europe mobile marketingi.bnet.com/blogs/macq-iad-report.pdfcues from japan and emerging markets 9...

Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our

website www.macquarie.com.au/research/disclosures.

EUROPE

Inside

Mobile media usage is exploding; ad

spending is following 3

The mobile device landscape 6

Cues from Japan and emerging markets 9

Mobile marketing channels 11

The opportunity for ad agencies 21

Data and privacy issues 25

Appendix: Mobile marketing players 26

Macquarie Capital (Europe) Ltd Tim Nollen +44 20 3037 4524 [email protected] Angus Tweedie +44 20 3037 4099 [email protected] Guy Peddy +44 20 3037 4509 [email protected] Macquarie Securities (Australia) Limited Alex Pollak 61 2 8232 3172 [email protected] Macquarie Capital (USA) Inc Ben Schachter +1 212 231 0644 [email protected] Macquarie Capital (Europe) Limited, Niederlassung Deutschland Nicolas Patrick Von Stackelberg +49 69 50957 8027 [email protected] Macquarie Capital Securities (Japan) Limited Nathan Ramler, CFA +81 3 3512 7875 [email protected]

9 December 2010

Mobile marketing Dawn of a new medium Mobile usage is exploding and ad revenues should follow

We think 2010 marked the crux of the hockey stick for mobile marketing.

Smartphones are already 35% of the handset market in the US, Europe and

Japan, and tablet computers are now taking off. Apple and Android apps set a

new standard, and mobile is now at the forefront of marketers‟ conscience.

A $14 billion market – at least – by 2015

This report focuses on marketing, not tech or telecoms, though we

incorporate views from Macquarie‟s internet, telecoms and software analysts.

We estimate the global mobile ad market could grow from about $3.5bn in 2010

to $14bn in 2015. Mobile only comprises 1% of total ad spending today, but we

think this could rise to 3-4% in the next 5 years, and 5-8% over time. We believe

mobile marketing and services represent an incremental growth opportunity for

ad agencies of anywhere from 0.2-1.3%, and can help elevate agency organic

growth to long-term GDP-plus rates.

The ultimate targeted advertising medium

This is a different type of media, incorporating display ads through both apps

and browsers, search, messaging (sms and mms), location-based services such

as in-store couponing, and games. Mobile extends digital capabilities to a more

highly personalised, interactive and omnipresent way of communicating with

consumers, and offers exciting e-commerce (m-commerce) potential. Still, as

this is such a nascent industry, there is plenty of room for improvement.

The ad agencies’ role: integration

Mobile introduces new layers of complexity that create new demands for

agency services. Mobile campaigns cannot stand alone: mobile search links

must lead to mobile-enabled websites with m-commerce options, and any mobile

message must keep consistency with brands‟ other creative messages.

Apple or Google? Or RIM, Nokia or others?

We believe apps in a closed environment have created a great user

experience, but browsers based on open platforms will gain share over

time. With HTML5 emerging as a common language in which mobile web

programs are written, we expect browser-based devices to proliferate, attracting

consumers and hence advertisers. Google, RIM and Nokia could profit from this.

The biggest risk: data and privacy concerns

Personal data is extremely sensitive, and potential legislation such as allowing

consumers to opt out of internet tracking could throw a wrench into all this.

Key agency players

All ad companies are building capabilities in mobile. We don‟t offer specific

stock picks on this basis, but reiterate our positive view on companies with

strong digital expertise. These include Outperform-rated Publicis, Interpublic,

Omnicom and Dentsu, and Neutral-rated WPP and Aegis. In this report we

also discuss smaller-cap names like YOC, and numerous private companies.

Macquarie Research Mobile marketing

9 December 2010 2

Fig 1 Macquarie Global Media Comps

Source: FactSet, Company data, Macquarie Research, December 2010

Ticker - 07-Dec Price Mkt Cap Mkt Cap Net debt FCF y Div y Net D/

Company Bloombg Rec Price target Upside Local (m) USD (m) (m) 2010E 2011E 2010E 2011E 2010E 2010E EBITDA

Advertising

Aegis AGS LN N 146p 140p n/a 1,788£ 2,829$ 396£ 10.3x 9.0x 14.3x 13.5x 8.3% 1.8% 2.2x

Dentsu 4324 JP O 2,345¥ 3,000¥ 27.9% 683,498¥ 8,229$ 9,147¥ 13.2x 10.6x 16.3x 15.9x 11.7% 1.2% 0.2x

Havas HAV FP U 3.50€ 3.50€ 0.1% 1,503€ 2,006$ 1€ 6.9x 6.4x 12.6x 11.5x 8.5% 2.3% 0.0x

Interpublic IPG US O 10.96$ 13.00$ 18.6% 5,189$ 5,189$ -28 $ 7.0x 6.0x 26.3x 17.8x 6.3% 0.0% 0.0x

Omnicom OMC US O 46.89$ 49.00$ 4.5% 14,555$ 14,555$ 2,026$ 9.6x 8.8x 17.3x 15.0x 7.6% 1.7% 1.2x

Publicis PUB FP O 36.33€ 44.00€ 21.1% 8,518€ 11,367$ 540€ 8.3x 7.7x 15.0x 13.2x 7.7% 1.7% 0.6x

WPP WPP LN N 764p 825p 8.0% 9,557£ 15,116$ 2,747£ 9.0x 8.7x 13.5x 12.0x 7.8% 2.3% 2.3x

Publishing

APN News and Media APN AU U A$ 1.91 A$ 2.02 6.0% A$ 1,165 1,155$ A$ 697 8.2x 7.6x 10.4x 9.6x 10.9% 7.5% 3.1x

DMGT DMGT LN N 535p 575p 7.5% 2,054£ 3,248$ 817£ 8.2x 7.9x 11.6x 10.6x 10.7% 3.0% 2.3x

Fairfax FXJ AU U A$ 1.45 A$ 1.48 2.4% A$ 3,399 3,369$ A$ 1,654 7.9x 7.4x 12.2x 10.4x 8.2% 2.6% 2.6x

Informa INF LN O 407p 500p 22.9% 2,442£ 3,862$ 908£ 10.0x 9.7x 11.2x 10.6x 8.3% 3.5% 2.8x

Pearson PSON LN O 1002p 1150p 14.8% 8,018£ 12,682$ 1,067£ 8.9x 9.1x 13.8x 13.3x 8.4% 3.8% 1.0x

Reed Elsevier REL LN U 520p 520p 0.1% 6,222£ 9,841$ 3,972£ 9.8x 9.6x 12.2x 11.7x 7.6% 4.1% 2.4x

UBM UBM LN O 657p 800p 21.8% 1,610£ 2,546$ 476£ 11.1x 9.0x 12.7x 10.7x 8.7% 3.8% 2.5x

Thomson Reuters TRI US NR 36.88$ n/a n/a 30,675$ 30,675$ 6,881$ 11.4x 9.6x 21.1x 15.6x 4.6% 3.1% 2.1x

West Australian News WAN AU N A$ 6.72 A$ 6.96 3.6% A$ 1,436 1,423$ A$ 249 10.0x 9.2x 14.9x 13.6x 7.6% 7.5% 1.5x

Wolters Kluwer WKL NA N 16.15€ 16.00€ -0.9% 4,813€ 6,422$ 2,073€ 8.3x 7.8x 10.8x 10.0x 9.4% 4.1% 2.5x

Conglomerate

CBS Corporation CBS US O 17.94$ 21.00$ 17.1% 11,539$ 11,539$ 5,465$ 7.0x 6.3x 14.8x 11.1x 9.0% 1.2% 2.3x

TEN Network TEN AU N A$ 1.49 A$ 1.61 8.1% A$ 1,557 1,544$ A$ 298 8.9x 7.5x 16.0x 12.1x 6.9% 5.3% 1.4x

Time Warner Inc. TWX US O 31.20$ 40.00$ 28.2% 34,982$ 34,982$ 12,548$ 7.5x 7.0x 12.9x 11.3x 8.3% 2.8% 2.0x

The News Corporation (Ords) NWS US N 16.25$ 19.53$ 20.2% 41,345$ 41,345$ 4,504$ 8.1x 7.3x 15.6x 13.9x 7.1% 1.0% 0.8x

The News Corporation (Prefs) NWSA US N 14.36$ 18.71$ 30.3% 36,958$ 36,958$ 4,504$ 7.3x 6.6x 13.8x 12.3x 8.0% 1.0% 0.8x

The News Corporation (Ords) NWS AU N A$ 16.31 A$ 19.61 20.2% A$ 42,106 41,736$ A$ 4,504 8.2x 7.3x 15.6x 13.9x 7.0% 1.0% 0.8x

The News Corporation (Prefs) NWSLV AU N A$ 14.49 A$ 18.79 29.7% A$ 37,694 37,362$ A$ 4,504 7.4x 6.6x 13.9x 12.4x 7.9% 1.0% 0.8x

The Walt Disney Company DIS US O 37.12$ 40.00$ 7.8% 73,273$ 73,273$ 9,758$ 9.2x 8.3x 17.1x 14.8x 5.0% 0.9% 1.1x

Viacom Inc. VIA/B US N 39.40$ 43.00$ 9.1% 23,810$ 23,810$ 5,915$ 7.9x 7.6x 12.5x 11.2x 8.3% 1.5% 1.6x

Vivendi VIV FP NR 19.92€ n/a n/a 24,625€ 32,860$ 8,500€ 4.0x 4.0x 9.2x 8.9x 5.3% 7.1% 1.0x

Distribution

BSkyB BSY LN O 731p 770p 5.3% 12,719£ 20,118$ 613£ 9.5x 8.1x 17.6x 14.0x 6.3% 3.1% 0.4x

Comcast CMCSA US N 20.79$ 22.00$ 5.8% 43,027$ 43,027$ 25,884$ 4.7x 4.5x 16.5x 14.5x 9.4% 1.8% 1.8x

Cablevision Systems Corp. CVC US NR 33.23$ n/a n/a 9,971$ 9,971$ 10,875$ 8.1x 7.4x 24.3x 17.0x 8.8% 1.3% 4.2x

DIRECTV DTV US O 39.41$ 50.00$ 26.9% 32,857$ 32,857$ 7,658$ 6.9x 6.2x 17.1x 12.9x -1.1% 0.0% 1.3x

Dish Network DISH US N 18.54$ 21.00$ 13.3% 3,732$ 3,732$ 5,279$ 3.1x 3.0x 8.9x 8.7x 11.2% 0.0% 1.8x

Jupiter Telecom 4817 JP O 87,900¥ 105,000¥ 19.5% 610,713¥ 7,353$ 149,883¥ 4.8x 4.7x 15.2x 14.7x 9.3% 1.7% 1.0x

Sky Network Television SKT NZ O 5.16NZD 5.95NZD 15.3% 1,825NZD 1,825$ 447NZD 7.9x 7.0x 22.5x 18.5x 8.2% 2.9% 1.6x

Time Warner Cable TWC US O 65.40$ 75.00$ 14.7% 23,116$ 23,116$ 19,915$ 6.3x 6.1x 18.6x 14.9x 8.7% 2.4% 2.9x

Communication Infrastructure

Echostar SATS US U 20.53$ 19.00$ -7.5% 770$ 770$ 188$ 2.4x 2.5x nmf 33.9x 5.0% 0.0% 0.5x

Content Networks & Entertainment

Discovery Communications DISCA US N 42.91$ 40.00$ -6.8% 17,412$ 17,412$ 2,597$ 12.4x 11.0x 23.1x 18.9x 4.8% 0.0% 1.7x

