The mobile-ad world sucks, and Vungle’s chief wants to make it better

The popularity of so many ad blockers means one thing to Zain Jaffer, chief executive of Vungle, which helps mobile game and app publishers acquire more users and make money via in-app video ads

“It tells us the advertising world sucks,” said Jaffer in an interview with VentureBeat. “Consumers are so sick of ads being intrusive that a website doesn’t even load. You need an ad blocker just to browse the Web. Advertising has become a game of … it’s the opposite of transparency.”

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Vungle tries to generate more revenue for mobile-app makers and get better exposure for brands as they follow consumers into the huge mobile-apps market and the $34 billion mobile-game market. Roughly half of Vungle’s business is in games. Vungle’s video ad technology is used in apps that generate billions of views a month. And Jaffer wants to keep improving return on investment and performance so that the value of the advertising is transparent.

I recently spoke with Jaffer and Catherine Mylinh, vice president of marketing at Vungle.

Vungle started in 2012, and it competes with rivals like AdColony, Yahoo’s Flurry, Unity Technologies, and Supersonic. Vungle has raised $25 million to date from investors, including Google Ventures, AOL, SoftTech VC, and Tim Draper. A wide variety of publishers use Vungle, including Sega, Ubisoft, Electronic Arts, Scopely, Storm8, Playrix, and Outfit7.

Here’s an edited transcript of our interview.

GamesBeat: Could you describe Vungle for people who may not know what it is?

Zain Jaffer: Vungle is a performance marketing platform. We help some of the largest advertisers out there get installs. We focus on the UX, the experience the advertiser delivers. We can optimize their creative and make sure the ad format itself is engaging. We also do a lot with data. We’re able to ingest data from our advertisers and identify what a high-value user looks like for the specific advertiser and generate more users like that.

Our advertisers want ROI. If we don’t deliver ROI, they’ll cut spend. They’re ruthless. Because we collect data from them, we’re much more able to deliver high-value users.

GamesBeat: It’s modern, performance-based advertising, then.

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Catherine Mylinh: Specifically for in-app mobile video.

Jaffer: Exactly. Our core customers are gaming advertisers. We also work with a variety of utility apps, travel apps, commerce apps. But gaming-app advertisers, if they work with Facebook, Twitter, or Google, they absolutely need to be working with a video channel like Vungle. Our customers are generally sophisticated. They’re not average marketers.

GamesBeat: Speaking of that, we’ve heard a lot of talks on the state of mobile advertising lately. MZ founder Gabe Leydon gave a lot of people in New York a shock. I wonder what your view is in light of what’s been said lately.

Jaffer: Gabe is spot on. I do not see a future where marketers can afford to waste advertiser dollars on inefficient channels. Every dollar you spend needs to generate an ROI. Right now you see gaming advertisers doing it, but in the future, everything will be quantified. We’re all about that. We’ve always been about that.

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GamesBeat: It’s an interesting age in terms of things like ad blockers. People are trying to escape advertising. What does that tell you?

Jaffer: It tells us the advertising world sucks. Consumers are so sick of ads being intrusive that a website doesn’t even load. You need an ad blocker just to browse the Web. Advertising has become a game of … it’s the opposite of transparency. It thrives on the intimation of symmetry. The result is focused on making a quick buck instead of delivering value to the advertiser. The user ultimately suffers.

Ad blockers don’t work inside of apps. Frankly, I wish they did because then we’d have to ensure that ad experiences were good. But the industry at large is screaming loudly for advertising to fix up what it does.

GamesBeat: What are your clients asking for and getting from you?

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Jaffer: Our vision statement as a business is to deliver high-value users through engaging video ads. That means users that are going to spend money inside your application. Video is the secret sauce to doing that. Our advertisers want high value and they want volume. We’re able to ensure every dollar the advertiser spends results in an ROI-positive outcome.

Our advertisers give us data like revenue data, event data. I can see how many tutorials are completed based on the user cohort. What events did they complete? Did they spend on in-app purchases? How much? When we collect that data on a user level, it allows us to build a very powerful machine.

The other thing we do is enable advertisers to embrace video. We do that by creating a video for them if they don’t have their own. We add metadata to our video assets. Then we can A-B test different video ads. We’re at a point where if you upload 10 different videos to the Vungle platform, our system is intelligent enough to understand which creative works with which segment of users. If we see that a certain creative doesn’t perform well, we’re able to get a new creative built with all the machine learning and data we have.

Mylinh: We’re working with a major retailer on a rewards app. Like most app developers, in the beginning they were very reticent to hand over post-install data. [There are] a lot of privacy issues. Slowly but surely, we’ve been working with them to collect more and more of this to show how it helps them.

