How large is the mobile gaming advertising market?

This article was originally published on Mobile Dev Memo

Someone recently asked me if I had ever seen an estimate of the size of the market for mobile games advertising, and I confessed that I hadn’t. Newzoo estimates the size of the mobile games market at $70.3BN in 2018, and eMarketer estimates total mobile advertising spend to be at $76BN in the US alone in 2018 (growing to $113BN by 2020), but to my knowledge, no one has ever tried to estimate the size of mobile advertising spend for games — that is, the amount of money spent on mobile channels to advertise mobile games.

It’s an interesting question to try to answer using intuition and broad, sector-level statistics. Any mobile games advertiser who has ever reacted to the aggressive tactics of an unctuous mobile advertising salesperson by thinking, “this conduct must work on some people if it is being used on me” has indirectly acknowledged the massive scale of aggregate ad spend on mobile games. The odds that any salesperson’s unwanted and aggravating email, phone call, or in-person confrontation is their first or last are certainly low for a given encounter: ad salespeople are getting money from somewhere, so there must be a lot of it floating around the ecosystem.

There are two ways to approach estimating the total size of mobile games advertising spend: top-down using spend ratios and overall market size, and bottoms-up using in-game advertising revenue data.

The top-down estimate

The first place to start with a top-down estimate is with Facebook and Google, which, combined, generate the majority of mobile advertising revenue. eMarketer estimates that Google and Facebook controlled 56.8% of total digital ad spend in 2018

According to Facebook’s 2018 10-K, the company did $55BN in advertising revenue in 2018, with approximately 92% of that revenue — or $50.6BN — being generated on mobile (sidebar: this statistic is hidden deep in the 10-K, ostensibly because the increase over 2017’s 88% is attributed to higher ad load per user).

Alphabet announced $116BN in advertising revenues for 2018 in its 10-K across both Google sites and Google Network sites, but it doesn’t break this out by mobile and desktop web. eMarketer estimates mobile’s share of Google’s total advertising revenue to be 67% in 2017, but that proportion likely grew in 2018. 75% of total advertising revenues — or $87BN — seems like a reasonable assumption for the mobile share of Google’s advertising revenues in 2018.

So if Facebook did $50.6BN of mobile advertising revenue in 2018 and Google did $87BN, the total revenue for both companies is $138BN. Now two questions have to be answered with rough assumptions: 1) What percentage of that $138BN was for mobile games?, and 2) Do Facebook and Google control more of the mobile games advertising market on mobile than they do the overall mobile advertising market?

The first assumption is more straightforward to derive from intuition than the second. Based on conversations with a few people that I had in writing this article, I’d estimate that mobile gaming made up 40% of Facebook’s mobile advertising revenue and 30% of Google’s advertising revenue in 2018. Why?

• YouTube might be the best placement for brand advertising on mobile. As such, Google probably captures more brand revenue than Facebook does, meaning gaming’s share of Google ad revenue is lower than for Facebook;
• Facebook has a longer history with gaming and seems particularly focused on it.

Using these assumptions, the mobile gaming share of each platform’s mobile advertising revenue is .4 * 50.6 = $20.4BN for Facebook and .3 * 87 = $26.1BN for Google, for a total of $46.34BN across both platforms.

The second question — whether Facebook and Google’s share of mobile gaming advertising is different than their collective share of overall mobile advertising — is deceptively perplexing. On one hand, the gaming advertisers I spoke to for this article spend between 50% and 75% of their budgets on Facebook and Google each month, which is consistent with what I’ve heard more broadly.

But on the other hand, gaming advertisers have far more choice in channels than do advertisers for D2C products and other categories of marketable mobile apps (eg. travel, dating, health, streaming, etc.). Gaming advertisers benefit from dedicated gaming inventory (or inventory that is overwhelming skewed towards gaming) on channels like Unity, Applovin, Vungle, etc. whereas other app verticals only have Facebook and Google as viable marketing channels. My best guess for the Duopoly’s share of mobile gaming advertising revenue is 45%, slightly below its overall share of mobile advertising revenue. This would put the total size of worldwide mobile advertising spend for mobile games in 2018 at $46.34 / .45 = $103BN.

