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AppLovin: King of the Bid

We recently made the observation that The Trade Desk and AppLovin, two of the largest public, independent advertising networks, are owned and led by founders with significant skin in the game. Jeff Green is the largest single shareholder and owns 50% of voting shares of The Trade Desk, a network focused on monetising the web outside of Google and Facebook. Adam Fouroughi, owns 25% of voting and 10% of common shares outstanding in AppLovin, the largest independent mobile advertising network.

We interviewed a Former Managing Director who is now a customer at AppLovin to understand how developers use AppLovin and the strategic positioning of the company in the mobile ecosystem.

AppLovin (APP) was founded in 2011 as a mobile app developer. The co-founders built their first mobile app but quickly realised that finding new users was actually the real problem to solve, not building great apps. This insight led APP to pivot and focus on helping mobile app developers acquire new users globally. This is how AppDiscovery was born, AppLovin’s core marketing exchange.

AppDiscovery is a mobile marketing platform to help advertisers find new customers. Just as advertisers build campaigns on Google, mobile app developers will build campaigns and bid for users on AppDiscovery to drive downloads and greater app monetisation.

The mobile advertising market includes Google’s Admob, Facebook, ironSource, Unity, and AppLovin. It isn't a winner takes all market structure because developers set a target return on ad spend (ROAS) and will use each channel as long as it hits the target ROAS:

"If I advertise on Facebook, I will be buying on the Facebook and Instagram Apps, but also on their audience network, which is smaller than AppLovin and significantly smaller than AdMob. I will buy as many users as I can, hitting the KPIs I've given the network to hit, then go to AdMob where I will buy on Google Search, the Google Play Store and YouTube."

Although Google and Facebook’s scale will always attract advertisers, AppLovin has carved a unique position in mobile game advertising by taking a different approach: vertical integration.

Since 2018, APP has spent over $1bn on 15+ studios that own the top grossing games across various categories:

"AppLovin has run a fascinating strategy of acquiring or building titles in all major verticals in the mobile gaming stack, from puzzles and RPG to cards and slots, which are traditionally the biggest verticals. They are in the top grossing charts for all those verticals, feeding their machine, finding the most high value players in every vertical, and making that data accessible indirectly to any advertiser. As a slots advertiser, using AppLovin is unavoidable because they have created an aura of inevitability. If you choose not to advertise with AppLovin, you will fall behind and competitors will eat you."

Recent IDFA and GAID changes increasingly highlight the precarious position of all companies built on top of Apple and Google. AppLovin CEO Adam Foroughi seems to have realised that any company that relies solely on third-party data would be at a huge disadvantage in the long run. By acquiring mobile gaming studios, APP now owns unique data on over 200m MAU’s of the best mobile games globally.

The acquisition of 1P data was a bold strategic move because now APP directly competes with their app developer customers to acquire new users. However, Adam had the foresight to understand that ownership of first-party data is crucial to build a sustainable targeting advantage for advertisers on the AppDiscovery platform. The better the targeting, the higher the ROAS on AppDiscovery which drives user growth for customers.

Not only is it a win for APP customers, APP also increased its bargaining power across the mobile gaming value chain:

“there was an argument that if we do this well at scale, nobody can turn us off. If we start to have our own gaming business, we also have demand that buys in gaming ad inventory everywhere. The rule was that, once the AppLovin content platform was starting to scale, if somebody turned us off and no longer wanted to monetize with us because they didn't want their data in our hands, AppLovin refused to allow them to advertise and restricted their access to AppLovin inventory. If we stopped advertising with them, that would reduce their demand and their yield would decrease, so it was a pretty ballsy move.”

APP now owns a unique data set of the highest LTV players on the highest grossing mobile games. If advertisers want access to the best gamers from APP’s 1P games, they have to use AppDiscovery.

Just as Facebook exclusively leverages Instagram and Facebook App user data to build lookalike audiences, AppLovin is following a similar approach. APP’s ownership of user data from top-grossing games enables it to build effective lookalike audiences for mobile advertising. This is a significant strategic advantage over other independent ad networks and arguably even Admob and Facebook.

