Automobiles: The Ultimate App Machine?

BMW_Harman_App_PlatformThe most interesting theme to emerge from all the announcements at CES last month was that of the automobile becoming an app platform. The Big Three all released information about their respective efforts towards this, ranging from Chrysler enabling internet radio apps to stream on its Uconnect system to Ford and GM both announcing app development programs for their respective in-car software platforms. Not to be outdone some of the leading consumer mobile tech companies also provided updates on their continued integration efforts with the automobile manufacturers including: Pandora naming Chrysler as its 20th auto brand partner and Hyundia and Kia joining 3 other car companies in working with Google to integrate Maps capabilities into their respective car connectivity systems. Add to this the recent announcements regarding the incorporation of Siri Eyes Free into specific Acura, Honda and Chevrolet models following Apple’s announcement of this initiative last year, the availability of Amazon’s Cloud Player in select Ford vehicles and Facebook’s hiring of a Head of Automotive, you can see why the next great battleground for audience attention is taking place right behind the steering wheel.

And why not? The automobile is the last physical space where Americans spend an inordinate amount of time (18 ½ hours on average per week according to a 2009 Arbitron national in-car study) that hasn’t been infiltrated by the internet. With time spent in cars continuing to rise (an average increase of 31% for weekday driving since 2003 according to the same study) the opportunity to replace the current analog automobile experience with apps is only getting bigger.

The in-car digital experience will differ from how we currently interact with apps and the greater web on desktop and mobile computing devices in one dramatic way- the user interface. Since driving requires focus on the road, hands-free controls to both navigate and consume content will be the default setting in automobiles. With Apple’s Siri-based iPhones and Microsoft’s Xbox having become mainstream consumer devices at this point, the learning curve for performing voice-activated commands won’t be an issue. Instead, the limitation will be on the content side where audiobooks, internet radio, music, podcasts and voice navigation systems are the only categories already in a format that can leverage this opportunity, leaving text-based media to be adapted in order to participate. This creates a new market for speech and text conversion technologies like Nuance to be the provider of voice navigation controls at the automotive platform level or apps like iSpeech that convert articles and books from text to speech.

Not surprisingly, local radio station owners and navigation system manufacturers are the most likely to be disrupted in this evolution. Without the technical limitations of terrestrial radio signals, consumers will be able to access local programming from anywhere in the country through apps like iHeartRadio or national programming without any additional in-car hardware from SiriusXM Radio. Subscribers will also have the ability to create their own music stations via Pandora or listen to the exactly what they want using apps such as Spotify. As audio consumption continued to increase online, so to will the allocation of local ad dollars as marketers will have access to audience-related metrics that aren’t available through traditional radio including actual listener numbers, not estimates, and the ability to target ads to the zip code, not just the station.

From the perspective of navigation systems, apps like Google Maps and Waze will continue to take the place of built-in and after-market navigation devices with their ability to provide current mapping data and crowd-sourced traffic updates via their respective networks. This is a much more compelling solution than paying the auto manufacturer to send you a CD every year just to update the in-car mapping data (which is my car’s case).

Pandora Media has the potential to be a big winner in the digitalization of the automobile experience but not for the expected reasons.  Pandora’s viability as an internet radio service has been questioned because of the cost structure challenges presented by the music industry. But with more than 1,000 partner integrations, including 85 vehicle models and 175 aftermarket automotive devices, Pandora could evolve into a platform service, much like Amazon did with Web Services, that would allow other developers to leverage these automobile-related hardware integrations to allow their apps to connect with vehicles and related devices as well.

Google_Maps_MenuNo matter how the battle for the next digital screen plays out, Google is one of the best positioned companies because of its existing portfolio of technologies. With Google Maps slowly getting integrated into various vehicles experiences, Google will have its Trojan Horse for offering up services beyond just mapping and traffic data. By looking at the additional data layers offered in Google Maps you get a picture of this: Navigation provides turn-by-turn directions, Local identifies nearby retail establishments, Latitude find people you know that are physically near you and History stores information on the places you’ve been. This provides Google with contextual data around where you go and with whom which can feed newer services like Google Now, which uses machine learning to predict the information you might be interested in (like when to leave for a meeting, activities you could do nearby or sports schedules for your favorite teams), to enhance the user experience across all screens. Add to this Google’s quickly improving natural language capabilities for voice commands and Android-based in-car app platforms being developed by the likes of Harman, one of the largest suppliers of in-car technology, and you can see why Google is so well-positioned to dominate the in-car content experience going forward. Either by consumers using its apps, or better yet by automotive-related manufacturers using its mobile operating system to enable apps, Google will continue to capture an increasing amount of data on consumers, which in turn makes its services smarter and more useful to people, which brings more users to Google’s platform in a self-fulfilling cycle. If all else fails, Google could simply provide the driverless car technology it has been testing and own the entire digital automotive experience itself.

