Why Are Mobile Marketing Costs Rising?

Mobile user acquisition costs climbed sharply in mid-2014, and this analysis argues the cause is the maturation of the app economy rather than reckless spending by venture-backed game start-ups. Fiksu reported that average acquisition costs on its network rose 9% year-over-year to $1.97 in July, while Chartboost saw iPhone CPIs jump 21% to $2.56 between June and August. The piece responds to op-eds claiming that VC-funded mobile gaming companies drive much of Facebook's mobile ad revenue, which reached 62% of total advertising revenue in Q2 2014.

The author rejects the VC explanation using funding data. Digi Capital figures show gaming VC investment down 6% through Q2 2014 versus the 2013 run rate, and deal volume down 49% in H1 2014. Crunchbase data on funding by year of first funding shows that large mobile gaming raises clustered in 2011-2012, when free-to-play was a new investable idea. Meanwhile, large developers such as King, on a marketing run rate above $400MM for 2014, spend far more than start-up launch campaigns could plausibly add.

Two structural shifts are offered instead. First, the "great unbundling" of platform apps has made top download charts harder to crack: Facebook holds three of the top 20 iPhone spots in the US, Google two, and Apple one, with only three games in the top 20. Four companies capture roughly 70% of unique views to the top 20 apps, so a given download volume now earns a lower chart position, which the author calls top-charts install rate inflation. Second, non-gaming advertisers are competing for mobile inventory. Mobile travel bookings rose 20% year-over-year in H1 2014, and Magna Global projects mobile ad spend growing 61% to $27.1BN in 2014, with mobile's share of digital spend rising from 14% in 2013 to 20% in 2014, 25% in 2015, and 35% in 2018.

The author concludes that rising CPIs reflect broader market competition and that Facebook's reluctance to disclose app install revenue may soon be explained.