Dreamworks Animation DWA US O 30.61$ 42.00$ 37.2% 2,759$ 2,759$ -170 $ 11.0x 8.7x 16.9x 13.5x 4.6% 0.0% -0.7x

Lions Gate Entertainment LGF US NR 7.23$ n/a n/a 988$ 988$ 734$ 22.5x 14.3x nmf nmf nmf 0.0% 9.6x

Scripps Networks Interactive SNI US N 52.64$ 51.00$ -3.1% 8,688$ 8,688$ 468$ 11.6x 10.6x 21.2x 18.8x 5.3% 0.6% 0.5x

Internet

Alibaba.com 1688 HK U 13.26HK$ 12.50HK$ -5.7% 56,095HK$ 56,095$ (2,785)HK$ 29.2x 23.3x 46.2x 36.6x 2.4% 0.0% -1.5x

AOL AOL US N 25.41$ 27.00$ 6.3% 2,739$ 2,739$ -530 $ 3.4x 5.0x 6.2x 14.3x 16.9% 0.0% -0.8x

CarSales.com CRZ AU O A$ 4.80 A$ 5.81 21.0% A$ 1,116 1,106$ -A$ 14 17.1x 13.2x 25.7x 19.5x 3.9% 4.3% -0.2x

Google GOOG US O 588.60$ 725.00$ 23.2% 145,850$ 145,850$ -34,217 $ 8.5x 7.3x 20.2x 17.1x 4.8% 0.0% -2.6x

Rakuten 4755 JP U 66,500¥ 50,000¥ -24.8% 875,692¥ 10,543$ 340,644¥ 13.7x 11.5x 18.6x 16.0x -5.0% 0.2% 3.8x

Seek Limited SEK AU O A$ 6.92 A$ 7.58 9.5% A$ 2,324 2,303$ A$ 60 20.3x 15.8x 28.0x 20.2x 3.6% 2.6% 0.5x

SINA SINA US O 69.96$ 68.00$ -2.8% 4,226$ 4,226$ -552 $ 33.4x nmf nmf 33.0x 2.6% 0.0% -5.0x

Tencent 700 HK U 175.20HK$ 125.00HK$ -28.7% 269,635HK$ 269,635$ (4,397)HK$ 25.8x 20.2x 40.9x 32.1x 2.0% 0.3% -0.4x

Yahoo YHOO US N 17.14$ 18.00$ 5.0% 22,081$ 22,081$ -3,407 $ 11.1x 11.5x 18.9x 22.4x 4.1% 0.0% -2.0x

Yahoo Japan 4689 JP O 31,250¥ 42,000¥ 34.4% 1,978,840¥ 23,824$ 129,238-¥ 12.0x 11.0x 20.7x 18.3x 7.3% 0.4% -0.8x

Out-of-Home

Focus Media FMCN US O 22.80$ 30.00$ 31.6% 3,037$ 3,037$ -376 $ 11.3x 9.6x 19.0x 23.8x 3.7% 0.0% -1.6x

VisionChina VISN US O 3.68$ 5.25$ 42.7% 266$ 266$ 58$ nmf 31.9x nmf 24.1x -13.6% 0.0% -0.6x

AirMedia AMCN US N 7.35$ 7.50$ 2.0% 484$ 484$ -74 $ 30.9x 8.3x nmf 14.7x -3.0% 0.0% -5.6x

EV / EBITDA P/E


9 December 2010 3

Mobile media usage is exploding; ad spending is following Mobile marketing has come a long way in 2010, largely driven by device and software

introductions by Apple and Google. We believe 2010 marks the crux of the hockey stick and

meaningful growth will now follow. For advertisers, many believe the time is now is adopt a

mobile strategy: Just as the dawn of the internet brought new channels to those companies

that embraced it, so now mobile presents an entirely new and incredibly targeted marketing

tool that cannot be ignored. For agencies, building technological and intellectual capabilities

is equally critical to capture this growth, which may provide incremental revenue

opportunities.

This report focuses on marketing, in the sense of what advertisers spend in the mobile

medium, mostly through agency services. These include mobile search, display advertising

(both via apps and browsers), messaging, location-based services, and games. We are not

talking about revenues that accrue to telecoms or internet companies such as mobile

operator fees or ringtone purchases, and we are not making judgments on tech or telecom

companies. But we do cover these bases here, as they are critical footholds in understanding

the medium.

iPhones and iPads have changed the game; but Android, BlackBerry and other smartphones and tablet computers are advancing it

This has been a long time coming – mobile for years has seemed an obvious “next great

thing,” with such huge usage: globally there are three times as many mobile phone

subscribers as there are internet users, and more than two-thirds of all people in the world

use mobile phones. But advertising-wise, mobile only began to take off with Apple‟s iPhone

launch in 2007. This was immediately followed by the global recession, so marketers began

to experiment in earnest in mid-2009. In quick succession, we have witnessed Google‟s

acquisition of leading mobile ad network AdMob, Apple‟s acquisition of ad network Quattro,

Apple‟s introduction of the iPad tablet device, and its subsequent rollout of the iAds app

advertising system. And then by year-end revenue from devices run on Google‟s Android

operating system had begun to outpace Apple‟s market-leading iPhone.

Now with a flood of devices on the market, real expansion has finally begun.

Smartphones, led by the iPhone, offer a quality media experience on the small

screen. Smartphones now have ~30% handheld market penetration in the US and

western Europe in terms of number of devices; as a percent of total sales smartphones

now account for 35% of the market. Macquarie telecom analysts estimate smartphone

handset sales will grow at a 31% CAGR to 2012, and Nielsen/eMarketer expects

smartphone penetration to reach 50% of all phone users by 2014 in Europe and the US.

Tablet computers like the iPad extend the media consumption possibilities. Gartner

forecasts Apple to sell ~10m iPads by the end 2010 globally; market penetration in the US

is now 4% of households. Other tablets now hitting the market include products from

Samsung, Lenovo, Toshiba, HP and RIM.

Fig 2 Global smart phone handset sales growth and penetration ($m)

Fig 3 US mobile internet users (m) and penetration

Source: Nielsen , Macquarie Research, July 2010 Source: Nielsen, eMarketer, July 2010

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

2008 2009 2010E 2011E 2012E

0%10%20%30%40%50%60%70%80%

Smartphone revenue % of industry revenue

0

50

100

150

2008 2009 2010 2011 2012 2013 2014

0%

10%

20%

30%

40%

50%

M obile internet users % of population

Mobile marketing has leapfrogged to the forefront of the

industry’s consciousness

There are 3x the

number of mobile

subscribers around

the world as internet

users


9 December 2010 4

Mobile marketing extends the reach of the internet

For advertisers this is finally a viable medium, because of:

The new possibilities to transfer imaging and video onto the mobile screen. Through

downloadable apps or increasingly the mobile web, the spread of 3G, 3.5G and soon 4G

broadband technology offers much faster data speeds and hastens the rise of mobile

marketing.

The personalized and localized nature of mobile. Research by mobile ad network

inMobi suggests 52% of mobile phone users are willing to receive personalized ads on

their devices.

This is a different type of media, extending digital capabilities to a more highly personalised,

interactive and omnipresent way of communicating with the consumer. Mobile marketing

goes far beyond advertising: it extends the ability of marketing as a means of immediate

interaction with consumers, spanning all media channels – print, broadcast, in-store, internet,

and it offers exciting e-commerce (or more correctly m-commerce) opportunities as well.

Sizing the market

Mobile advertising is still a tiny slice of the overall market, but we expect this to increase

significantly in coming years. Market size estimates vary wildly, depending in part on

definitions. eMarketer forecasts US mobile marketing up 79% this year to $743m, and

expects it to reach $2.5bn by 2014. IDC estimates the US mobile ad market more than

doubled to $877m in 2010.

Fig 4 Mobile is still only 1% of the US ad market … Fig 5 … but is growing at a 44% CAGR through 2014

Source: eMarketer September 2010, MAGNA Global December 2010, Macquarie Research, December 2010

Source: eMarketer, September 2010

Mobile: 1-2% of total advertising in the near term...

For our purposes (looking at mobile in the context of the agencies‟ opportunity) we stick with

the lower figures used by eMarketer. An agency-available market of $2.5 billion in 2014 would

still equate to only about 2% of total US advertising. But we think much of this will be

incremental growth – perhaps some taken from a marketer‟s online budget, but in many

cases new budget allocations.

…or 5% in 5 years…

Other forecasters have predicted much more for mobile, perhaps using broader definitions:

Informa Telecoms & Media has estimated a current market size of $3.5bn, expanding to

$24bn within five years, which would be 5% of MAGNA Global‟s worldwide ad spend

forecast for 2015.

Strategy Analytics goes even further, estimating the global mobile ad market at $3.6 billion

already in 2009, and reaching $38 billion in 2015.

ABI research thinks global mobile advertising & marketing totalled $7.5 billion in 2009, and

will hit $21 billion in 2012.

Industry commentator Chetan Sharma estimates mobile apps will grow at a 92% CAGR

2009-2012, and revenue at a 62% CAGR to $17.5 billion (this includes paid app

downloads, virtual goods sales, and advertising). More broadly speaking, this would

equate to 4% of total ad spending.

TV

40%

Internet

17%

Newspapers

16%

Magazines

11%

Radio

11%

Outdoor

4%

Mobile

1%

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2009 2010 2011 2012 2013 2014

Mobile is effective

as an opt-in medium

US market:

$2.5bn in 2014E

Global market:

$17-21bn in 2012E

$24-38bn in 2015E


9 December 2010 5

… or 8% in the long run

Another way to look at it is to assume advertising follows eyeballs. The European Interactive

Advertising Association estimates 8-18 year-olds currently spend 6.4 hours per week online

with their mobile devices. This would be 8% of total gross media consumption, based on the

Kaiser Family Foundation‟s assessment of 8-18 year-old time spent with media, and we

would only expect this to grow. If mobile marketing moved up to 8% of total ad spend, this

would imply a market size of $40 billion.

For agencies, mobile is still only a tiny fraction of revenues, probably still less than 1-2%

of total ad holding company revenue. At the individual agency level the figure is higher: Aegis

Media and Interpublic‟s media buying agency UM both say mobile is less than 5% of total,

and MRM, an Interpublic digital specialist, estimates mobile is currently 10% of its business.

But again, if growth projections of 44% CAGR are correct, mobile would account for about 3-

4% of agency sales in the next 5 years.

Definitions are loose

For practical purposes stripping out “pure” mobile ad spend will be complicated by the rise of

integrated campaigns.

For example, a mobile site accessed via an ad-sponsored game can refer to a micro-site

on the internet, such as a car dealership where the user can book a test drive of the actual

product by entering contact details, which are then fed directly into the CRM database of

the advertiser.

Another tried and tested format is a link to a mobile site advertised as part of an outdoor

campaign via tags picked up by users taking a picture with the camera now available in

most phones.

Separating revenue streams between agencies, mobile operators, content creators and

media buying likely contributes towards the large differences in estimates. But what is

important for agencies is they can participate in these revenue streams – for example agency

services that feed data in the car dealer example may command a cut of an eventual sale, or

take a fee for providing this service. Because of this wealth of activity, growth rates for

agencies will likely be higher than those of other forms of advertising and marketing as this

becomes a normal part of advertisers‟ marketing mix.

