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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