How Barter Ad Deals Fuel Silicon Valley's Mobile App Economy

Ad Inventory Swaps Key for App Promotion But No Money Changes Hands

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Advertising is a key part of acquiring new users for mobile apps, and thus ascending the all-important top lists on Apple's App Store and Google Play.

It's advertising with one big caveat: In deals between app makers, money often does not change hands.

Disgruntled by the high cost of acquiring users on mobile ad networks, a subset of app makers have created an informal barter economy to promote their products in which they swap ad clicks in hopes of driving installs among users.

There's nothing new about barter ad deals in old or new media, but these kinds of deals have become a bigger feature in Silicon Valley's mobile-app economy over the past year.

The logic goes like this: Many apps developers have huge audiences of users, but those users download and use many apps, some find it better to swap that audience with a noncompetitive app developer. But there are pitfalls since it is hard to know if you're getting equivalent value out of a swap. In the end, the deals are fueled by relationships: a handshake and trust.

For some major app developers, like the game maker TinyCo, maker of "Tiny Monsters," they're just a small piece of the overall paid media mix, since the scale offered by ad networks is indispensable. However, there are examples of developers that need to market to a mass audience but have managed to cut out the middleman altogether.

Ad for Smule's new app, Strum
Ad for Smule's new app, Strum

Take the music-app maker Smule, which currently has five out of the top 15 grossing iPhone music apps, according to App Annie. For today's launch of a social video app called Strum, Smule has saved up 350,000 clicks it's owed for campaigns recently hosted within its own products, which it will claim this week by running ads in four partners' apps that click through to Strum's listing in the App Store.

"[Barter has] become a more explicit part of our marketing process," said Smule's GM, Prerna Gupta, adding that barter deals were in a more experimental phase in 2011, but picked up steam at Smule early this year. (Her company, Khush, was acquired by Smule last December, which she says partly resulted from the companies getting better acquainted after working together on a barter deal during the previous summer.) "We were sort of doing it ad hoc and would randomly reach out to a developer or two to give it a try. Now we're trading inventory with developers on a regular basis."

The economics of barter deals work for Smule largely because it has its own network to lean on and can market new apps like Strum within enduring hits like Magic Piano. (Marketing for Strum will also include YouTube promotion through platform stars like Mystery Guitar Man.)

The company's savings from barter are potentially considerable, since a swap of clicks with a partner that converts especially well and yields 10,000 installs is essentially saving $20,000 (assuming a $2 cost per install on an ad network), and Smule is trading inventory it says it's unlikely to otherwise sell.

"We very rarely show display ads that are not barter," Ms. Gupta said, noting that most of the company's ad revenue takes the form of incentivized ads where a user might earn virtual currency in exchange for watching a video ad, for example. "Relative to how much they degrade the user experience, we don't think they monetize well enough to be worth it."

Strum's mini ad blitz this week suggests that partners in cross-promotion need not necessarily have similar products. One of Smule's partners is Fotopedia, which bills itself as a "collaborative photo encyclopedia" with a dozen apps for destinations like Morocco and Italy.

Its senior VP-global operations, Christophe Daligault, said Fotopedia had tried advertising through ad networks more than two years ago but found it to be cost-prohibitive, since the ad-supported product doesn't generate a lot of money per user and relies instead on the scale of a user base that generates 200 million page views per month. It's done no external advertising again until now, but has benefited from plugs from Apple.

"We're not competitive with Smule -- everything we do is visual, and everything they do is around music -- but I think we have high-quality audiences, in as much as these are people who like the respective apps and spend a lot of time in them," Mr. Daligault said, noting that the swap is essentially an experiment from his end.

Real estate giant Trulia did a deal with another lifestyle brand for its app earlier this year, swapping mobile impressions, and saw a 3% click-through rate, according to its director of mobile, Steven Yarger. However, suitable partners are hard to come by , since a good brand fit is a prerequisite and he can't work with the gaming companies that are experienced barter deal makers.

"In 2013, we'll be looking for more of these," said Mr. Yarger. "Since there aren't as many obvious partners, it's not something we went deep on in 2012."

While barter deals have become commonplace, even their biggest advocates acknowledge that there are logistical problems. An oft-cited one is scale, since there is a much smaller pool of developers with enough users to be able to ante up 100,000 clicks during a given weekend. There's also a trust issue, since even if you're trading a set number of clicks, there's no way to know which users your partner is showing your ad to.

"More sophisticated developers can siphon off and send you the lower-performing users, so you're getting their worst traffic in return for traffic you're giving," said Chris Akhavan, senior VP-global partnerships at the mobile ad network Tapjoy.

Even the lion's share of developers that are executing barter deals honestly may not be providing equal value in their trades, since one audience may prove more valuable than another and yield more clicks and installs.

A company called Chartboost spotted a business opportunity in that disequilibrium. Created by former executives from the Disney-owned gaming company Tapulous, which ultimately built its own internal technology to facilitate cross-promotion, Chartboost enables barter deals by essentially serving as a marketplace, but also enables direct buying between gaming developers.

CEO Maria Alegre says Chartboost has 8,000 games signed up, up from 800 at the beginning of the year. Its pitch is that it's an ad network alternative and also a niche version of LinkedIn that helps connect developers to facilitate the direct deal-making that will save them marketing dollars. It's free to use in most cases and makes money through a revenue share from when companies choose to sell their inventory to its network as a whole instead of negotiating directly with another member.

"People start bartering with good faith, but the natural transition is to start buying and selling," she said.

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