The bottoms-up estimate

Attacking this problem from the other angle, we can try to estimate the total size of mobile gaming ad spend for 2018 by extrapolating out advertising revenue for some gaming apps.

In its Q4 2018 earnings report, Activision Blizzard announced that King (which runs the Candy Crush franchise) saw an average of 268MM MAUs in Q4 2018 with average MAUs per quarter for the year of 271.5MM. Newzoo estimates the number of worldwide smartphone owners at just under 3BN in 2018. Assuming that every smartphone owner opens one app at least once each month, that means that King’s MAU base reaches roughly 9% of all smartphone owners.

Additionally, in the Q4 earnings call with analysts, Humam Sakhnini, King’s newly-appointed President, announced that King’s ad business had grown by 50% from 2017 and that he expects it to generate more than $100MM in revenues in 2019. From the earnings call transcript (emphasis mine):

And in 2017 and what you saw in 2018 was we scaled the business by lighting up more of our inventory and adding more impressions in our network, and that was a key driver as we started scaling the business. And we hit some important financial milestones in the year in 2018, first, profitability in Q1, and then growth in every quarter after that.

And I think the ad business is going to start to be meaningfully contributing to the King overall. So we expect it to cross the $100 million booking threshold this year.

Assuming that King’s ad business generated $75MM in revenue in 2018 — meaning that $100MM in ads revenues in 2019 would represent roughly 33% year-over-year growth from 2018, which is aggressive yet achievable — and that the geographic distribution of King’s MAU-base roughly reflects the overall mobile gaming market’s in terms of usage, not IAP revenue (which seems like a fair assumption, given the popularity and breadth of King’s games), then one could use King’s ad revenue and smartphone reach to calculate total mobile gaming ad spend.

There are two obvious wrinkles with using King’s numbers to conduct this analysis. The first is that King actually doesn’t let other games advertise to its users, and as a result, its CPMs are likely lower than what they’d be if they did. I estimate this CPM discount at 25% — that is, King’s actualized, effective CPM is 25% lower than it could potentially be if it allowed games to advertise in its apps, meaning the $75MM annual revenue number grows to a theoretical $94MM of ad revenue from other mobile games. Using the 9% global smartphone reach metric from above, this means that if every single smartphone owner on Earth monetizes via gaming advertising in one app each month to a similar degree that King’s MAU base does, that would generate $1.042BN in a year ( $94MM / .09 = $1.042BN).

But how many apps that feature game advertisements and that get engagement from a King-like game does the average smartphone user open per month? 10 feels like a fair assumption: App Annie says the total number is 30, but few apps get King-like levels of engagement. Multiplying the $1.042BN amount by 10 — meaning, every single smartphone owner on Earth monetizes via gaming advertising in ten apps each month to a similar degree that King’s MAU base does — produces $1.042 * 10 = $10.42BN.

The second problem that arises in the above analysis: does MAU behavior differ between King games and those hypothetical 10 apps? Surely it does: King makes puzzle games that are likely opened less often than hypercasual games like the ones published by Voodoo. It’s tough to get concrete data here, but I’d estimate that the DAU/MAU ratio across King’s games is about 1/10th that of ad-revenue-generating mobile games at large, meaning that not only does the one-app MAU get multiplied by 10 to represent the number of apps that global smartphone users open at least once per month, but the 10-app MAU gets multiplied by 10 again to represent the number of times those 10 apps are opened per month. This brings the $10.42BN number to $10.42BN * 10 = $104.2BN for a global smartphone owning population opening 10 apps per month and interacting with them at a rate of 10x King’s games.

How many tennis balls are made each year in the US?

This exercise feels similar to a McKinsey interview question, but it’s valuable to walk through this type of analysis from time to time since the numbers that tend to get circulated are usually published as part of content marketing from vendors.

Conveniently, both approaches here produce similar numbers: $103BN in the top-down calculation and $104.2BN in the bottoms-up calculation. Even if the underlying assumptions used in the article are fundamentally and severely flawed and the true extent of mobile games advertising revenue on mobile is half or a third of $100BN, it’s clearly a massive, important industry.

Photo by Aaron Sebastian on Unsplash