AGILEVC My idle thoughts on tech startups

August 1, 2012

i*Pad [eye-pad]
noun – a $700 version of Words With Friends

About 6-12 months ago you could hardly throw a rock in the startup ecosystem without hitting a VC expressing their enthusiasm for “mobile”.  Now the frenzy about mobile has extended into the mass media and public equity markets, though with trepidation as often as excitement.

The best example of this was Facebook’s disclosure during their IPO process back in May that “mobile” usage was increasing significantly but FB’s monetization of mobile users lagged considerably.  This question has lingered for Facebook and other consumer internet companies in recent months.

I think it’s worth dissecting the frenzy around “mobile”, both the enthusiasm and the skepticism. First the enthusiasm.  The growth of internet connected smartphones and tablets is truly astonishing.  Business Insider had a good presentation if you’re looking for a primer.  But a couple of data points for perspective… Apple sold more iOS devices in 2011 than all the Macs they sold in the combined 28 years previously.  The iPhone is only 5 years old yet Apple’s already sold more than 150 million of them globally.  You can bust out nearly as dramatic statistics for Android smartphones.  And tablets are still a newer category but are off to significant adoption.  No matter how you slice it, “mobile” is indeed big and we’re arguably still in the early-mid phases of the adoption curve.

But not all “mobile” devices are created equal.  At NextView we talk about “ubiquitous computing” because we think it captures the broader technology adoption more accurately, and FWIW we’re incredibly bullish.  It’s less that smartphones or tablets are replacing laptop/desktop computer usage, and more that people are now using 3-4 “computers” for different tasks and in various use cases.  Our total “computing” time has increased significantly as these devices become more pervasive in our daily lives.  Tablets are used differently than smartphones… longer session times, frequently in a “fixed” location (e.g. at home on couch, in coffee shop for an hour, at office, on beach on vacation), with a mix of app and browser based usage.  Smartphones have shorter session times, are used more frequently “on the go”, and typically see a significantly higher percentage of app usage vs mobile browser usage.  There’s also marked behavioral differences between iOS usage and Android usage (iOS consumers use their devices more and spend more on apps, commerce, etc).

So what about the skepticism?  Again forget “mobile” in the sense of cell phones and think about ubiquitous computing with non-PC/laptop devices.  Also divide the world among business vs consumer usage, and then subdivide consumer into the three business models of the internet… commerce, premium services, and advertising.

Businesses large and small are still figuring out how ubiquitous computing will impact their employees, customers, and business partners.  There are lots of folks trying to capitalize on this wave, and some meaningful companies will be built that will essentially have “picks and shovels” business models… e.g. providing the tools and services for businesses to be more productive enterprises in a world with widespread usage of tablets, smartphones, wearable computers, etc.  There will undoubtedly be some differences, but broadly speaking this will look roughly similar to other new waves of technology adoption within businesses.  I know it might seem odd to some of you, but there was a time when only a handful of people in a company had a PC on their desk or who had a laptop for on the go usage or had an internet connection or email or whatever.

So what about consumers?  Is the sky falling for Facebook and other consumer-facing companies since “mobile” is here?  Well some consumer companies are actually prospering with ubiquitous computing.  eBay is doing well again amidst a quasi turn around in part because of a surge of app-based commerce (both eBay and PayPal sides of the company) on tablets and smartphones.  As my partner Rob (an eBay alum) put it in his post Why Mobile Works for eBay the “power of mobile has very little to do with mobility.”  This is broadly true for commerce based internet companies.  Ubiquitous computing is also propelling many premium services, primarily in the entertainment realm.  Gaming is still the largest category, where you see multiple mobile game companies with $100M+ revenue (e.g. Gameloft, Rovio) and a couple $1B+ revenue companies in Asia (GREE, DeNA).  But ubiquitous computing is also in part behind the rise of non-gaming services like Spotify and is likely to expand into other consumer categories (e.g. productivity – Evernote).

That leaves advertising based consumer models.  At present, ubiquitous computing does present challenges as monetization is harder than on the desktop web.  But why is it harder?  And will these challenges be persistent or temporal?  Let’s dissect:

  1. Advertiser Spend – Mobile ad spend is growing, but is still currently a fraction of traditional web ad spend (display, search, video) or other mediums like TV.  Yet companies like Facebook, LinkedIn, and others are seeing 25-50% or more of their users accessing their services via mobile device.  Today ad spend on mobile is significantly behind the consumer usage patterns.  But ad spend has always lagged consumer adoption of new media and there’s little reason to believe that smartphone and tablets won’t capture more ad spend in the comping years as they continue to capture more eyeballs.  Remember there was a time not that long ago when people questioned the monetization of the desktop web relative to the consumer usage of it.  Just ask any dead tree media company how that played out (and not just newspapers but yellow pages, magazines, etc).  –> Almost certainly temporal
  2. Consumer Tracking & Targeting – A key differentiator, relative to other media, for web advertising has been the ability to track, target, and analyze ad spend at a much more granular level and essentially in real-time.  At present tracking and targeting consumers on ubiquitous computing devices is inferior to the desktop web for a range of reasons, largely pertaining to the way third-party cookies are treated (the kind used by advertisers as opposed to the actual websites you visit) and the logistics of tracking IPs across wireless networks.  Perhaps 80% of iOS devices don’t currently support third-party cookies because of default settings.  There are a bunch of companies both large and small working on trying to overcome these challenges, some of which are technical and some of which are the result of coordination across mobile ecosystems (site/app publisher, advertiser, wireless carrier, device/browser maker, etc).  –> Probably temporal, but may take awhile
  3. Form Factor & Behavior – A smartphone or even a tablet is inherently different than the desktop web or other ad-supported media like TV.  Most commonly cited are the limitations particularly screen size though also bandwidth, mixed support for Flash, etc which limit the nature of advertising that can be conducted on these devices.  But there are also opportunities which are yet mostly untapped… the fact that ubiquitous computing devices have a vastly higher penetration of capabilities like location based services (LBS / GPS) or speech input (thank you Siri).  Also content consumption on mobile devices is fragmented across both apps and web browsers, and even the rise of HTML5 is unlikely to completely erase that.  –> Most likely here to stay, though some opportunities in addition to known challenges

The current difficulties posed by advertising on tablets and smartphones are real, at least in the near to intermediate term.  But ubiquitous computing (or “mobile” if you must) is indeed huge and only getting bigger.  The enthusiasm is justified.  So before falling for either the hype or the gloom when “mobile” is thrown around, think more critically about the underlying business and the timeframe under which you’re evaluating it.