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We take that post-install data and plug it into our lifetime value optimization product, which then models and creates lookalikes, so they can understand how to acquire more engaged users who will come back to the app multiple times over a period to make a purchase. Not only are they buying users intelligently, but they’re growing their business organically over time. We were able to reduce cost per purchasing user by 40 percent compared to all other [user acquisition] channels and vendors they were using while also increasing overall install volume by two times.

GamesBeat: What’s the difference between a good ad, a so-so ad, and a bad ad?

Jaffer: Most ads are so-so and bad, by the way. But it comes down to understanding the context of the user. I’ve never believed that you should take one typical message and broadcast that to a mass audience. You need to look at the data you have access to. Our [software development kit] collects a ton of data on users. We can see certain behaviors.

If the user’s phone is in portrait mode or landscape mode, that tells us something. If they’re in portrait mode, we should show a video that’s optimized for that view. If the app is in landscape, you should show a full-screen landscape ad. If the volume is muted, why show a video that relies on sound? Often, when people create a video, they assume the sound will always accompany the images. Seventy percent of users have their volume [at a level] you can’t hear, though. We detect that, and it tells us we may need to add subtitles or we may need a video that doesn’t involve speech.

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If they’re not on a Wi-Fi connection, is there any point in showing them an ad that’s really heavy for an app that has a large download size? You should be intelligent as far as whether they’re on Wi-Fi or whatever kind of cellular connection. These are some of the insights we have that allow us to be experts and render the right type of videos to the right type of users.

Mylinh: Two of our main products are [lifetime value (LTV)] optimization, which is taking post-install data and modeling it so we can find more high-value users for advertisers. The second one is creative optimization. You ask what works in terms of inline ads in the apps. We believe that ads need to enhance the native UX of the publisher app. The video is interactive. It picks up variables like device settings, location, country, and so forth. At the end, there’s an interactive end card. It looks like part of the ad, but the user can interact with the card. We collect a lot of the gestures and movements related to that card, so we can use that data to model creative optimization and be able to serve the right ads to the right users.

Jaffer: The example Cat mentioned about this rewards app … in the end card, we were showing offers that are live within the app. You get a discount from this or that retailer. We were A-B testing different offers and seeing which ones users were clicking on. That allowed us to make the offer relevant to the user by understanding what offers they like. We can add so many things on that end card, things people can swipe over or otherwise interact with. In this case, we had coupons, live coupons within the app.

GamesBeat: I hear a lot of the usual angst about the high cost of user acquisition and the difficulty of cracking into the higher ranks of the top-grossing charts. People are almost giving up. You can see that in the flow of money that goes into the mobile-game industry. It’s dropping dramatically as far as VC investment in game companies and shifting over to virtual reality, which doesn’t have those problems yet.

Jaffer: You’re right in that developers have a hard time with user acquisition. When I started this business five years ago, I was so annoyed every time I spoke to a developer, asked about their marketing strategy, and they’d say, “Oh, my marketing strategy is to get featured by Apple.” That is not a marketing strategy. That’s why we built Vungle.

In the early days, it was very difficult to gain traction because people would keep asking us how much it cost to acquire a user. They would compare us to incentivized installs and say, “Well, we can buy a user here for 20 cents.” And that makes no sense. We are expensive, yes. This is video. It’s not cheap. We’re a premium product. But if you’re a good app with a good monetization engine, we’re absolutely worth it.

Even today, we’re not a cheap channel. Our customers spend millions of dollars with us. Our largest customer is only a small percentage of our revenue, so we’re very diversified. But video is not cheap. Video is expensive. It’s premium.

The costs of user acquisition are absolutely increasing. Ever since I started the business, I’ve seen costs continue to rocket. That’s driven by a couple of things. Users are spending more and more money inside apps. More focus is going to formats like video. Video is becoming the default channel people use to acquire users. Also, there’s this myth that the user-acquisition market is propped up by VC dollars. That’s not true. In fact, the VC bubble in gaming popped a long time ago. Our customers are self-sufficient most of the time. They’re profitable. That’s an important thing to point out. Gaming companies have had a hard time drawing venture funding, so they’ve had to focus on ROI. Today, when you look at our customers, most of them are self-funded.

GamesBeat: Does that translate into any changes in the industry you expect to see for both developers and advertising?

Jaffer: We’re starting to see non-gaming app advertisers, brand apps, tapping into the big opportunity here. If you have a user spending $50 on virtual items inside a game, you can bet that user also buys food or uses transport or books hotels. We’re excited about the next generation of performance marketers tapping into this rich audience mobile offers.

Gabe was absolutely right in his talk. Vungle actually played his video to everyone internally. It signifies what we’ve always believed. Machine Zone is a large customer of ours, one of the largest app advertisers. It was refreshing to hear them be honest about where they think the industry is heading, which is where we believe it’s heading as well.

