhibit 10: Percentage of US Mobile Absorption by Device & Media

Source: Prosper Mobile Insights Mobile Survey 2011

27.5%

34.2%

41.6%

40.3%

19.5%

52.3%

20.8%

14.1%

44.3%

24.2%

20.1%

61.1%

37.6%

28.2%


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from non-mobile devices in 2013. For the time being, the traditional PC and notebook are mainly used for work-

related tasks and content creation that involves heavy use of the mouse/touchpad and keyboard, while the percentage

of users using tablets is now larger for pure consumption-related tasks, as seen in Exhibit 11 (which shows the

percentage of respondents who reported which device they used for certain tasks). As keyboards and mice are

integrated into tablets, as Microsoft is doing with the Surface, there will be little reason for the desktop or notebook

as they exist today.

Mobile Advertising

With users and content migrating to mobile platforms, monetization strategies will have to quickly adapt. As mobile

devices are quickly becoming the primary portal for accessing the Internet, the mobile advertising landscape will

follow on the same explosive trajectory.

Mobile Ad Spend

While the shift toward mobile is well underway, the migration of advertising dollars has lagged until now. As seen

in Exhibit 12, advertising dollars have not yet caught up to the time spent with new devices. However, as advertising

spend begins to catch up and as mobile penetration continues to ramp, this will lead to tremendous growth in the

mobile advertising sector. The mobile advertising sector experienced nearly 45% growth in 2011, with revenue

breaking $2 billion. This trend is projected to continue, with an estimated 27.9% CAGR through 2021 when total US

mobile advertising revenue is expected to surpass $25 billion, as illustrated in Exhibit 13.

Exhibit 11: Consumption vs. Creation

Source: AlphaWise and Morgan Stanley Research 2011


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As shown in Exhibit 14 on the following page, the market is dominated by Google, which commanded 48% of the

total 2011 mobile advertising revenue and grew 40% in 2011 to $1 billion. Apple and its advertising network

Quattro only accounted for 6% of the total market with Yahoo! and Twitter following with 5% and 4% respectively.

The biggest growth story was Pandora which reportedly saw half its gross revenues from mobile ad placements and

experienced a 476% increase in mobile ad revenue from $15 million in 2010 to $86.6 million in 2011, ranking 5th.

Search and display formats accounted for 45.0% and 30.7% of total US mobile advertising spending in 2011,

respectively. Other ad formats, such as video, are projected to see significant growth over the next 5 years while

SMS/MMS based advertising quickly diminishes as a contributing medium, depicted in Exhibit 15.

Exhibit 12: 2011 US Consumption vs. Ad Spending Exhibit 13: US Mobile Advertising Revenue

Source: KPCB 2012 Source: SNL Kagan 2012

7%

15%

43%

26%

10%

25%

11%

42%

22%

A B C D E F G H I J

0%

10%

20%

30%

40%

50%

Print Radio TV Internet Mobile

Media Consumption Ad Spend Potential Opportunity

~$20B+

Opportunity

528 8071,531

2,2003,124

4,405

6,212

8,386

10,734

13,417

16,369

19,315

22,406

25,767

-

5,000

10,000

15,000

20,000

25,000

30,000


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Video and Rich Media Mobile Ads Proving to Be Most Effective

With mobile devices rapidly becoming the primary

portal for accessing the Internet and mobile networks

becoming more robust, rich-media advertising is quickly

becoming a preferred advertising format, skipping the

long evolution traditional online advertising

experienced. Static mobile banner advertisements have

been rapidly replaced with rich media units that are

capable of delivering powerful and engaging

impressions through high-resolution, interactive content

such as video, full-screen takeovers and social

networking integration. In 2011, mobile video ads

accounted for just 4.7% or $103 million of the $2.2

billion spent on mobile advertising in the US This

format is expected to grow to 10% of the total ad

spending in 2016, or $1.1 billion out of a total $10.7 billion spent on mobile ads. Even though DCA anticipates

video to gain significant market share, display will see the largest growth from 30.7% of all mobile ad formats in

2011 to 37% in 2016. This growth will be due in large part to the increasing usage of rich media, which has proven

to have significantly better engagement than non-rich media ads. As seen in Exhibit 16, during the first six months

Exhibit 14: 2011 US Mobile Ad Revenue Market Share Exhibit 15: US Mobile Ad Spending by Format

Source: SNL Kagan 2012 Source: SNL Kagan 2012

Exhibit 16: Global Mobile Display Breakout

Source: Opera 2012

48%

6%5%

4%

4%

3%

30%

Google/AdMob Apple/Quattro Yahoo!

Twitter Pandora Jumptap

0%

25%

50%

75%

100%

2011 2012 2013 2014 2015 2016

Search Display SMS/MMS Video

28.0%

51.0%

35.0%

21.0%6.0%

13.0%31.0%

15.0%

0%

25%

50%

75%

100%

Jan-12 Jun-12

HTML5 Rich Media StandardVideo Expandable Banner


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of 2012, HTML5 rich media ads jumped from 28% of all display ads to 51%. This is a sign that advertisers and

agencies are becoming more comfortable with mobile as a medium due to double-digit engagement rates, in-ad

features driving time spent up, and click-through rates averaging higher than its online counterpart.

Srini Dharmaji, CEO of GoldSpot Media, a mobile rich media and video advertising platform, noted the pros of

mobile rich media, including higher CPMs, but pointed out some limiting factors as well. One of the biggest

barriers to adoption of rich media is the need for the time and skills to create the ads. He pointed out that the lead

time for creating one iAd campaign is currently about 8-10 weeks due to Apples tight control of the process. Media

planners do not have the time to sit down and create a lot of these ads, he said frankly. A big company like Apple

can do that because they have the budget and clout, but smaller businesses have neither the time nor the money.