If advertising

follows eyeballs,

mobile should be

worth 8% of total ad

spending – a $40bn

market


9 December 2010 6

The mobile device landscape We believe Apple (Not Rated) has played a critical role in making mobile marketing relevant.

iPhone and iPad apps – closed systems that aim for tighter inventory and higher pricing, all

controlled within the Apple environment – have been great for putting mobile marketing on the

map and establishing a clearer quality standard. And for establishing a much higher price for

the medium: Apple charges a $1m minimum fee, plus $10 cost per thousand impressions

(CPM) and a $2 cost per click (CPC) for use of its iAds platform.

Yet Apple has fumbled in its attempts to convert interest into actual spending in these closed

apps systems (for more on this, see page 11 below), and this has coincided with a 2H 10 rise

in Google‟s Android OS market share. According to Millennial Media, iOS average monthly ad

impressions rose 12% month-over-month in October in the US, while Android OS requests

were up 65%. RIM is now putting more weight into its smartphone ads as well as its new

tablet, and while Nokia has lagged it could grow much more quickly now as its Symbian

platform refocuses with simpler functionality across devices.

Fig 6 US mobile internet devices share of mobile ad impressions: smartphones have opened the market …

Fig 7 … and among smartphones, Android US ad impression share has caught up fast to Apple’s OS

Source: Millennial Media, November 2010 Source: Millennial Media, Macquarie Research, November 2010

Among individual devices iPhones do still dominate share of ad impressions, and the iPad

has quickly moved into the top 10, but the number of devices running on Blackberry and

Android operating systems is increasing.

Fig 8 Device makers’ share of ad impressions on Millennial Media’s ad network

Share of Device ad impressions Operating System

Apple iPhone 16% iOS Blackberry Curve 8% Blackberry OS Apple iPod Touch 8% iOS Motorola Droid 7% Android Samsung Freeform 2% BREW Blackberry Bold 2 2% Blackberry OS Samsung Vibrant Galaxy 2% Android HTC MyTouch Magic 2% Android Apple iPad 1% iOS Motorola Cliq 1% Android

Source: Millennial Media, Macquarie Research, November 2010

Keep in mind too the variations globally: according to inMobi, one of the largest global mobile

ad networks, Nokia in fact retains huge global share of both available mobile impressions and

of operating systems across its platform:

Smartphones

61%

Connected

devices

11%

Feature phones

28%

55% 46% 37%

19% 29%37%

16% 19% 20%6% 4% 6%4% 2% 2%

0%

20%

40%

60%

80%

100%

August September October

iOS Android OS RIM OS Other Windows Mobile OS

Android now

gaining share on

iOS; equal on

mobile ad

impressions


9 December 2010 7

Fig 9 Global manufacturer share of available impressions: Nokia owns more than half the market

Fig 10 Global OS share: Nokia + Symbian is nearly half

Source: inMobi, September 2010 Source: inMobi, September 2010

Hardware basics

Mobile data usage increases substantially with smartphones

iPhone and Android devices command much higher data usage. Fig 11 below left shows

the main operating systems‟ handset share compared with share of mobile web and apps

usage. ABI Research estimates the average user will consume 60% more data in 2010 vs

2009. And mobile data usage could double annually from here: Tech Crunch forecasts mobile

data consumption in the US to grow at a CAGR of >100% from 2010-15.

Fig 11 More internet use on more advanced handsets Fig 12 US mobile data usage (petabytes/month)

Source: AdMob, May 2010 Source: Tech Crunch, March 2010

4G (LTE) broadband technology could provide 2-3x the speed, so more capacity for

mobile activities – which importantly can begin to include streaming video, an obvious target

for advertising. The launch of 4G services has begun in the US with Verizon Wireless‟ roll-

out, but globally is more a 2011 or even 2012 event. Smartphone devices built for 4G would

then follow – a virtuous circle that we believe will further drive mobile internet consumption to

new heights.

Consumers are using smartphones more like portable computers, both on the go with

wireless roaming functions, but increasingly at home as well as they log onto home wifi

networks. The point is consumers don‟t have to wait for LTE; fast data speeds are here now.

Increasing data usage will likely lead to more tiered pricing packages at the operators,

aiming to balance usage with the cost of provision. As LTE becomes more widespread, the

operators‟ cost of providing this may fall, so the impact on consumers may be neutral.

Importantly, higher mobile usage within tiers that users are comfortable with encourages

advertising. This may not be what the wireless operators hope, but if it came to pass it would

ultimately be good for advertising.

One of the key reasons Japan remains ahead of the curve in mobile web use is that a

majority of Japanese mobile data users are on a flat-rate plan, so they don‟t have to worry

about getting stuck with unintended high bills. 3G handset penetration is so high (95%), and

coverage and quality are so good, that this encourages consumption of rich content. It

therefore follows that Japanese mobile advertising is currently about 2x the size of the US.

Nokia

53%

Samsung

14%

Motorola

4%

LG

3%

Apple

9%

SonyEricsson

11%

RIM

3%

Sony

1%

Palm

1%Nexian

1%Nokia

26%

Symbian

22%Android

3%

iPhone

8%

RIM

3%

webOS

1%

Other

37%

44%

19%15%

7%10%

5%

24%

6%

40%

2%

26%

2%

0%

10%

20%

30%

40%

50%

Symbian RIM Apple M icrosoft Android Other

Handset Share M obile Web/App

0

50

100

150

200

250

300

350

2010 2011 2012 2013 2014 2015

LTE and tiered

pricing should

encourage more

mobile usage


9 December 2010 8

Tablet computers: another important mobile device

Apple‟s introduction of the iPad of course unleashes another set of mobile devices on the

market. We include these in this report as the ad economy functions similarly on tablets as

on mobile phones: Apple‟s iAds operate in a closed apps system, while other devices coming

to the market will run on Android, Blackberry, Windows or other operating systems.

Tablets on the market (and their operating systems) include, or will include:

Fig 13 Tablets on the market and expected launches

Manufacturer Product Release date Size OS Price

Apple iPad On the market 9.7" iOS £429 Apple iPad 2 Jan-11 - iOS - Dell Streak Imminent 7" Android - Samsung Galaxy On the market 7" Android £450 Lenovo LePad Early 2011 10.1" Android - Toshiba Folio 100 On the market 10.1" Android £330 HP Slate 500 Early 2011 8.9" Windows 7 - HP PalmPad Early 2011 8.9" WebOS - RIM Playbook Early 2011 7" Android &

Windows 7

Source: Company data, Macquarie Research, December 2010

Software basics

OS technology: Apple rejecting Flash opens the door for a third programming language alternative – HTML5

Apple‟s creation of an app economy highlighted its rejection of the long-established Flash

operating language of the internet, as Apple systems until now have run explicitly on its own

proprietary software and hardware. Excluding Flash means iPods and iPads exclude a

majority of online content that normally appears on websites and mobile screens through

Flash – thereby forcefully creating Apple„s own ecosystem of apps, for which content

providers and advertisers must then proposition content. For Apple, it‟s a gamble that users

will not have access to so much content, but given its popularity, Apple is wagering that

providers will adapt to it.

But another factor at play is the rise of HTML5, which is emerging as a competing technology

on which internet and mobile web programs are increasingly being written. This could set up

a scenario in which HTML5 becomes more popularly used to write programs to run on mobile

devices, which could then spawn more open-platform products.

We have already begun to see the rise in popularity of Android devices; if HTML5 becomes

the de facto standard, then Apple‟s closed apps could become a niche concept. Ongoing

success of Apple‟s proprietary software technology would then depend on continued success

of its hardware brands.

Nokia too favours HTML5, stressing the location aspects that are an integral part of it. Nokia

also supports Flash.

Android supports the HTML5 programming language that works on any mobile phone

(except Apple‟s, which of course doesn‟t use Android). This provides consumers with an

operating system that lets them browse the mobile web just as they browse the internet, and

presumably drives demand for more Google searches. So Google is busy in both the closed

apps environment, and in the open mobile web.

Facebook plans to continue to develop its apps for iPhone and Android, but is

increasingly looking to HTML5 to reach a broader mobile web audience. Interestingly

though, Facebook to date is free of mobile advertising, as Facebook wants to keep control

over the content, which still now means keeping mobile clutter and inconsistent standards

out. But we are confident this will change, seeing the huge attractiveness of this platform for

advertisers; 40% of all mobile usage is on Facebook alone, according to comScore.

Google’s Android

system was

developed as an

open platform

Facebook is based

in HTML5, but does

not yet support

mobile advertising

HTML5 software

language emerging

as a challenge to

Apple


9 December 2010 9

Cues from Japan and emerging markets Japan sets the tone

Cutting-edge trends in Japan, as previously mentioned, lay a path for likely mobile marketing

development elsewhere in the world.

Yahoo Japan says mobile advertising is nearly 6% of the total for the company (making

their annual mobile ads approximately US$100m) with a similar contribution across display,

paid search and listing. Management has indicated mobile search ads are doing well, and

iPhone display ads are seeing good interest from major advertisers. Although Yahoo Japan

is not yet promoting this area too aggressively because of limited advertisers, the company

believes this is an area of significant future growth and is laying the groundwork today to take

advantage of the proliferation of more suitable mobile devices.

Yahoo Japan sees the heaviest mobile advertising from: 1) social games, 2) financial

services, 3) cosmetics and toiletries, and 4) mobile operators. Games companies, in

particular, appear to be one of the biggest beneficiaries of mobile devices as an ad platform,

with a natural fit between mobile gaming and advertising (we discuss games later in the

report, on page 19). We also expect to see strong future synergies for SMEs from using

mobile phones for leveraging location-based services (which we also discuss later, on page

17), taking advantage of the mobility factor.

As the mobile carriers are selling more smartphones and pushing Android-based models, we

expect the interest from advertisers in Japan will increase. Improvements in screen size and

in ads‟ attractiveness and effectiveness (and decreasing the annoyance factor) are making it

easier to use phones as an ad platform.

Dentsu has flagged this area as strategically important and notes that mobile ad

proposals are increasingly desired by their clients. Banners are still their main product and the

users are still mostly small clients, but large clients are increasingly interested in mobile and

in investigating how to use it as a marketing tool. In November Dentsu announced an iAd

partnership with Apple, which although it will have a limited number of clients, we expect to

have a positive impact on the market.

Emerging markets make an interesting case study for advertising

Mobile consumers in emerging markets have skipped generations of technology and gone

straight past the computer screen to the phone. In some, the prohibitive cost of traditional

broadband and fibre expansion make mobile internet a highly attractive substitute to fixed

lines in sparsely populated areas or in those which lack the necessary infrastructure.

Poorer areas also show a greater predilection for mobile internet. Typically, traditional

internet penetration of +50% in established economies occurs when household income

exceeds $20,000 GDP per capita. In emerging markets, mobile penetration can reach a

similar level at GDP per capita of $5,000, according to Nielsen. Some examples:

Turkey has a greater level of mobile internet penetration than fixed line.

India is adding 20 million mobile subscribers each month and is expected to have 1 billion

mobile subscribers by 2013, with 150 million 3G connections by 2014, according to GSMA.

Chinese mobile internet users comprise about 50% of all internet users now, and this

continues to grow rapidly with the ubiquity of 3G.

Skipping

generations in

emerging markets

Mobile is already 6%

of Yahoo Japan’s ad

revenue


9 December 2010 10

Fig 14 Mobile marketing growth in the BRICs: 2012 up 3-6x vs 2009

Source: eMarketer, September 2010

Other trends in China bear watching. Mobile value-added services (MVAS) such as sms and

caller back ring-tones are huge revenue sources to operators, and many internet activities

such as chat and games are transferring to mobile devices. Importantly, much of this in

China is based on network-building. For example, Tencent has built a huge video gaming

business based on its QQ instant messenger service, which claims nearly 600m active users.

