08 September 2016

Blog: How to Play Mobile Tech - Moon-shot or Shovel?

by Bruce Packard | 08 September 2016

Ever since the first Californian gold rush, shrewder types have observed that the way to wealth is not necessarily finding gold. Gold mining has the return distribution of a ‘moon-shot’ – high upside but low probability. Whilst more speculative types are on their knees prospecting for nuggets, the higher probability way to make a fortune in a gold rush is by selling shovels and other services to the gold mining hopefuls.

The analogy can also apply to another Californian industry: Technology. Microsoft and Intel piggy-backed off the booming PC market by supplying the supporting software, while IBM and others who actually made the hardware boxes struggled for profitability. Cisco did very well providing the infrastructure to the internet, where many ‘moon-shots’ like Pets.com and Webvan did not pay off.

More recently, Google and Facebook followed a similar ‘selling shovels’ strategy. They provided the platform / gateway for others with more ambitious dreams, ‘moon-shots’ of reaching a global market. A modern form of ‘pay dirt’.

So it is interesting to listen to what Google and Facebook are now telling analysts where they can see opportunities. The answer seems to be in the ‘selling shovels’. Sundar Pichai, CEO of Google said on their most recent quarterly analyst call that:

“The strength of the quarter is about mobile. It's transformed the way that people consume information, and Google's products have become a central and much-loved part of their experience.

Our investment in mobile now underlines everything that we do today, from Search and YouTube to Android and advertising. Mobile is the engine that drives our present.”

Meanwhile, Facebook’s reported mobile ad revenue was $5.2 billion in their most recent quarter, up 81% and around 84% of total ad revenue. Sheryl Sandberg, COO of Facebook, told analysts:

“For 62 years, the advertising industry has gathered in Cannes to celebrate creativity. People have shifted to mobile and marketers know they need to catch up. Mobile is no longer a ‘nice’ to do— it's a ‘must’ do and we're working closely with marketers to help them make this transition.

The best marketers understand that people watch video differently in mobile feed.”

That is, ‘mobile’ and ‘video’ advertising. By contrast, there was surprisingly little discussion of ‘moon-shots’: Virtual reality and self-driving cars.

The focus on mobile and video advertising is hardly surprising however, given that 2015 was the first year that US consumers spent more time in apps than watching TV[1]. Where the eyeballs go, the advertising dollars will surely follow.

But it is far from clear that companies that are successful on desktop can transfer this to mobile.

For instance, 90% of time spent on smart phones is ‘in app’ and Facebook is just one of many apps. It seems unlikely that other app developers and publishers will want to rely on a direct competitor, in the form of Facebook, to help them monetise their advertising. Because of this fragmented market, Google finds it harder to earn revenue from mobile advertising than it is on desktop PCs.

Perhaps a new platform / market place / gateway will emerge. Naturally, it is both time consuming and expensive to build an advertising marketplace. But once established the economics should be wonderful, because like any network or market place, the more supply and demand that is attracted to the platform, the more useful it is to both sides. The platform becomes the supporting infrastructure for the app developers hoping to make it big, and advertisers looking for eyeballs. Revenue grows strongly, but costs stay fixed resulting in a rapid expansion of both margin and profits.

Psychology suggests that everyone dreams of ‘shooting the moon’, a few may succeed. But a platform that supports these kind of dreams is the more likely way to make a fortune.

[1] Source: Magna Global