A Shift Away from the Browser

As the devices we use to access the web change, so

too will the ways we access and experience the

web. While the desktop browser web experience

was still dominant (it was overtaken by mobile use

in the first half of last year), companies tried to

recreate this same browser experience on the

mobile phone; however, they quickly realized this

was the wrong approach. Mobile devices have

become heavily app based and many advertisers

are now realizing the mobile experience a user has

with their company should be through app form, as

seen in Exhibit 18. Many companies, even ones

with mobile-optimized websites, have now created

apps giving their users a much more native feeling and streamlined experience. As this trend continues, agencies and

brands will look to mobile advertising companies to reach their targeted audiences. Celtras CEO, Mihael Mikek

states, Rich media advertising proved to be the most effective form of advertising on mobile devices. It drives

incredibly high engagement rates as well as desired conversions. Our efforts in mobile rich media advertising have

been focused on providing the best possible engagement experience and users appreciate and reward that.

Mobile Ad Targeting

Targeting remains the number one attribute advertisers are looking for across mobile, according to a September

Jumptap/Digiday survey. Initially, this was a problem on mobile devices due to carrier imposed security restrictions

Exhibit 18: Desktop Browsing vs. Mobile App Usage

64 70

74 72

43

66

81

94

Jun-10 Dec-10 Jun-11 Dec-11

Minutesperday

Web browsing

Mobile app usage

Source: Flurry Analytics 2011


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over cookies and tagging on mobile browsers. While major mobile ad networks have gained access to large

advertising budgets, they currently lack the transparency and rich analytics to prove that the media buy was effective

for advertisers and brands. Alex Rahaman, CEO of StrikeAd, a global mobile demand side platform, pointed out:

As advertisers and agencies seek to access an effective mobile audience, they are looking to move away from blind

buying to highly targeted media buys. However, the shift toward mobile apps has allowed for better ad targeting

because of the workaround provided by direct usage of a closed system app. After logging in, perhaps via Facebook

connect, a publisher now has the ability to pull a users demographic information directly from their social

networking profile. Additionally, the mobile device allows for real-time geo-locational targeting without the need

for complex cookies or profiles because the app can simply use the phones GPS location. Mobile search engines

and social-location networks such as Foursquare have made early use of this, providing ads based on the users

current location. As these geo-targeting models and device identification approaches are combined with other

techniques such as behavioral and audience targeting, mobile advertising will reach a level of sophistication that few

other platforms have attained.

Picture of the Future

The shift to mobile continues at a rapid pace, with mobile devices quickly becoming the central portal for accessing

media, facilitating communication and connecting the world. Having the ability to target and serve individuals

across such a diverse and global user base will be critical for advertisers as well as publishers who are looking to

monetize content. As mobile advertising continues to develop and mature, DCA believes that the greatest market

activity will be in targeting and other mobile advertising products such as reporting and analytics. With majormobile ad networks such as Millennial Media already publicly traded, and its rival Jumptap preparing for a 2013

IPO, we believe we are only months away from a significant ramp up in M&A activity as private capital seeks return

on investment. Already, larger players such as Opera have made their bets acquiring mobile advertising companies

4th

Screen Advertising and Mobile Theory, while others such as InMobi sought strategic investment, locking up a

$200 million capital injection from SOFTBANK.

As the mobile advertising landscape continues to evolve, DCA anticipates that the established networks in the space

will mimic earlier expansion tactics of DoubleClick and others by acquiring competitors in other countries while

complementing their networks with highly technical acquisitions that will enhance targeting, audience selection and

most importantly increasing margins. These acquisitions will allow companies to move from blind and channel

buying to highly focused audience buys that target a consumer with the most advanced optimization witnessed to

date.

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Digital Capital Advisors

Digital Capital Advisors is the premier global investment banking boutique dedicated to serving innovative media

companies for whom digital is core to their DNA as well as those who would like it to be. Founded and run by long-

time media investment bankers and former CEO's, these entrepreneurs / financiers / investors / advisors have been

fully immersed in and have helped shape the media landscape for the past 20 years, both offline and online. Such

invaluable experience, well-honed insights and extensive relationships throughout the industry with both strategic

operators and financial sponsors are of immense value to DCA's clients as it helps them navigate the fast-changing

media landscape and create superior value.

DCA provides advisory services in the form of sell-side and buy-side M&A, as well as the private placement of

equity and debt, for digital media companies throughout their evolution. A key differentiator of the firm is its focus

on seamlessly executing cross-border transactions, just as the digital world has knocked down those boundaries. The

firm's unique capabilities are enhanced by the recently launched venture capital fund, Entrepreneur's Investment

Fund in the US, and by its strategic alliance with eValue Group AG, a prolific and highly successful European

venture capital fund, as well as other global alliances that have been formed over the years.

From its headquarters in New York City, DCA's principals span the globe uniting and building digital leaders of

today and tomorrow. They regard their client relationships as partnerships in the true meaning of the wordunified

with one another in a sphere of common interest as they help entrepreneurs and other business owners transfer

various forms of capital into tangible and significant wealth.

Jay C. MacDonald Marti J. Frucci

CEO / Managing Partner Managing Director

[email protected] [email protected]

All inquiries and requests for further information should be directed to:

112 West 34th Street 18th Floor New York, NY 10120 +1.212.877.7100

the evolutionary shift to mobile

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