With over 105 million solo drivers on the road in the U.S. the digital dashboard opportunity goes beyond just enabling subscribers to consume more information and have access to better in-car utilities. It also creates an opportunity to give advertisers access to a very targeted, but maybe more importantly, captive audience. By marrying registration and demographic data of the driver with their current location, via GPS, along with intended destination, via maps and navigation, content providers and advertisers will be able to incorporate much better audio ads, using real-time ad-insertion technology, and digital offers than ever before. And because of the linear nature of consuming audio content, advertisers should expect a better return on their marketing expenses because drivers won’t be distracted by anything else.

It’s reasonable to believe that we will see the fruition of these early in-car efforts over the next 2 to 4 years. Now imagine 2020, when the first driver-less cars are expected to hit showrooms (although if Google had its way, it would happen sooner). The experience of driving a car will become obsolete and everyone will become a passenger so the content consumption and advertising-related opportunities will expand as former-drivers can focus on other activities in earnest turning the car into a portable living room.

Maybe then Bill Gates’ famous quote comparing the computer and auto industries, and subsequent rebuttal from GM, might actually have some truth to it.

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The Valuation Disconnect in Mobile

Well before the media anointed mobile the Next Big Thing, venture capitalists saw its potential. Consumers have rewarded VCs for their foresight by how quickly they’ve adopted non-voice mobile services over these past couple of years. The result has been a number of high-profile liquidity events this year starting with mobile ad network Millennial Media’s IPO followed by Facebook’s acquisition of Instagram for an eventual price of $736 million and record levels of gaming sector acquisitions led by mobile. With all this positive momentum it’s not surprising that VCs continue to allocate an increasing share of deals and dollars to mobile startups as the overall number of investments has reached its highest levels since the dot-com days.

In contrast to this optimism in the venture community, Wall Street is down right negative towards mobile. Google’s third quarter earnings announcement was met with a 8% drop in share price in part due to the increasing number of search queries being performed on mobile devices which is causing a deceleration in the company’s revenue growth. And while Facebook’s most recent quarterly earnings report resulted in the stock rising 20%, the company’s market capitalization is still only at 60% of its peak value from its first day of trading. This is in largely due to concerns over Facebook’s ability to monetize their growing mobile audience, which now consists of 600 million users, including 126 million of which use Facebook mobile exclusively.

The Typical Relationship

So why the disconnect in how these investors value mobile? It can be partially explained by how each type of investor evaluates investment opportunities to begin with. Venture capitalists, especially early stage ones, typically look to buy private, and thus illiquid, stock in pre-revenue companies with nascent, but potentially market-disruptive, ideas. As such, these investments may take up to 10 years to realize a return for their VCs, if at all. Contrast this with public market investors, such as hedge and mutual funds, which focus on the predictability of earnings and revenue growth relative to a company’s market value and reevaluate their investments in real-time based on news and quarterly earnings reports since liquidity is readily available in these stocks.

So when VCs invest in start-ups, especially consumer-oriented ones that are ad-supported, they are betting not only on a company’s potential to execute on their business plan but also on the formation of a rapidly growing market. Due to this, the focus is usually on customer acquisition and market share growth- not revenues. As a market begins to mature in size and opportunity, monetization solutions are developed, usually by other start-ups, allowing the entire market to benefit from the creation of new revenue streams. Companies that don’t get acquired and can show they have a path to profitability have the opportunity to go public and in the process become industry bellwethers, using their new capital infusion and stock shares as currency to further enhance their market position.

Why Mobile Had Been Different

In the case of mobile, a couple of things happened that has affected the usual relationship between the private and public markets. First, the consumer adoption of mobile has outpaced any other technology in the history of the U.S.- including radio, TV and the internet. As such the native monetization solutions that were developed alongside these other technologies have been slow to scale in mobile because (1) the ad formats currently being used are largely re-purposed ad technologies from the desktop internet, such as banner and rich media ads, which were easy to launch with in an effort to capture mobile revenue early on and (2) advertisers have been slower to allocate advertising budgets to mobile than previous technologies due to this speed of growth- funds that would be used to help spur innovation in ad experiences on mobile devices.