The grease in the machine is Tencent's successful micropayments system – users pre-

purchase cards which they then use to buy virtual goods; we expect this model to be adopted

particularly in mobile outside of China. With a huge user base, advertisers gravitate to media

outlets like these.

0%

100%

200%

300%

400%

500%

600%

Brazil Russia India China

2010 2011 2012

Micropayments a

likely business

model


9 December 2010 11

Mobile marketing channels Approximately 50% of mobile marketing spending is done via search, with the other half split

between display advertising and various agency services such as building apps, establishing

customer loyalty programs, and integrating mobile IT with existing internet infrastructure. In

terms of the marketing potential we think of mobile marketing in four basic activity buckets:

1. Display advertising, which includes both apps-based and mobile internet-based, and in

both static and video formats

2. Search marketing, as on the web, but fitted to the smaller mobile screen

3. Messaging – sms and mms – which is often the channel for location-based services such

as couponing or social media

4. Games – both games developed as a form of advertising for brands, and in-game

advertising, like product placement.

1. Display advertising

It is the mobile display ad market that has garnered so much attention of late, as two methods

have evolved – mobile internet-based (open), and apps-based (closed). The former has been

evolving for the past few years, but really began to take off in 2010. The latter has been

championed by Apple to great success lately, partly thanks to strong revenue growth via in-

app ads from AdMob, now owned by Google.

The difference is complex, and has huge ramifications for Apple and Google – but for

advertisers and agencies, we think it‟s all good: Apple has raised the profile of mobile

marketing, but the browser-based mobile web will likely become more predominant over time.

Advertisers will have to address both.

Apps and iAds

Apps are compelling for advertisers, because open web advertising that has been tried for so

long has not really worked – quality has been poor and standards inconsistent, and devices

until recently were insufficient to support mobile viewership. But apps in a closed

environment offer limited as opposed to infinite inventory, and therefore high pricing for

publishers and operators. Because this is such high quality, targeted inventory, it should lead

to higher ROI on ad spending for advertisers.

Fig 15 App stores: number of apps

Source: Apple, RIM, AndroLib, Nokia Forum December 2010

For media properties and retailers, providing an app is a way to ensure that consumers

familiar with the brand can access it on their iPhones and iPads; but this assumes iPhone

users will be looking for that brand. By contrast, browsers on the open mobile web provide a

search function that can lead a viewer to that brand.

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

iPhone Android Blackberry Nokia

Apps in a closed

environment re-set

the bar for standard

– and price


9 December 2010 12

Apple has extended itself across the value chain

What Apple did so successfully was

a. create a high-quality environment for mobile content,

b. for which it created demand by offering a direct revenue share of 70% with developers (vs.

the 10-20% previously offered by telecom operators), and

c. closed the system by building demand from its iTunes user base, through which it directly

bills consumers – locking out the operators completely.

This concentrated the iPhone‟s capabilities, in which Apple‟s apps brought a much better

media experience to mobile. Integrating with iTunes and the app store created new channels

for both consumers and advertisers.

So Apple runs the complete value chain, from hardware (iPhone and iPad) to software (apps

hosting) and services (iAds served through apps) that run on that hardware. And advertisers

have been forced to adjust to this due to its popularity. Because Apple owns the technology

to puts ads into its apps, advertisers are wholly reliant on Apple to manage the development

process and serve the ad, thereby ceding pricing power to Apple. Hence the huge premiums

Apple is charging for its iAds.

iAds create a tightly controlled environment …

Apple acquired ad network Quattro earlier this year, and quickly adopted its technology to

create iAds. Apple then shuttered Quattro to focus its technology exclusively on apps as its

source of ad revenue.

The effect of this was to push out smaller-scale advertisers that can‟t afford the platform,

which are then more likely to go to Android-supported phones or Blackberry or Nokia devices.

This marked the clearest cut yet seen between open-system mobile internet advertising and

closed-loop apps, effectively segmenting the landscape for these different players.

Not content with creating the revolutionary mobile app, Apple has tried to overhaul the pricing

system for online advertising as well, by charging a punchy $1m minimum participation fee,

plus a charge of $10 CPM and a $2 CPC for use of its iAds platform. This pricing runs

substantially ahead of most prices in display advertising and is also a significant premium to

Google‟s AdMob, which charges CPMs up to $10-15 and no CPC, or a CPC-only rate of

$0.15-0.30 on average. With pricing at this level it aligns iAd at the top-end of the market with

highly targeted internet rich-media and video campaigns.

Part of the success of Apple‟s apps is they provide incentives to developers to use the Apple

platform. The table below provides an example of the revenue potential for Apple and app

developers: the developer of the “LED Light for iPhone 4 Free” app had 26,700 requests (app

launches) on a single day, which generated 9,300 impressions. Of those impressions, the

developer saw an 11.8% click-through rate (CTR) for 1,100 clicks. This admittedly is a very

successful app (12% CTR is huge) and is based on only one day‟s sale, but it illustrates the

point. The revenues break down as follows:

Fig 16 Example of the revenue generation potential of an Apple app

Revenue to Revenue to 1: $10 CPM: Impressions Mille CPM CPM revenue Apple (30%) developer (70%)

9,300 9.3 $10 $93 $28 $65 Revenue to Revenue to 2: $2 click-through fee: CTR Clicks CT fee CPC revenue Apple (30%) developer (70%)

11.8% 1,097 $2 $2,195 $658 $1,536 Total revenue to Total revenue to Apple developer

Combined revenue $686 $1,601 Annualized $250,514 $584,533


Advertisers are

wholly reliant on

Apple to manage ad

development and

purchasing

iAds force all but

the blue-chips into

browser-based

mobile


9 December 2010 13

Apple says half of the top 25 US advertisers are signed up for iAds, though we have only

seen a few of these actually complete iAd buys to date. iAds launched in Europe in

December: Apple says it has sign-ups from blue-chip advertisers including AB InBev,

Absolute Radio, Citi, Evian, LG Display, L'Oréal, Louis Vuitton, Nespresso, Perrier, Turkish

Airlines, Renault and Unilever.

… So tight that advertisers and agencies feel frozen out

iAds offer targeting based on prior user behaviour, and advertisers know exactly which apps

their ads appear on. However, Apple still owns the data and processes and has been stingy

about sharing this data. This in addition to the hefty participation fee has served as a barrier

to widescale adoption by advertisers and agencies. Apple does provide metrics such as the

total number of ad impressions served via iAds, number of clicks, number of page views, and

average time spent in app ads – but these are all aggregated data, not specific to the

advertiser. This is a major problem for agencies and advertisers who can access such data

clearly in other media, and indeed on Google‟s Android systems.

So Apple‟s combination of high pricing and lack of transparency appears to be a stumbling

block. In addition, Apple has put obstacles into the production process, by keeping its ad

development codes in-house and by essentially vetting the advertisers and intruding into ad

creation.

In addition, Apple’s browsers aim to mitigate the success of the mobile web

Here again, Apple has set up walls to ensure its closed iAds system will succeed. Apple

introduced technology in its latest Safari 5 web browser that can block ads on individual

websites. This could have significant implications for the amounts online advertisers are

willing to pay publishers and more importantly (given online is still small but needs to grow for

the publishers to survive) may have adverse effects on the potential opportunity represented

by mobile advertising. How? The opportunity in mobile advertising lies in the fact newspaper

applications on the iPad (like the Financial Times or the Wall St Journal) can be formatted to

be more conducive for advertisers – however, if Safari blocks this, it blocks the revenue

upside for the papers as well. This clearly sounds like part of a plan to migrate all advertising

to Apple‟s own iAd platform, where Apple takes a 30% share of all advertising revenue which

it hosts.

Fig 17 ’Safari Reader’ ad blocker illustration

Source: Apple Inc, Macquarie Research July 2010

Half of US top 25

advertisers are

supposedly on

board; Europe iAds

launched this month


9 December 2010 14

But Apple is opening the door a little now

Through recent modifications Apple is demonstrating a need to work with agencies to bring in

advertising clients; it appears Apple already recognizes it must work with agencies to draw

blue-chip advertisers, and that it cannot simply corner the mobile ad market with apps. We’ve

seen this time and again in media – most recently with Google actively partnering with

agencies to gain blue-chip advertisers after an initial hands-off approach. Media owners and

tech providers cannot attract advertising directly – in fact by introducing complexity to the

market they bring about an even greater need for agency services, in our opinion.

Google is catching up quickly, App Inventor opens the mobile web. Google‟s App

Inventor, introduced in the summer, allows users to create their own simple applications on

mobile smartphones using Google‟s Android platform – all without the need to know any

programming code whatsoever. By allowing users the opportunity to create their own

content, this is reminiscent of the ideological battle between Microsoft‟s more open-source

PC platform and Apple‟s stricter view on control dating back to the 1980s, which has

persisted to this day – e.g. Apple‟s veto power over all App Store applications.

iAd development kit on the way? Until now Apple has not made available a developer kit

for agencies to create iAds – which forces agencies to rely on Apple for final ad creation.

Apple is again charging premium rates of up to $100,000 for this – around double what an

agency currently charges its clients for similar work. Providing a development kit would be

a response to training and software that companies like Medialets make available to

agencies to create mobile ads for Android applications and the mobile web.

Letting Flash in. Apple has stepped down its rhetoric and now allows Flash technology

into its apps (but not its Safari browser). This may be a reaction to shifts in the data

hosting over time: cloud computing is the concept that data and software are not stored on

individual machines; rather, everything is stored centrally and accessed on demand. This

should come into focus in the next five years or so as internet speeds increase.

As cloud computing takes hold and information is stored centrally, this means the

hardware used to access this information will become increasingly less valuable – a scary

proposition for a company like Apple that derives the lion‟s share of its revenue from the

sale of devices.

Inversely, this means that two other things will become increasingly more valuable:

The software used to access the central database such as iTunes and the App Store

Access to quality content at prices that will support the Apple business model

This is why Apple needs to contain Adobe Flash in its own environment and why it goes

some way towards explaining the urgency surrounding Google‟s push to ramp up Android.

Mobile web

Apps offer a rich user experience and could bring exclusivity to branding. But how can

consumers live in an app world, without a browser? Why would consumers not search the

web and limit themselves to specific apps? We believe apps may become specialized to user

tastes, where users will have their favourite apps just as users have their favourite websites

online.

We think the next phase of growth will be browser-based: just as on the internet, web

searches lead users to results they seek. Advertising can be targeted based on mobile users‟

personal information, interests and location, so advertisers will be drawn to this much broader

medium. We think browsers are essential for advertisers to get reach, and more effective

means to target consumers will only raise demand for the mobile web ads.

Increasing interest, demand for data, and ultimately liquidity in markets means ad buys

will become more sophisticated. Like the PC web, the mobile web is built on open

standards, which lets advertisers build mobile sites that can run on many more platforms, and

hence reach many more users, than apps. Plus the sheer volume of interest in the mobile

space from all angles means Apple‟s attempt to close the system might only work for so long.

We think eventually

the mobile web will

prevail

Cloud computing

could change the

game yet again

Medialets provides

a competitive

software for other

operating systems


9 December 2010 15

In addition, it is possible agencies will guide clients toward the mobile web where they can

work more effectively, and possibly more profitably. iAds may increase pricing pressure on

ad agencies, and advertisers may squeal about the high charge from Apple, limiting agencies‟

ability to pass costs through; another reason why open systems may prevail.

