Okapi Digital #1
Welcome to the first edition of Okapi Digital- a weekly analysis of the most impactful news across digital entertainment, adtech and more.
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AdTech
$APP AppLovin to Acquire Twitter’s MoPub Business
I wrote about this on Twitter and summarized why I like APP in the thread below.
First some quick background on the companies involved-
AppLovin owns mobile games and is one of the largest mobile in-app advertising players that offers customers a suite of solutions to acquire customers, monetize their apps and more.
MoPub (last owned by Twitter) is a large SSP that helps apps monetize via advertising. Notably and discussed more below, MoPub has a large market share in mediation (a software layer that allows apps to simultaneously sell ads to many different buyers).
At the end of the day, this deal is a no-brainer as it consolidates more supply under the AppLovin advertising ecosystem (via MoPub) which in turn drives stronger returns to the user-acquisition side of their business, which should accelerate the flywheel driving their business today.
Adtech guru Eric Seufert wrote about this here (emphasis added below). The benefits of controlling supply cannot be overstated- it is a competitive advantage to know what your peers are bidding and what ads they buy, and this drives stronger ROIs for a network that operates both sides of an auction. It also provides additional margin that AppLovin can reinvest or flow to profits. They can forego margin on the sell-side to drive a higher ROI to the demand-side which in turn can drive even more demand, improve yields for the sell-side and drive more publishers to adopt AppLovin mediation.. which all plays into accelerating the flywheel.
These arguments make eminent sense, but they raise a different question: why would Applovin buy MoPub? I think the answer is mostly obvious and aligned with Applovin’s general operating strategy, at least since it acquired MAX, its in-app header bidding product: to aggregate as much mobile advertising supply as possible such that it can construct a corpus of data that provides a competitive advantage to not only its advertising platform but also to its first-party content business.
Applovin’s acquisition of MoPub contributes to this strategy by giving Applovin SDK access to MoPub’s existing publisher client base, by eliminating a major supply competitor, and by delivering an advantage to its demand platform, AppDiscovery. Applovin’s blog post about the transaction implies that MoPub will be shuttered and that current MoPub customers will be transitioned onto Applovin’s platform. Supply platforms get insight into every impression filled on behalf of publisher clients: bid levels, fill rates, etc. Through an in-app bidding platform such as MAX, Applovin receives this data in real-time and can aggregate it in ways that benefit all aspects of its business, which is especially valuable in the post-ATT environment.
AppLovin first embarked upon their strategy to own & operate first-party (1P) games with the launch of Lion Studios in 2018 to publish hypercasual games. They have since expanded across most categories within mobile gaming and 1P games (IAP and in-game advertising) make up >70% of revenue.
Investors still skew negative on APP and view it as a low-quality roll-up of games, which I vehemently disagree with. AppLovin’s founder and CEO Adam Foroughi has seemed to operate years ahead of the competition and the 1P strategy has really been about data, the benefits of which are just starting to show after the launch of AXON in late 2020 and as the removal of IDFA by Apple rolled out in late summer of 2021.
AXON is trained by AppLovin’s 1P games to run effective user acquisition for customers of their Software business that makes up just >20% of revenue today (I think this business will be far larger than investors believe in 2022). This 1P data was not too differentiated a year ago, but in a world where their competitors lose much of their basic data (anecdotes point to FAN seeing declines as large as 50% on iOS), this 1P data becomes a meaningful differentiator separating AppLovin from competitors like ironSource which only operates a smaller publishing arm in the hypercasual space.
Digital Entertainment
$AAPL Apple to appeal Epic ruling that would force changes to App Store
The press and analysts spun the outcome of the Apple/Epic trial as a win for Apple- in my opinion this is just plain wrong. While it wasn’t the outcome that Epic wanted as they continue to fight for a truly open mobile ecosystem, it does force Apple to allow alternative payments flows and likely threaten their core app store business as a result. Companies like Paddle are already developing high-converting alternative payment flows that will vastly improve the margin structure of in-app purchase business models.
It is exciting to see how this will drive both better content and ultimately new business models that could not operate under the construct of Apple/Google’s 30% take rate.
I continue to believe investors are being short-sighted and underestimating the potential for government-mandated app store fee reductions and/or workarounds that will allow games, dating apps and others to reduce their effective commission from 30% to closer to 10% on iOS and Android.
The negative potential for Apple’s highest-multiple and highest-margin revenue stream and the positive implications for the whole gaming and content industry are incredibly large and I believe this presents one of the most attractive 1 to 2-year risk/rewards in the broader TMT investable landscape. Just about every major country has some sort of anti-app store legislation or regulatory examination in process- this has reached critical momentum and in my view, will happen in some shape or form.
$RBLX has gone on record to state that they will pay most of any fee reduction out to the long tail of small developers on their platform- at the end of the day Apple’s 30% fee is a monopolistic tax that hurts thousands of small businesses.
$TTWO Grand Theft Auto: The Trilogy – The Definitive Edition and More Coming Soon
Rockstar officially announced the long-rumored GTA remaster of Vice City, San Andreas and GTA III. This should quell some investor fears of Take Two missing their annual guidance as the delay of the GTA5 next-gen remaster was recently delayed to March 2022 and limited supply of next-gen consoles that may not end until late 2022 could still limit its success. In fact the stock has already rallied ~20% off its September lows.
Random Things & Other News
Toto Wolff is the coolest guy in sports.
Epic / Balenciaga partnered to bring Balenciaga swag to Fortnite and Fortnite swag to Balenciaga in real-life ($475 t-shirt anyone?). This is a trend that I only see accelerating after recent successes from Gucci/Roblox and the continued success of Metaverse-like platforms where users truly view their avatars as representations of themselves and the social aspect of the platform comes before the game.
$EA Battlefield 2042 beta is performing extremely poorly and the game was already delayed despite EA taking an additional year to work on the game.
Population stagnation is a long-term global economic issue.
Apple TV is the only streaming app that I open every week lately for Ted Lasso and Foundation.
$MSFT will allow the Epic Games store to operate on its PC app store with no fee.
Gene Editing and Cell Therapy- I started looking at this space after watching Unnatural Selection on $NFLX. The industry has faced a few setbacks of late with weak data from $EDIT and a safety issue from $ALLO. I continue to believe this is the most exciting thing to happen to healthcare in decades and has transformative potential for cancer and rare-drug treatment but recent issues have certainly spooked investors. These things never happen in a straight line and I continue to favor $MXCT as my diversified play on the sector.
$AMZN New World continues to dominate the Steam charts and looks like a real MMORPG hit, although the launch has not been without multiple hiccups from long queue times to scammers.
Luckily these NPCs going mad did not happen in a physical setting like Westworld or to the infamous Boston Dynamics robots.
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