Measuring Value in an Advertising-Supported Industry

There are many competing theories of value in economics, but the neoclassical assignment of value to an object or service based on the price it would bring in an open and competitive market is fairly widespread.

This definition of value, unfortunately, requires rather significant tweaking to work in an advertising-supported market. With “free to consumer” products such as web sites, newspapers, and broadcast television, the consumer product’s “price” is paid indirectly by advertisers. (The advertisers ostensibly are leading the consumer to some other product which itself has value.)

To model the value of an advertiser-supported product based on the price paid for the advertising opportunity is about the best valuation we can hope for. In the fluid economy of internet advertising, we have something very close to the “open and competitive market” required. Unfortunately, unlike in the examples of newspapers and television programs, there exists no clear one-to-one mapping between the consumer product offered and the advertising opportunity actually paid for. Various attempts to map one on the other have proven clumsy, forcing us into unnatural analyses such as treating individual “page views” as consumer products.

Yet try we must. The value of the products and services we offer is, in aggregate, defined to be the amount of advertising money we bring in. It is sometimes useful to assign a value that is based on the number of customers. The average value of our service is simply the advertising revenue divided by the number of customers (visitors to our website) in any given period. Having an average measure of value like this allows us to examine and optimize our service’s value to users independently of growth patterns.

It’s important to remember that what we are measuring is the value of our service to users, not the value of our website or company as a whole. Measuring that is a far more complicated matter, as it depends heavily on one’s perception of our potential to grow our service’s value to our users. This speculative assignment of value for a web site or company can be seen every day in investments and acquisitions in the internet economy.

Toward a Myxer Economy

These are complicated times in the mobile industry. Unlike in years past, there is no unambiguous, multi-tiered value chain that neatly describes how each company in the industry relates to the others. In 2004, it was clear how content platforms were operated by aggregators to interface between content owners and carriers. It was clear how device manufacturers relied on network operators (carriers) for retail distribution and demand generation.

Above all, it was clear how carriers exclusively owned the relationship with consumers.

Today, things are very different. Apple sells hardware through their retail outlets. Google is launching an open device platform. After failing as a virtual carrier, ESPN emerges with a direct to consumer web offering. It’s going to get progressively harder for everyone to figure out where to set up their booths at CTIA and 3GSM in the coming years.

It is the power of the internet, and the internet economy, that is driving this change. Based on open protocols and unrestricted access, the internet does not allow for redundancy or inefficiency in the value chain between service/content provider and consumer. In stark contrast to the mobile industry, the internet makes it possible for anyone to reach everyone and everyone to reach anyone. And while far from being stable, the large free-market economy of the internet seeks out and rewards value, and punishes inefficiency harshly.

If you don’t provide value in the internet economy, you disappear. The internet economy will “route around” you, as the internet protocols themselves will route around damaged nodes.

And so as the internet continues its inexorable spread into the mobile industry, previously comfortable (and therefore lazy) companies find the threat of disintermediation around every corner.

Myxer has been a pioneer in applying internet economics in the mobile industry, even as the establishment claimed our approach was impossible, and even as one hurdle after another was placed in front of us. Our stubborn persistence and faith that the openness of the internet would prevail in the mobile industry has finally been vindicated. And we find ourselves today in the enviable position of serving an audience of millions with a differentiated service offering in an exciting and dynamic time.

We have an advertising-supported business model that is dependent on extremely high volumes of low-margin transactions to support it. In order to insure we continue to generate the high volume of transactions required for our success, it’s not enough for us to turn inward and focus on our operations. Scale, redundancy, and new opportunities are all dependant on fostering the development of a supportive ecosystem – not only of consumers, but also content partners, advertisers, affiliates, and others. Each of the players in this community must be given motivation – a compelling value proposition – that directly or indirectly supports our success.

The various interactions between Myxer and these other companies together make up what we call The Myxer Economy. We model the Myxer economy in a conceptual framework that highlights the important currencies exchanged between various constituents, allowing us to understand our partners’ motivations and efficiently address them.

One of the most important conclusions that comes from a consideration of The Myxer Economy is that, ultimately, all of our value comes from the size and quality of our user community.  The people who visit our properties form an audience for our advertisers, who pay us money in exchange for the opportunity to reach them. In this way, we are like any other advertising-supported business, such as newspapers, television networks, and other websites.

And like these other ad-supported businesses, our continued success depends on us delivering compelling content and services to our user community. When we deliver a good experience to our users, we are rewarded not only with their continued patronage, but with user growth as a result of word of mouth recommendations and other viral effects. Many advertising-supported businesses have low overhead and need only maintain their existing user community, but our business plan is relatively capital intensive and requires compounding growth rates for success. Only viral growth from within our user community can deliver that.

So providing a great user experience is absolutely fundamental to the success of our business. Everyone from artist recruitment to the CEO needs to vigilantly work to insure that our users are engaged, happy, and have incentive to “tell their friends” about us.