Mobile display advertising has its own peculiarities as a result of download speeds and screen size

These difficulties are exacerbated by the lack of uniformity among browsers and whether

websites have been optimised for mobile browsing – where sites can be wrongly sized for the

screen, slow to load and, in the case of the iPhone, do not support the use of Flash

technology. But this is evolving. Mobile agency executives say Yahoo stands out as having

both a well designed mobile search page, and mobile-enabled web pages onto which

searches land viewers cleanly.

Ad networks are the predominant mechanism for buying mobile ads

One unsurprising problem with mobile web-based display advertising is supply greatly

exceeds demand. The ad serving architecture of mobile browsers is broadly similar to the

internet, but inventory is predominantly sold on a CPM or CPC basis through ad networks –

i.e. automated systems that represent mobile publisher inventory – rather than directly.

Automated ad networks allow publishers to sell inventory on their mobile sites without having

to dedicate a sales team to it.

Research group MobiThinking distinguishes among these three groupings:

Blind networks – large aggregations of mobile publisher inventory, paid for by CPC, for

marketers seeking direct response, but offering no option to choose specific mobile

websites or apps. Blind mobile ad networks include AdMob and InMobi.

Premium blind networks – which take blind networks a step up to offer some direct sales,

and a combination of CPC and CPM but still on a non-guaranteed basis. Premium blind

networks include Millennial Media and Jumptap.

Premium networks are CPM-based, with good sales and support, used by marketers

willing to pay premium prices to secure prime locations. Premium networks include YOC,

Microsoft Mobile Advertising, Advertising.com (part of AOL), and Nokia Interactive

Advertising.

Millennial Media is the market share leader. With AdMob now part of Google, and with

Quattro now closed, the largest independent ad network by far is Millennial Media. Nielsen

estimates Millennial Media has inventory reaching 81% of US mobile web users. One agency

executive we spoke with believes Millennial 40% larger than Google and Apple combined in

the US, and is probably #1 in the world.

Millennial charges on a flat CPM basis, whereas AdMob is moving more and more to CPC.

There are strong arguments for both: CPM is for reach-based media exposure, and appeals

to those seeking mobile page views, which can be relevant for branding purposes even if not

clicked. CPC is performance-based, appealing to those seeking direct response; this is of

course even more accountable.

As has occurred on the internet, we expect CPM declines over time as mobile inventory

explodes, but total volume growth should more than offset this. We expect CPC-based pricing

to grow, as targeting effectiveness rises.

Ad network Smaato graphs ad pricing vs impressions on such networks as follows. (We

equate Smaato‟s terminology with MobiThinking‟s as premium = premium networks and direct

sales; secondary premium = premium blind networks; and remnant = blind networks).

CPM vs CPC: reach

vs response

Ad networks are the

channel to market


9 December 2010 16

Fig 18 Mobile ad serving market architecture

Source: Smaato, August 2010

Other mobile web ad sales channels include:

Ad exchanges and demand-side platforms (DSPs) will likely also emerge, leading to

more demand from advertisers for broad and targeted distribution across the mobile web.

As of now Microsoft operates the only mobile ad exchange within its Atlas ad serving

business. DSPs – ad platforms representing advertiser budgets – do not exist in mobile.

Direct sales may also increase as the medium matures and publishers seek to optimize

their mobile web properties. Some of the more sophisticated mobile publishers, such as

ESPN and Yahoo, run internal ad networks and engage in direct buys with agencies. It

does take a certain scale and sophistication to do this, which we think is a natural evolution

of the medium.

Affiliate marketing – whereby an ad server recognizes content on a screen and delivers a

relevant ad – is also growing in stature in the mobile environment; this is performance-

based, whereby the user clicks on the banner ad delivered, and the ad server is paid on a

CPC or cost-per-lead (CPL) basis, not CPM. YOC has a mobile affiliate marketing

business, and internet marketing firms like Zanox and TradeDoubler have transitioned their

online affiliate marketing programs to mobile.

Keep in mind too, Apple apps also of course receive ad placements from Google‟s AdMob

and others; agencies can purchase app as well as Apple mobile web ads via Apple directly

but also via AdMob and other ad networks. Macquarie internet analysts estimate Apple earns

hundreds of millions of dollars from Google searches via Apple mobile devices.

Also important to note is alternative iAd programs now coming to market. YOC‟s recently

launched Ad+ format offers arguably even more advanced features than iAd at a price point

deliberately pitched below that charged by Apple. YOC stresses that there is no way

technically or legally that Apple could ban Ad+ from its platform.

2. Search

Mobile search is basically internet search on a screen customized to mobile devices. It is so

compelling because a user often performs a search on the run, so may be more receptive to

marketing messages and more likely to consummate a transaction immediately. We think

agencies play an important role in helping clients focus efforts on mobile search.

A few points differentiating mobile search from internet search:

Google says mobile

web search has

risen 5x in 2 years


9 December 2010 17

Search queries are usually shorter, because typing is harder than on a computer keyboard,

so search marketers must adjust their keyword purchases accordingly.

The smaller screen size concentrates the user on the top results, making the top three paid

search positions even more desirable. There is less competition, but fewer ads, meaning

more relevance is required.

Mobile search is likely to be based on a greater degree of interaction or definitive aim. It is

usually more local and more immediate. So mobile search becomes much more location-

based.

Hence more mobile-specific content is required, like links to local shops and to app

downloads. And advertisers need to develop mobile-specific websites to which searchers

can link through.

There is plenty of room for improvement in mobile search. So many advertisers do not have

a mobile website, meaning so many mobile search queries take viewers to unformatted

websites.

Google absolutely dominates mobile search, with 97% share globally, according to

StatCounter. Google‟s search bar is of course prominent on most Android devices, and

Google is the default search provider for Apple devices, where it has 95% search share.

3. Messaging

SMS marketing has been around as long as the mobile phone, but now interactivity and

location-based services render this rather basic form of communication more compelling. A

text message that links to a mobile internet site, or that delivers a coupon when the user

enters a shop, or an MMS that serves an ad related to a text message subject, has much

more power than on the wired internet.

The charts below show how quickly the market is evolving from primitive SMS marketing to a

predominantly internet-based ecosystem.

Fig 19 US mobile advertising spend by medium 2008: sms dominates

Fig 20 US mobile advertising spend by medium 2012: search and display will take over

Source: eMarketer, September 2010 Source: eMarketer, September 2010

Interactivity is key. There is a substantial degree of consumer interactivity inherent in many

campaigns, such as texting a code from the inside of a wrapper or on a billboard in order to

gain a promotion. This requires consumers opting in – being receptive to messaging. As

digital marketing firm 360i writes in its “Mobile Marketing Playbook”, companies must be

relevant, ask consumers for permission to send messages, and offer something valuable and

time-sensitive, such as contest entry or discounted/free products.

Location-based marketing exploits social media, and creates live e-commerce (or m-commerce) potential

Mobile creates a new imperative for advertisers: as consumers have so much live

information at their fingertips, including price-comparison apps and websites that enable

shoppers to find products cheaper, brand owners and retailers will have to devise mobile

marketing and m-commerce strategies just to stay in front of consumers.

Messaging

60%

Display

22%

Search

18%

Messaging

28%

Display

35%

Search

37%

Google has 97%

mobile search

market share!


9 December 2010 18

Geolocation is where the true potential of mobile marketing becomes apparent. Whereas

mobile search and display are essentially an existing form of marketing transferred onto a

mobile device, and can bring behavioral targeting to a more personal level, location-based

mobile marketing – identifying a mobile user‟s location to a nearly precise spot through GPS

and tailoring ads to that person at that time at that location – allows a degree of interaction

not achievable through any other medium.

Google has built its own digital map of North America and is in the process of compiling one

for Europe. It also has launched a beta version of a “free” turn-by-turn navigation. These are

fundamental building blocks for location-aware advertising.

Nokia has these aspects covered as well through its acquisition of Navteq (including

Traffic.Com in the US), Gate5 and Plazes.

The ability to measure click-through rates and page views has been a major spur to the

growth in internet advertising, and on the mobile internet is even more effective. And hence

more expensive: location-based mobile ads can command CPMs as high as €20-50,

according to Nokia – the upper end of this being well above typical TV or internet CPMs

(source: David Barker, Director of EMEA, Nokia’s Navteq at Nokia World, Sept. 2010. Note

that in Germany CPM is higher by 20-25% for location-based ads).

Retailers are quick to recognize the important of m-commerce. Several examples

include:

eBay expects to gain $1.5-2 billion from sales via mobile devices in 2010.

In the UK, online grocery distributor Ocado says 15% of sales are made or edited through

mobile apps.

A survey by mobile operator Orange shows 40% of its customers have used m-commerce

in the last six months, and 40% are likely to do so in the future.

Google says the number of shopping searches on mobile has risen 30x in the last 3 years.

And a survey by the Mobile Marketing Association indicated 59% of US mobile users in

2010 expect to make Christmas purchases or holiday planning on their mobile devices.

Promotions and vouchers can become location-based to activate when a consumer enters a

store, and can also be transferrable and forwarded with ease. Integration with mobile maps

increases their utility and makes them more interactive.

Code scanning – swiping a mobile device to pay for goods – is yet another mobile service

likely to take off, in our view.

Fig 21 Starbucks voucher app

Source: Company data, Macquarie Research, September 2010

m-commerce takes

off


9 December 2010 19

Mobile lends itself well to social media, and here players like Facebook have the

advantage of gathering personalized customer data that can be used for direct-response

targeted marketing.

“Check in services,” such as Foursquare and Facebook Places, use GPS to allow consumers

to see their location on a map as well as that of their friends and places of interest,

recommend things to each other, and gain points and promotions from „checking in‟ at various

locations. All this can build customer loyalty, and is based on the data gathered. The

attraction for marketers is in reaching consumers at this point of sale.

Even this is not precise; a marketing service provided by Placecast helps narrow down users‟

locations even further, by identifying which particular establishment Foursquare users are

most likely to be in; agencies are working with Placecast to really refine their direct marketing

efforts.

4. Games

Mobile games are among the most popular app downloads – 47% of the total app volume in

July, according to Millennial Media. Gartner expects mobile gaming to grow 19% in 2010 to

$5.6bn and to more than double by 2014, with the market reaching $11.4bn, while iSuppli

sees the unit-shipment of game-capable mobile phones up 11.4% to 1.27 billion this year

compared to a broadly flat console market.

Unsurprisingly this growth is largely underpinned by the migration to higher spec

smartphones from feature phones. The processing capabilities of the iPhone are such that

they are capable of offering high quality video gaming experiences which are increasingly

popular.

Advertisers use games as an alternative form of marketing: creating a game around a

brand is akin to creating an ad, but a game is a much more compelling media event that

consumers want to engage in. Cost-wise, creating a game can be inexpensive, but the

popularity of some games brings big brand awareness, and can lead to commercial actions.

One example we‟ve seen is the Audi A4 driving challenge, the type of game that costs

$50,000 to develop, but has thus far seen 3.5m viewers – that‟s huge usage and exposure to

the Audi brand on a relatively small financial outlay. Volkswagen has enjoyed over 8m total

downloads of such game promotions of cars such as Polo, Tuareg, and Scirocco.

Another example is the Barclaycard-sponsored Waterslide Extreme game for the iPhone (and

its sequel Roller Coaster Extreme), created purely as a marketing exercise. Launched in July

2009, Waterslide Extreme registered 10 million downloads within six months and had average

brand engagement of 100 million minutes and strong brand recall. With the Roller Coaster

Extreme these two games combined have seen over 24m downloads to date. This level of

reach and interaction make these a highly interesting proposition for advertisers.