The economic realities of increasing supply of mobile ad inventory coupled with relatively low demand for quality ad experiences thus far has resulted in effective CPMs that are 1/5th the price of desktop internet advertising. This disparity in monetization capabilities between mobile and desktop is forcing public investors to reevaluate consumer tech investments where mobile is becoming impactful enough from a usage perspective to potentially affecting earnings. With Millennial Media, a pure-play mobile ad network, and Pandora Media, whose ad-supported internet radio audience is now 75% mobile, still not profitable as publicly-traded companies, investors will continue to discount the mobile businesses of public consumer technology companies for the foreseeable future.

Without having proven their business models to Wall Street yet, Millennial and Pandora can’t be considered mobile bellwethers, which is needed to preserve the private-to-public valuation relationship. Companies such as AdMob and Instagram might have achieved bellwether status if they hadn’t been acquired before realizing their potential as stand-alone public companies. As such it might be left to existing ad-supported consumer internet tech leaders who are able to make the audience and business transition into mobile to perpetuate the ecosystem. Facebook, which has faced scrutiny over its performance as a public company in part due to mobile, has the momentum in user growth and sheer audience size to accomplish this transformation if they can prove their various mobile ad products can profitably scale. Because of this you could argue that Facebook actually went public too early, instead of too late, if you look at it as a mobile-first company. Probably the best positioned public company though is Google which acquired what is now the most popular mobile operating system in Android, largest mobile ad network in AdMob and is seeing mobile growth in its core search business as well as across YouTube.

Mobile is Really Two Different Experiences

The second part of the answer to the valuation disconnect is in the definition of mobile. When research companies forecast trends and investors talk about opportunities they always speak about mobile as if it were one cohesive distribution channel when in fact it is composed of two distinct experiences- smartphones and tablets. Being able to differentiate between the two is critical because of the activities each device is best suited for based on the physical limitations of each display as well as their monetization opportunities.

Smartphones

While Apple might be credited with ushering in the consumer mobile era with the launch of the iPhone in 2007, it was the launch of the App Store the following year that enabled smartphones to properly leverage their mobility as the physical limitations of mobile phone screens (3 to 5 inches in length) required task-specific applications be built instead of all-encompassing web experiences. Because of this, the most successful app experiences, as Benchmark Capital’s Matt Cohler eloquently describes it, mimic a remote control in that they are easy to use and provide a specific utility to consumers. In turn, advertising on mobile phones need to abide by these same principles in order to be valuable.

Rare Crowd’s Eric Picard described the current mobile ad format problem in a recent article while also presenting a possible solution for smartphones that is interruptive without being intrusive- and can be delivered at scale. For app developers that have large enough user-bases though, creating native experiences, especially ones that can leverage location, will always result in better value for both the advertiser and consumer. Expanding on sponsored ad units that Facebook (via Sponsored Stories) and Twitter (via Promoted Tweets) have popularized in the social activity stream and more recently on mobile, location-based social exploration platform Foursquare launched Promoted Updates for local merchants this past summer and crowd-sourced traffic app Waze launched its own self-service advertising platform earlier this month that focuses on solving users’ location-based needs.

Tablets

Like smartphones, Apple can also be credited with jump-starting the tablet market a mere 3 years ago. The company was prescient in introducing the iPad as a tool for consuming media as users have made watching TV shows, playing games and reading the primary uses for the device. This makes sense when you consider the screen size of tablets (ranging from 7 to 10 inches) allows consumers to replicate the offline experience of reading a magazine or watching television in a more convenient and personal format than traditional computers allow for. Because of this, advertising on mobile tablets can be interruptive like traditional media and less concerned with other vectors such as location since most people are using their tablets at home and as a second screen complement to watching television. That means online video and rich media interstitials, which are higher-valued ad units than traditional banner ads, will work with minimal refactoring compared to smartphone ad experiences. That doesn’t mean there isn’t an opportunity for companies to innovate around the ad experience as start-ups like Kiip are proving by rewarding user engagement and retention within mobile apps with real world rewards.

When It’s All Said and Done

With tablets expected to outsell PCs by next year, focusing efforts on this part of the mobile market might be the most prudent move for consumer tech companies with mobile audiences since the advertising experience most closely resembles the desktop internet from both a format and value perspective. The smartphone advertising market will take longer to scale simply because of the utility-oriented nature of the user experience.

As these advertising solutions sort themselves out though, so should the discrepancy between public and private market investor valuations around ad-supported business models. As start-ups fill these gaps in the consumer mobile space with monetization solutions that prove to be effective, so to will public investors get comfortable with the long-term value mobile users have to offer, which, at the end of the day, will benefit everyone involved in growing the value of the mobile industry.