GamesBeat: Do you have any worries about a collapse among smaller developers?

Jaffer: Large companies like Machine Zone and Supercell have a very high hurdle rate when developing games. They’ll routinely kill games before they make it out there. The indies don’t have that luxury. They have to release things fast. The indies have speed in their favor, though.

Games these large companies kill are still good games. They’re just not big enough for a Machine Zone or a Supercell or whoever. But the indies absolutely have a chance. Some of these games they release will still make it very big. Our favorite moments are when there’s an app built in a garage somewhere on the other side of the world and suddenly it’s a top-grossing app. Those guys test stuff. Of course many indies will still go bust. There are way too many apps out there in the ecosystem. But the indies still have a chance.

GamesBeat: What about ad fraud? That’s a problem we’re hearing more and more talk about.

Jaffer: Ad fraud is a big problem. We’re very familiar with it because if we generate low-quality users, we can immediately sense … hold on a second, we just delivered a thousand users to this advertiser, so how is it these users aren’t spending anything? How is it they’re all coming from the same IP address? How is that they all have the same characteristics?

We’ve developed a lot of algorithms, but we’re also leaning on the attribution companies to help us. … Like Gabe said, it’s scary being an advertiser. People are trying to rip you off. We’re very lucky in that we’re ROI focused. The moment there’s any hint of fraud, the advertiser won’t pay us, so we’ll tackle that very fast.

GamesBeat: What do you think are some new future avenues for advertising? I’ve already been pitched a couple of stories on advertising in virtual reality.

Jaffer: VR is very interesting. It’s a bit of a bubble right now, though. There are plenty of things to do with the mobile devices we’re already serving ads on. Most ad experiences are designed for the lowest specification of phones. I’m sick of a world where you always design for low-end devices. We’re trying to change that. We’re trying to understand the devices and render more powerful ads.

You can have things like augmented reality within the ads themselves. You can have calls to action. You can integrate. You can see an ad for a movie theater, see a movie trailer, and then within the experience go to Google Maps or Fandango and book a movie ticket. Deep linking is one of the mechanisms used to power this type of experience. It’s going to be very powerful on the ad side. Creative optimization is also important. We’re trying to push our advertisers to build multiple creatives. If we don’t have multiple creatives, we’ll get it built for them through what Vungle does.

We’re also looking at pricing innovation, the ability for an advertiser to say, “I don’t want to negotiate pricing with you. I just want X percent return on ad spend within seven days.” Let’s say the target is 15 percent return on ad spend within seven days. Go get it for me. If the user costs you 20 cents in Brazil, so be it. If the user costs $50 in the U.S., so be it. As long as I make 15 percent of my money back in seven days, that’s fantastic. That’s a trend we’re starting to see with many of our advertisers today. Many of our advertisers tell us, “Control our budget for us. We don’t want to negotiate pricing. Just get me this threshold.”

GamesBeat: What do you think of the state of competition in your corner of the industry? We’re often seeing expansion followed by consolidation.

Jaffer: Exactly. The industry has a pretty bad reputation. When you look at the public comps, they’re terrible. However, when you look at other advertising industries, these companies have actually done pretty well. Rubicon has outperformed the stock market. It’s close to a billion-dollar valuation. TubeMogul is a half-billion valuation. It hasn’t missed many earnings. Some of them have a $2.5 billion valuation. There are companies out there that can be big.

Here’s the thing. Who is the mobile-first company out there that’s public? Who’s the video-focused company out there that’s public? It’s not fair to compare Vungle to these other companies. We’re very in-app mobile focused. We’re always compared to the online-ad tech companies. Their economics are different. Their scale potential is different. Their technology profile is very different.

The industry has a bad reputation, but a lot of investors are very bullish. We get a lot of investors who want to consider financing for Vungle. We’re not interested in that right now. We’re profitable, doing very well. But there are some investors out there who see the opportunity. Funny enough, these investors tend to sit on the boards of other gaming companies, companies that are apps, and they see the value that channels like Vungle offer. Investors that have inside knowledge are the ones that appreciate how big a business you can build here.

GamesBeat: Any last thoughts you’d like to share?

Jaffer: Our core target audience is the performance marketer. Today, it’s gaming-app advertisers. In the future, it’ll be every type of app advertiser. Eventually, it’ll [be] every marketer period.

Advertising needs to be ROI focused. When you’re ROI focused, you build technology. When you’re just focused on delivering views or clicks, things like fraud start to happen. Vungle is different because we do two things. One, LTV optimization. We take data and target on that data. Two, user experience and creative optimization — rendering ads and building multiple variants of ads.