The Future of Bloatware, Making a Buck a Phone

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A number of global carriers, including Verizon in the US and America Movil in Latin America, have partnered with a small public company, Digital Turbine, to preinstall targeted apps. These are specifically chosen upon activation based on mined user data. Certain OEMs like HTC, Acer, Asus, and Sony are also dipping their toes. But bloatware will soon go far beyond a few extra annoying, custom-picked icons on your homescreen. The future is app recommendations, in your face, for as long as you own your device. If you want to know more, just follow the cash.

Digital Turbine, formerly known as Mandalay Digital, took a big gamble late last year. The company’s core business, modest in size, powered content stores (apps, music, etc.) for carriers, including some large ones in Australia like Vodafone.

In November 2014, Digital Turbine announced it was issuing $100 million of stock to acquire a startup called Appia. The deal closed in March 2015. Appia is a middleman: it links companies who are willing to pay for users to install their apps to anyone who has access to consumer eyeballs, including other app developers and content publishers. For example, as of right now if an Appia partner–and it’s relatively easy to sign up as one–can convince a single Android user to install and run HBO Now, that partner will receive “up to” $1.19. It’s not so different from web affiliate programs in which publishers get paid to drive purchases on eCommerce sites, but app install ads have become big business. This CPI (cost per install) model is one of the ways Facebook has been so successful driving advertising revenue on mobile devices–nearly $3Bn per quarter right now. The promise of Appia for content partners is that they too can monetize mobile users as well as Facebook. Appia, with reported gross margins around 20%, presumably makes about $0.30 for facilitating the HBO Now transaction.

“The combination of Digital Turbine and Appia creates a single unique…app ecosystem that offers an app agnostic approach through which wireless carriers, OEMs, and distributors can enhance their own revenue generation as the majority of app installs today goes to both Facebook and Google.” Bill Stone, Digital Turbine CEO

A New Kind of Vertical Integration

At the time of the acquisition, Digital Turbine was just another Appia partner. The company had built two products, DT Ignite and DT IQ, to power app installs and app recommendations for carriers. DT Ignite was originally pitched to carriers as a mobile device management (MDM) solution that would allow them to deliver content to devices after they were sold, reducing the risk of missing shipping deadlines as apps were debugged and updated. Here is the marketing video from 2014, which only just mentions “customized CPI deals.”

But delivering ads to the homescreen quickly became the clear winning pitch, and Digital Turbine wanted to own the entire supply chain–from advertiser relationship to carrier relationship, including the underlying ad marketplace and technology for choosing and pushing apps to the end-users’ devices. It was a big, big risk. A couple quarters post-acquisition, Digital Turbine is getting short on cash, and its stock is near an all-time low. The company is adamant its fortunes are about to change.

The universe of companies who might be willing to pay $1+ to have their apps installed on a phone is big, representing pretty much any app that has a meaningful possibility of generating ongoing revenue from the user. This includes subscription services like HBO Now, Spotify, or Netflix; eCommerce businesses from Amazon to Target to Hotels.com; sharing-economy darlings (Uber); scammy junk with in-app purchases; and free-to-play (aka pay-to-win) games. That list also includes VC-funded startups looking to buy growth, even if uneconomically. The highest paid CPI offer for partners on Appia right now is $4.57 for Empire: Four Kingdoms on iPhone. [One thing is very clear from the amount companies are willing to pay for installs: iPhone users are far more “valuable” (gullible, maybe) than Android users.]

It’s not uncommon for people in the smartphone biz to refer to the homescreen as the most valuable real estate in mobile. Digital Turbine’s software–and now with Appia, its advertiser relationships–give its carrier and OEM partners another way to wrest control of the homescreen from Google and sell that beachfront property to the highest bidder.

Today Digital Turbine has relationships with many mobile operators. Here’s a slide from a recent investor presentation:

It’s All About The Money, Money, Money

So, now the big question: What’s it all worth? Digital Turbine says that by the end of the year it hopes that it will be generating $2 of revenue per activated device. This figure comes from some number of pre-installed apps per phone multiplied by an open rate multiplied by the average revenue per offer. $2 is a global figure, so it’s likely higher in the US, but that still doesn’t sound like much. Digital Turbine’s partners, the carriers or OEMs, share in less than half of that amount. So, today Verizon is selling its customers’ homescreens for about a buck each.

We’re not the first to talk about DT Ignite being preinstalled on phones, but we’re here to tell you it’s still the first inning for app-install ads. Based on investor presentations, Digital Turbine is hoping to build long-term towards $6+ per activation, still less than $3 net to the carrier but maybe a bit more interesting. In the month of June, DT Ignite was pre-installed on about 800,000 devices globally. If Digital Turbine is to hit its financial guidance for the year, that number will have to climb dramatically– to something closer to 3.5 million per month. So, if you haven’t seen it yet, keep an eye out for DT Ignite coming soon to phones near you.

Digital Turbine’s DT IQ product–offered in whatever form the customer wants (see image above)–lives on the phone at all times in order to drive app-install revenue for the carrier (and for Digital Turbine) through the life of the device.

“Remember that IQ is a recurring revenue opportunity. So when we put IQ on millions of devices this year, the monetization of those devices will not be just for those devices but also the new ones we add next year.” Bill Stone, Digital Turbine CEO

DT IQ launched on six T-Mobile devices in the US in the second quarter along with all new Vodafone Android devices in Australia. On America Movil, a carrier with nearly 300 million subscribers primarily in the Americas, Digital Turbine will, starting this quarter, be using the “Appia demand network to supply app installed ads into the American Mobile application on the homescreen of all Android devices.”

Of course, DT Ignite and DT IQ aren’t on iPhones. Apple would never allow it.

So, does anyone care? Of course we in the Android community, we who buy Nexus devices and root for no reason other than to get rid of bloatware, hate all of this, and it wouldn’t take too many customers voting with their wallets to get carriers to stop. But for now, you should all prepare for the coming era of homescreen monetization.