Fig 22 Barclaycard Waterslide Extreme game

Source: Company data, Macquarie Research, September 2010

Mobile lends itself

well to social media

Mobile games:

games themselves

as marketing tools


9 December 2010 20

Mobile games advertising can also take the form of product placement in, or

sponsorship of games. Advertising demand for social games may be on the brink of a sharp

growth curve: eMarketer predicts ad spending on games to rise 33% 2011 to $192 million,

with much of this on social games. But game makers have divergent opinions on mobile

advertising: Zynga is one of the major players in social games, with hugely popular games

like Farmville. But while these games are free to play, Zynga is not chasing ad revenue,

rather it makes money off credits for add-ons. Activision Blizzard (acquired by Vivendi in

2008) has likewise talked down the impact of mobile games and the advertising behind this,

focusing instead on its major paid-for games like World of Warcraft. This could open the

door for other game companies like Disney or Electronic Arts to take the lead in mobile ad-

sponsored games.

eMarketer predicts a

33% rise in games

advertising to

$192m next year


9 December 2010 21

The opportunity for ad agencies For the advertising & marketing services companies, mobile places new demands on creative

agency work, data and direct targeted communications, and the media planning and buying

functions as mobile is incorporated into larger marketing budgets.

A mobile campaign cannot stand alone: for example, mobile search links must lead to a

mobile-enabled website, and this should have built-in mobile-enabled e-commerce options

available. Any mobile messaging must keep consistency with the brand‟s other creative

messages, and there are cross-media opportunities to tie mobile campaigns with other media

like outdoor or TV (for example, texting in response to a billboard or TV ad).

We believe that, as with fragmentation of media brought on by the internet, mobile introduces

new layers of complexity that create new demands for agency services. So just as Google in

its online world recognizes it needs ad agencies to bring them client ad budgets, so Google‟s

mobile efforts are actively engaging agencies as well. By contrast, Apple‟s initial attempts to

corner the market have not carried through to completed orders, and Apple has been forced,

reluctantly, to adjust to work better with agencies who represent ad budgets.

Another key point driving agency work in mobile is that unlike the internet, mobile search and

display advertising is being led more by large branded advertisers than by local search

marketers. Complex sms and search campaigns with links to mobile websites and rich-

content apps are not the business of pizza shops and drycleaners, which were early adopters

of internet search. This is an agency business – mobile ad networks like AdMob and

Millennial Media rely on agencies to bring client revenue through the door, and Apple and

Android won‟t go straight to the blue-chip advertisers, just as Google, Microsoft and Yahoo

don‟t now for internet search and display.

Agency mobile activities include the following:

Media

Build apps

Build mobile websites

Search engine optimization for mobile

Creative work to support messaging and display ads

Planning and buying

Services

Data mining and management

Loyalty program management

M-commerce applications – coordinating and in some cases running the IT

infrastructure between mobile websites/apps and e-commerce

IT/infrastructure standardization between internet and mobile sites

An example of an agency‟s comprehensive mobile work is Kraft‟s iFood Assistant app, which

offers recipes, cooking videos, etc. Viewers pay a small fee to download the app, but then

can redeem the fee for product offers from Kraft via the app. The app provides links through

to Kraft‟s mobile website, and e-commerce capabilities are built in. Kraft also has to advertise

the app itself – all this is agency work.

Mobile provides new growth opportunities for agencies

And all this can be incremental revenue for the agency. In a world where much of media is

stagnating, agencies can help clients redirect ad spending to this fast-growth area to gain

some growth of their own. Hyper growth in mobile marketing could contribute to overall

growth in ad spending returning to previous growth rates of GDP-plus 2% or so. We expect

the prominence of mobile advertising revenues to increase as a proportion of agency

revenues contribute to higher revenue growth.

Agencies’ primary

role: integration

Unlike internet

search, mobile

advertising is led by

large branded

advertisers

Mobile could

provide an

incremental 20-

130bps of revenue

growth to agencies


9 December 2010 22

Some mobile budgets, particularly from novice advertisers, come from existing traditional

media such as local radio, or from online budgets; but more sophisticated marketers are

carving out incremental budget allocations specifically for mobile.

We calculate if mobile grows at about a 40% CAGR over the next five years, it could

comprise 3% of global media spending and contribute anywhere between 0.2% to 1.3% – 20-

130bps – to agency growth; this is a lot on current average annual organic growth forecasts

of about 5%. The tables below present scenarios on revenue implications of mobile for ad

agencies.

First, we consider MAGNA Global’s assessment of the total global advertising and

internet ad spending markets.

Fig 23 MAGNA Global ad spend forecasts ($m)

2009 2010 2011 2012 2013 2014 2015 CAGR

Global media market (A) 365,265 390,643 411,743 438,159 461,649 493,148 522,025 6.1% Internet media spend 55,172 63,024 70,893 78,550 86,970 96,404 106,615 11.6% Internet proportion of media spend 15.1% 16.1% 17.2% 17.9% 18.8% 19.5% 20.4% Global media growth 6.9% 5.4% 6.4% 5.4% 6.8% 5.9% Internet ad spend growth 14.2% 12.5% 10.8% 10.7% 10.8% 10.6%

Source: Magna Global, Macquarie Research, December 2010

Next, we estimate the global mobile ad market could grow from about $2 billion in 2009

to $14 billion in 2015. This is based on eMarketer‟s estimate of a US market of $416m in

2009 and $743m in 2010, Dentsu‟s estimate of a Japanese market totalling $1,140m in 2009,

and our rounded assumption of $500m for the rest of the world in 2009.

We apply rounded growth figures based on eMarketer‟s US mobile ad market growth, as

noted in Fig 5 above. At this pace of growth mobile expands its share of global ad spending

from 0.5% in 2009 to 2.6% in the process, and mobile comprises 13% of total internet

spending by 2015. This actually sounds pretty conservative to us, given the phenomenal

growth and opportunity.

Fig 24 Global mobile ad spending forecasts ($m)

2009 2010 2011 2012 2013 2014 2015 CAGR

Mobile ad spend (B) 2,000 3,500 5,250 7,088 9,214 11,517 13,821 38.0% Mobile growth 75% 50% 35% 30% 25% 20% Mobile proportion of media 0.5% 0.9% 1.3% 1.6% 2.0% 2.3% 2.6% Mobile proportion of internet 3.6% 5.6% 7.4% 9.0% 10.6% 11.9% 13.0%

Source: eMarketer, Macquarie Research, December 2010

We then estimate agency revenue growth potential from mobile. The table below lays

out our thinking.

We start with a rounded estimate of ad agency revenue of about $60 billion in 2009. This

is based on our assumption that the top 10 global ad companies, with $45 billion of

revenue in 2009, represent approximately 75% of the global ad market. This $60 billion is

16.4% of MAGNA Global‟s total 2009 global ad spend estimate of $365 billion.

We assume agencies take a 25% share of revenues from mobile marketing, or $500m off

the $2 billion base assumed for 2009. We base this 25% cut on conversations with

agencies and we believe this may be conservative; indeed some agencies we spoke to

claim to take as much as a 50% share of mobile advertising spend.

We then present three scenarios:

1) Conservative scenario, assuming mobile ad spending is at the expense of other

media spending – i.e. total ad spending figures are the same, with mobile gaining

share from other media, such as local radio, print, or digital.

In this case the incremental impact for agencies is arbitrage between the 25% share

of mobile media spending vs the 16.4% share for other media. We estimate this

leads to 0.2% incremental growth in agency revenue.


9 December 2010 23

2) Optimistic scenario, assuming mobile ad spending is incremental to other media

and there is no cannibalisation of revenues – so overall ad spending rises above

current forecasts.

We add the $500m to our $60 billion total ad holding company figure for 2009. On

this basis we estimate that mobile marketing may result in a 0.6% increase in agency

growth – i.e. mobile revenue, if completely incremental, would add 60bps to ad

holding company growth.

3) Aggressive scenario. Should mobile overshoot the eMarketer growth rate

forecasts and produce a CAGR of 57% during 2010-15 compared to our base case

of 38%, agency growth contribution could more than double as the market scales up

more quickly. Note this does not assume mobile cannibalizes other ad spending; we

could get even more aggressive if we assumed this.

Fig 25 Mobile implications for agencies ($m)

2009 2010 2011 2012 2013 2014 2015 CAGR

Assumptions Total agency revenue (C) 60,000 64,169 67,635 71,974 75,833 81,007 85,750 6.1% Proportion of total ad spend to agencies (D) = (A/C) 16.4% 16.4% 16.4% 16.4% 16.4% 16.4% 16.4% Agencies take 25% cut of mobile media revenue (E) 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 1) Conservative scenario: Mobile budgets from other media

Mobile ad spend (B) 2,000 3,500 5,250 7,088 9,214 11,517 13,821 38.0% Mobile growth 75.0% 50.0% 35.0% 30.0% 25.0% 20.0% Agency revenue ex mobile (F) =(A-B)*D 59,671 63,594 66,772 70,810 74,319 79,115 83,480 Agency revenue derived from mobile (G)= (B*E) 500 875 1,313 1,772 2,303 2,879 3,455 Total agency revenue (F+G) 60,171 64,469 68,085 72,582 76,622 81,994 86,935 6.3% Industry growth 7.1% 5.6% 6.6% 5.6% 7.0% 6.0%

Incremental agency growth from mobile 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

2) Optimistic scenario: Mobile spending is incremental

Mobile ad spend (B) 2,000 3,500 5,250 7,088 9,214 11,517 13,821 38.0% Mobile growth 75.0% 50.0% 35.0% 30.0% 25.0% 20.0% Agency revenue ex mobile (F) =(A-B)*D 60,000 64,169 67,635 71,974 75,833 81,007 85,750 Agency revenue derived from mobile(G)= (B*E) 500 875 1,313 1,772 2,303 2,879 3,455 Total agency revenue (F+G) 60,500 65,044 68,947 73,746 78,136 83,886 89,205 6.7% Industry growth 7.5% 6.0% 7.0% 6.0% 7.4% 6.3%


3) Aggressive scenario: Mobile ad growth is even higher than above

Mobile ad spend (B) 2,000 4,000 6,800 10,880 16,320 22,848 29,702 56.8% Mobile growth 100.0% 70.0% 60.0% 50.0% 40.0% 30.0% Agency revenue ex mobile (F) =(A-B)*D 59,671 63,594 66,772 70,810 74,319 79,115 83,480 Agency revenue derived from mobile(G)= (B*E) 500 1,000 1,700 2,720 4,080 5,712 7,426 Total agency revenue (F+G) 60,171 64,594 68,472 73,530 78,399 84,827 90,905 Industry growth 7.3% 6.0% 7.4% 6.6% 8.2% 7.2%



In the long run we see mobile as an incremental media form, expanding consumer media

consumption and providing an efficient and targeted format for advertisers, thus in the long

run we anticipate the optimistic scenario to reign. However, in the near term advertiser

reticence and caution with the new medium will likely lead to the diversion of funds from radio

and digital spending into mobile rather than incremental ad spend. In light of this, it seems

likely the impact of mobile on agencies will be closer to the additional +0.2% in 2011 that we

forecast in our base case, but may ramp up toward 0.5% or 1% of agency revenue growth in

the outyears.

In terms of agency fees, pricing on mobile is similar to internet work: agencies charge a fee

for service, plus there is often an incentive element whereby successful ad campaigns are

rewarded. While the bulk of agency compensation is in the fee, we expect an increasing

portion to come from incentive/performance-based pay, given the highly targeted nature of

this work.

More performance-

based comp to

come


9 December 2010 24

Margin thoughts

Agency margins in the mobile space likely lag traditional media and wider digital margins at

the moment, due to the relative youth of the mobile business which requires investment and

has a higher fixed cost base. Also, for agencies margins are generally lower on messaging

work as this is not as „rich‟ creatively and lacks scalability.

There are few public companies specifically focused on the mobile agency space; one is

German firm YOC, a full-service mobile marketing agency and tech services business. YOC

owns an ad network, and is really more a tech platform and mobile enabler, not so much an

agency, but its financials give some insight into the revenue and margin potential of

companies in this industry.

Consensus on YOC‟s 2010 organic revenue growth is about 20%; YOC takes 35% of a

client‟s billings on its mobile ad network, and 22% on its affiliate fee activities (note this is

much higher than a typical agency take of some 2-3% of a client‟s media budget and 10-12%

of creative). YOC also charges a license fee for its mobile website build, and charges flat

rates for mobile data services.

EBITDA margin consensus is 10% for 2010 and 13.5% for 2011; management sounds

optimistic of exceeding these levels and enjoying good margin expansion beyond this year.

We would note as well this is probably still a low margin as the industry is only emerging from

nascency and is yet to really see operating leverage come through.

Which agencies stand out?

We would not really isolate any of the ad holding companies as being stronger than others in

mobile. All have been developing capabilities in recent years, and few highlight mobile-

specific agencies, given the intrinsic tie-ins with other agency services (particularly digital).

For this reason we think it actually makes less sense to list the mobile agencies within the

holding companies than to simply note that all appear equally engaged in and exposed to this

effort. But, as examples of the mobile activities within the large holding companies:

Aegis‟ (AGS LN, Neutral, £1.46, TP £1.40) digital operations are concentrated in its Isobar

and iProspect agencies; its Posterscope outdoor agency does a lot of work integrating

mobile as well. Aegis has acquired mobile specialists such as Marvellous Mobile, and

developed capabilities throughout.

Dentsu (4324 JP, Outperform, Y2,345, TP Y3,000) is increasingly active in mobile

advertising. For example, its digital advertising subsidiary CCI (Cyber Communications Inc)

invested in Jumptap, and D2 Communications, a long-standing joint venture with NTT

Docomo, Japan's largest mobile telecom operator, promotes mobile ads. In cooperation

with Apple, Dentsu is also spearheading the roll out of the iAds platform in Japan.

Havas (HAV FP, Underperform, €3.50, TP €3.50) likewise owns mobile agencies within its

advertising and media divisions, such as Mobext.

Interpublic‟s (IPG US, Outperform, $10.96, TP $13) agencies like Draftfcb, MRM and

R/GA do a lot of mobile work, and IPG operates a JV with mobile technology services

provider Velti (see below) called Ansible. But as Draftfcb says, “we don‟t have a mobile

department … all disciplines are dispersed throughout the organization.” (Online Media

Daily, 15 November 2010).

Omnicom (OMC US, Outperform, $46.89, TP $49) mobile agencies include Mobile

Behavior (held within Tribal DDB, a digital business within DDB Worldwide) and ipsh (held

within The Marketing Arm, a collection of marketing services companies) held within

Diversified Agency Services, among others.

Publicis‟ (PUB FP, Outperform, €36.33, TP €44) mobile efforts are concentrated in its

PhoneValley subsidiary, a full-service mobile agency acquired in 2007; Publicis‟s other

agency networks also engage in mobile activities. Publicis has long been outspoken on

mobile as a new mass medium, where some peers have been more reluctant to embrace it

– at least until smartphones and tablets came along this year.

WPP (WPP LN, Neutral, £7.64, TP £8.25). A search on WPP‟s website lists 30 different

agencies with mobile operations, including stakes in mobile agencies like Jumptap and

Icon Mobile.

YOC provides a

blueprint


9 December 2010 25

Data and privacy issues Mobile marketing is at the cutting edge of advertising technology, and as it continues to push

boundaries of personal privacy it raises the risk of increased regulation.

One of the main attractions of online marketing is the ability to monitor user

interactions and data; clearly this has profound implications for user privacy. The

personal and local aspect of mobile marketing compounds this further. Indeed in the UK, the

popularity of Google Latitude and „checking in‟ services like Foursquare led to the

establishment of the spoof website „robme.com‟ which showed when users where not at

home; this has morphed into something of a consumer watchdog.

Google’s acquisition of AdMob was vigorously opposed by consumer groups nervous

about Google’s potential exclusive access to consumer data. The Federal Trade

Commission in the US was concerned about mobile advertising market share, which Google

could quickly seize. Consumer groups worried that such control would also provide Google

with data that it could use not only to manipulate market pricing, but perhaps harm

consumers, with little opportunity to opt out. Similar concerns were raised over Google‟s

acquisition of DoubleClick in 2007, with fears it would gain unprecedented access to

consumer data via the ad serving transactions that DoubleClick processes. To ward off these

fears, Google and DoubleClick detailed how advertisers kept ownership of this data, which

Google could not exploit. In the case of Google/AdMob, market dominance was tough to

prove given Apple‟s already-ascendant position, but it brought the question of personal

privacy to a new level.

A stream of negative press has built up against Facebook and Google for their obtaining

and potentially misusing, or accidentally losing or releasing, consumer data. This has

resulted in both companies facing multiple lawsuits for a host of privacy issues.

Potential legislation in the US be on the horizon, as the FTC is currently investigating the

possibility of allowing consumers to opt out of internet data tracking – essentially setting up a

“do not track” register similar to the “do not call” list in the mid-2000s that profoundly changed

the outbound telemarketing industry. If passed into law, and if taken up by consumers, this

would effectively disable web tracking by ad networks and publishers that record user

preferences to send them targeted ads. And hence, this could take away an enormous

amount of the value that internet – and by extension mobile – marketing can offer.


9 December 2010 26

Appendix: Mobile marketing players M&A review and implied valuations

Data on transactions is slim, as these have mostly been acquisitions of private companies.

In November 2009 Google paid somewhere between 10-20x sales for AdMob in a $750m

transaction; TechCrunch estimated a multiple of 19x.

In January 2010 Apple paid 13x sales for Quattro in a $275m deal, according to IDC

estimates.

YOC, again, provides the clearest indication of public company multiples on mobile agencies:

YOC currently trades at 2x 2010 sales, 24x 2011 PE and 12.5x EV/EBITDA.

Mobile marketing agencies and tech enablers

Without trying to be comprehensive, below we list some of the mobile agency and tech

providers that have regularly emerged in our research.

Mobile ad networks

Adfonic is a US-focused ad network. 46% of its ads are served to iOS users with 45% of

users coming from North America. It offers publishers a 60% revenue share on both CPM

and CPC models.

AdMob is one of the largest global mobile ad networks claiming to serve more than 7

billion mobile banner and text ads per month. Google announced the acquisition of AdMob

in November 2009 and the deal was cleared by the FTC in May 2010. The vast majority of

AdMob‟s impressions (95%) are CPC-based, with 5% from CPM. In terms of revenue

though, 80% comes from CPC with 20% from CPM. AdMob is considered a reach

network, following Google‟s general approach, with lots of non-premium inventory at a low

CPC, and hence with low response rates.

Advertising.com, owned by AOL, operates a premium ad network based on AOL‟s

AdLearn platform.

Amobee is an operator–centric ad network founded in 2005. It is backed by VC firms

Sequoia Capital, Accel Partners and Globespan. Major telecom operators Vodafone and

Telefonica, as well as comm tech providers Cisco and Motorola also hold stakes.

Greystripe is a mobile ad network which serves ads across apps and the mobile web, in

banners and particularly in rich media.

InMobi is a leading global ad network which claims to serve 20 billion monthly

impressions. It offers a global presence although its initial focus was Asia, from its roots in

Bangalore, India. InMobi is backed by Kleiner Perkins Caufield & Byers amongst other

venture capital firms.

Jumptap operates across 16 countries with an audience of around 130m, serving 5 billion

monthly impressions. JumpTap provides premium inventory, historically focused on the

North American markets. Jumptap is backed by VC firm Valhalla Partners, with equity

stakes from ad holding companies WPP and Dentsu.

Microsoft, now a partner of Yahoo, provides a technology-based buy-side ad platform,

Atlas, that aggregates inventory and caters for advertisers aiming to spend less than

$5,000 per month.

Millennial Media is the largest mobile ad network in the US and perhaps globally. Nielsen

data shows Millennial has the largest audience size of the mobile ad networks in the US,

and one source we spoke with believes Millennial Media has 40% more mobile inventory

than Google and Apple combined. Agencies have highlighted its independence as a key

advantage, as this allows flexibility in the development of new products. After a potential

merger with RIM fell through over the summer, Millennial may file for an IPO, according to

The Baltimore Sun (19 August 2010) and TechCrunch (28 July 2010).

Smaato operates a mobile optimisation platform which aggregates inventory from 50 ad

networks to have access to 16 billion impressions per month. Founded in 2005, it has

offices in San Francisco, Hamburg and Singapore.


9 December 2010 27

Yahoo, among many other things, runs a premium ad network relying on direct sales reps

as much as technology – this caters for advertising budgets in excess of $5,000 per month.

Mobile tech and agency services

12snap is a German creative agency specializing in mobile campaigns

Buongiorno (BNG IT, market cap €125m, not rated) was founded in 2000 and listed in

2003 in Milan. It is a mobile media content provider, partnering with film studios and

recording companies to bring this content to mobile screens via carriers such as Vodafone,

Orange, and Sprint. Buongiorno also offers mobile ad design and delivery.

Fetch Media is a UK full-service mobile advertising agency including creative and mobile

media planning and buying.

Grapple is an app creation agency based in London.

Medialets is a leading mobile rich media and analytics platform, with software to help

agencies, advertisers and developers better create and target mobile ads. Medialets was

founded in 2008 and is funded by venture capital firms led by Foundry Group.

MobiKlix is a mobile creative agency offering design and build of apps, mobile websites,

sms marketing, ringtones and gaming.

Phluant provides ad creation across a range of mobile formats, particularly focusing on

rich media. It was started in 2008 by the founders of internet rich media company

Eyeblaster.

Placecast operates a service that facilitates location-based marketing, including data

analytics, by tying in GPS coordinates with location-based services like Foursquare to

more precisely target a user‟s proximity to retail outlets.

Ringleader, founded in 2005, operates a mobile ad server called Spark, which is

integrated into partner ad networks and works with agencies and publishers to deliver

targeted ads. Ringleader works with Microsoft‟s Atlas ad exchange as well. It is backed

by marketing services company W2 Group.

Velti (VEL LN, 492p, not rated). Market cap £175m, 2009 revenue US$90m. Velti is a full-

service mobile ad technology provider. It offers software as a service (SaaS) programs

including mobile media planning & buying, ad serving, website and ad design, CRM and

data analytics. Velti was founded in 2000 and listed on the AIM in London in 2006 . Velti

acquired the MobiClix ad network in October 2010.

YOC (YOC GR, €33.40, not rated). Market cap €60m, 2010 consensus revenue €31m.

YOC owns a leading European ad network, builds apps and mobile websites, and

performs services such as mobile SEO and SEM, affiliate marketing, sms/mms campaigns,

and m-commerce efforts such as mobile transactions, coupons and ticketing. YOC boasts

an impressive roster of clients including Daimler, Coca-Cola and Nike, and is one of the

larger players in this market. YOC recently launched an iAd competitor product aimed at

bringing down agency costs when developing inventory for in-app advertising. YOC was

founded in 2001 and listed on the Frankfurt Stock Exchange in 2006. It has 175

employees and operates from six offices and serves more than 2 billion monthly ad

impressions.

SMS companies

4INFO offers an integrated mobile publishing and advertising platform – including sms,

mobile ad serving, mobile search and mobile marketing.

Cellfire is an online and mobile coupon service.

HipCricket, previously listed on AIM in London , is a US-focused mobile messaging

company.

iLoopMobile is a mobile coupon provider.

Syniverse Technologies (SVR US, $30.79, not rated) is a US-based mobile messaging

solutions company, including sms advertising.


9 December 2010 28

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

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Macquarie - Canada

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Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

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This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 30 September 2010

AU/NZ Asia RSA USA CA EUR Outperform 51.06% 64.41% 55.07% 46.58% 66.99% 50.00% (for US coverage by MCUSA, 13.73% of stocks covered are investment banking clients)

Neutral 34.15% 17.31% 36.23% 48.40% 28.71% 36.81% (for US coverage by MCUSA, 11.76% of stocks covered are investment banking clients)

Underperform 14.79% 18.28% 8.70% 5.02% 4.31% 13.19% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)

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EMEA Research Heads of Equity Research John O’Connell (Global Co – Head) (612) 8232 7544 David Rickards (Global Co – Head) (44 20) 3037 4399 Julian Wentzel (Europe/South Africa) (2711) 583 2202 Carsten Werle (Frankfurt) (49 69) 509578028

Consumer Staples Food & Beverages Julian Wentzel (Johannesburg) (2711) 583 2202 Sreedhar Mahamkali (London) (44 20) 3037 4016 Vincent Hamel (Paris) (33 1) 7036 9607

Consumer Discretionary Retailing Julian Wentzel (Johannesburg) (2711) 583 2202 Stephen Carrott (Johannesburg) (2711) 583 2211 Sreedhar Mahamkali (London) (44 20) 3037 4016 Rebecca Lay (London) (44 20) 303 74468 Robert Joyce (London) (44 20) 3037 4355 Vincent Hamel (Paris) (33 1) 7036 9607

Energy Jason Gammel (London) (44 20) 3037 4085 Mark Wilson (London) (44 20) 3037 4466

Alternative Energy Shai Hill (Europe) (44 20) 3037 4232 Kasper Larsen (London) (44 20) 3037 4091

Financials Diversified Financials Neil Welch (London) (44 20) 3037 4272 William Howlett (London) (44 20) 3037 4196 Banks Edward Firth (Europe) (44 20) 3037 4077 Alessandro Roccati (London) (44 20) 3037 4254 Dave Johnston (London) (44 20) 3037 4525 Benjie Creelan-Sandford (London) (44 20) 3037 4081 Thomas Stoegner (London) (44 20) 3037 4532 Carsten Werle (Frankfurt) (49 69) 50957 8028 Insurance Chris Esson (London) (44 20) 3037 4277 Hadley Cohen (London) (44 20) 3037 4078 William Hardcastle (London) (44 20) 3037 4195

Industrials Capital Goods Peter Steyn (Johannesburg) (2711) 583 2337 Jean-Michel Bélanger (Paris) (33 1) 7036 9601 Beat Füglistaller (Zurich) (41 44) 564 0225 Christian Cohrs (Frankfurt) (49 69) 50957 8015 Autos Christian Breitsprecher (Frankfurt) (49 69) 50957 8014 Jens Schattner (Frankfurt) (49 69) 50957 8026 Transportation – Infrastructure Paul Butler (London) (44 20) 3037 4450 Robert Joynson (London) (44 20) 3037 4240 Peter Steyn (Johannesburg) (2711) 583 2337 Markus Hesse (Frankfurt) (49 69) 50957 8019

Materials Chemicals/Containers, Packaging/Paper & Forest Products, Construction Materials David Smith (Johannesburg) (2711) 583 2248 Peter Steyn (Johannesburg) (2711) 583 2337 Christian Faitz (Frankfurt) (49 69) 50957 8017 Jürgen Reck (Frankfurt) (49 69) 50957 8024 Global Metals & Mining Michael Bogusz (London) (44 20) 3037 4359 Sergei Stephantsov (London) (44 20) 3037 2142 Justin Froneman (Johannesburg) (2711) 583 2293 Avishkar Nagaser (Johannesburg) (2711) 583 2280 Gareth Neilson (Johannesburg) (2711) 583 2318 Kieran Daly (Johannesburg) (2711) 583 2208 Peter Metzger (Frankfurt) (49 69) 50957 8023

Pharmaceuticals Peter Düllman (Frankfurt) (49 69) 50957 8016 Claudia Lakatos (Frankfurt) (49 69) 50957 8022 Aadil Omar (Johannesburg) (2711) 583 2305 Christian Peter (Zurich) (41 44) 564 0226 Carri Duncan (Zurich) (41 44) 564 0224

Real Estate Property Trusts & Developers Leon Allison (Johannesburg) (2711) 583 2209 Alex Moss (London) (44 20) 3 037 4086 Sven Janssen (Frankfurt) (49 69) 50957 8020 Mario Davatz (Zurich) (41 44) 564 0223

TMET Telecommunications Guy Peddy (London) (44 20) 3037 4509 Martin Dullaart (Johannesburg) (2711) 583 2322 Media Tim Nollen (London) (44 20) 3037 4524 Martin Dullaart (Johannesburg) (2711) 583 2322

TMET – cont Technology/IT/Internet Nicholas von Stackelberg (Frankfurt) (49 69) 50957 8027 Marcus Sander (Frankfurt) (49 69) 50957 8025 Marco Zeidler (Frankfurt) (49 69) 50957 8029 Jean-Michel Bélanger (Paris) (33 1) 7036 9601

Utilities Shai Hill (London) (44 20) 3037 4232 Stephen Flynn (London) (44 20) 3037 4227 Peter Gladkow (London) (44 20) 3037 4090 Atallah Estephan (London) (44 20) 3037 4356 Matthias Heck (Frankfurt) (49 69) 50957 8018

Commodities & Precious Metals Jim Lennon (London) (44 20) 3037 4271 Max Layton (London) (44 20) 3037 4273 Colin Hamilton (London) (44 20) 3037 4061 Kona Haque (London) (44 20) 3037 4334

European Macro Group Economics Daniel McCormack (Europe) (852) 3922 4073 Strategy Matthias Jörss (Frankfurt) (49 69) 50957 8021 Ralf Zimmermann (Frankfurt) (49 69) 50957 8030 Franco Busetti (Head of Strategy SA) (2711) 583 2205 Quantitative Gurvinder Brar (London) (44 20) 3037 4036 Christian Davies (London) (44 20) 3037 4037 Andy Moniz (London) (44 20) 3037 4039 James Murray (London) (44 20) 3037 1976 Adam Strudwick (London) (44 20) 3037 4038 Hannes Uys (Johannesburg) (2711) 583 2281 George Ssali (Johannesburg) (2711) 583 2364

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Equities Stevan Vrcelj (Global Head) (612) 8232 5999 Duarte Da Silva (Johannesburg) (2711) 583 2000 Alan Watson (London) (44 20) 3037 4383

UK Trading Lloyd Smith (London) (44 20) 3037 4741 Julian Parmenter (London) (44 20) 3037 4826 Thorsten Ackermann (London) (44 20) 3037 4908 David Gill (London) (44 20) 3037 4980 Colin Reed (London) (44 20) 3037 4982 Harry Grist (London) (44 20) 3037 4950 Robert Tappin (London) (44 20) 3037 4827 Wayne Drayton (London) (44 20) 3037 4980 Andrew Vernik (London) (44 20) 3037 4818

UK Sales Trading Barbara Hantusch (London) (44 20) 3037 4910 Greg Hill (London) (44 20) 3037 4757 Drew Hendrickson (London) (44 20) 3037 4784 Joanne Mowatt-Morris (London) (44 20) 3037 4970 Leon Cutler (London) (44 20) 3037 4820 James Buckley (London) (44 20) 3037 4750 Jim Dixon (London) (44 20) 3037 4949 Chris Wellesley (London) (44 20) 3037 4779 Daryl Bowden (London) (44 20) 3037 4973

US Sales Trading Chris Reale (New York) (1 212) 231 2616 Robert Preziosi (New York) (1 212) 231 2503

EU Cash Sales Charles Nelson (London) (44 20) 3037 4832 Richard Alderman (London) (44 20) 3037 4875 Sam Bygott-Webb (London) (44 20) 3037 4767 Luke Ahern (London) (44 20) 3037 4960 Ettore Catalogna (London) (44 20) 3037 4962 Trevor Griffiths (London) (44 20) 3037 4964 Adam Shapton (London) (44 20) 3037 4974 Dominic Watt (London) (44 20) 3037 4975 Robin Wrench (London) (44 20) 3037 4978 Amy Stephenson (London) (44 20) 3037 4785 Matthew Camacho (London) (44 20) 3037 4972 Ed Reekie (London) (44 20) 3037 4957 Jacob Potts (London) (44 20) 3037 4929 Charles Lesser (London) (44 20) 3037 4771 Tim de Mierry (London) (44 20) 3037 4927 Paul De Thierry (London) (44 20) 3037 4809 Karl Filbert (Frankfurt) (49 69) 50957 8651 Heinz-Gerd Vinken (Frankfurt) (49 69) 50957 8659 Alex Schumacher (Frankfurt) (49 69) 50957 8657 Daniel Friedmann (Frankfurt) (49 69) 50957 8652 Heiko Backman (Frankfurt) (49 69) 50957 8650 Juergen Benker (Munich) (49 89) 2444 31808 Robert Weller (Munich) (49 89) 2444 31813 Klaus Pfaller (Munich) (49 89) 2444 31810 Alex Vogel (Munich) (49 89) 2444 31812 Fritz Hopp (Munich) (49 89) 2444 31809

EU Cash Sales – cont Marco Galfetti (Zurich) (41 44) 564 0221 Yves Monrique (Paris) (33) 178 423 827 Jean-Claude Bonnamy (Paris) (33) 178 423 819 Myriam Lam (Paris) (33) 178 423 821 Martin Pommier (New York) (1 212) 231 8054 Doug Stone (New York) (1 212) 231 2606 David Bain (New York) (1 212) 231 2542 John Macaskill (New York) (1 212) 231 6398 Mark McGregor (New York) (1 212) 231 8075 Jorg Hagenbuch (New York) (1 212) 231 8086 Will Allen (Boston) (1 617) 723 5348 David Bain (San Francisco) (1 415) 762 5008

EMEA Derivative/DD1 sales Steven Cowcher (London) (44 20) 3037 4707 Esmail Afsah (London) (44 20) 3037 4783

South Africa Sales Franco Lorenzani (Johannesburg) (2711) 583 2014 Jessie Ushewokunze (Johannesburg) (2711) 583 2378 William Ridge (Johannesburg) (2711) 583 2060 Jasper Crone (London) (44 20) 3037 4836 Sherryl Roberts (London) (44 20) 3037 4030 Roland Wood (Cape Town) (2721) 813 2611 Nazmeera Moola (Cape Town) (2721) 813 2725 Darrin Blumenthal (New York) (1 212) 231 2562

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