This leads us to Adam's second bold strategic move: in 2018, AppLovin acquired MAX, a real-time header bidding solution for in-app mobile advertising. This is what APP calls the ‘mediation’ business.

App developers use AppLovin in two ways: to acquire users via AppDiscovery and to monetise their in-game inventory via AppLovin MAX.

As with all marketing channels, the greater the ROAS, the more advertisers it attracts. By driving higher ROAS on AppDiscovery, APP attracted and built trust with advertisers. This improved the strategic positioning of APP in the mediation business.

All publishers want to earn the highest CPM possible for their inventory. Because APP owns inventory itself, MAX was built to optimise the CPM for AppLovin 1P games. This built MAX into a superior offering relative to other mediators:

"AppLovin built its mediation through the lens of its own content business. They built a tool which made their own games the highest yielding ones, which is what made MAX a superior product…it was built with the publisher in mind being a mediation for its own scaled large content business. One of AppLovin's biggest games is called Wordscapes by PeopleFun, and it is the biggest word game in the market. Word is an ad-revenue driven vertical and if you want the biggest word game in the market, you need the highest yielding mediation solution. That's why AppLovin's MAX beats others."

Although advertisers acquire users across many channels, the complexity of integrating with a mediation platform means most mobile apps only use one mediation service.

This leads to Foroughi's third bold strategic move: APP’s $1bn acquisition of MoPub from Twitter last year.

MoPub is the largest mediation platform globally with over 45,000 mobile apps using its software to monetise their inventory. AppLovin is unifying MoPub with MAX to become the leading in-app advertising platform with access to 70%+ of in-app advertising bids globally. With the continued shift of eyeballs to mobile, APP now owns one of the most important touchpoints with consumers in the world.

The MoPub acquisition is highly strategic for two reasons: publishers will see more competition for each ad impression and advertisers will get access to more inventory to drive higher ROAS. This quote from our interview highlights the strategic value of MoPub:

"[Mediation] is an integral piece to AppLovin's business. With the on boarding of MoPub to MAX, AppLovin will have visibility on the vast majority of bids in the in-app ads market. That removes all supply constraints from an ad network point of view and allows them to compete on everything. The stronger their ad network becomes, the more demand they have, and the more they can execute on building out their demand side."

There also seems to be an opportunity for APP to earn higher take rates on MoPub than Twitter ever realised:

"Twitter's network take rate on share of voice in MoPub was in the low single digits, which speaks for the strength of its ad product. They are not known to have a strong performance advertising product, whereas AppLovin is a performance advertising company at its core, and has a take rate many multiples higher than Twitter's. Adding that inventory to AppLovin will generate a lot more cash for the owner than Twitter has."

The MoPub acquisition builds the foundation for APP to expand into the non-gaming market. MoPub’s exchange has access to 130 DSP’s representing thousands of brands looking to advertise on mobile. These non-gaming advertisers will now be able to leverage APP’s unique 1P data set to bid on mobile inventory in real-time.

In the Q4 21 earnings update, Adam explains how APP’s 1P gaming data asset is powerful for non-gaming advertisers:

"When you know someone paid the $50 in Project Makeover, you know a lot of things about them. And one of those things you know for certain, just conceptually, we know this human being, that person doesn't only play Project Makeover 24 hours a day. They do a lot of other things. If they've got $200 a month to spend in a fashion design game, they're probably spending a lot of money on fashion, e-commerce apps, food delivery apps, rideshare apps, a whole bunch of other things that heads of households tend to invest in."

The 1P data fuels the APP machine. AppLovin has first-party data ownership of ~200m MAU’s and third-party access to 2bn+ users across the whole network.

Over the last few quarters, APP CEO has reiterated the power of 1P data to fuel the growth in software platform revenue, which includes both AppDiscovery and mediation. Here is Foroughi during the last earnings call:

"the games business may grow, it may not grow. It doesn't matter because it's scaled enough where it's fueling the massive growth in the software business. And so you sort of have today, 10% actual data, what we have perfect data on our own apps, and then 90% is predicted lookalikes. Being at a scale that we're at today with the technologies and data platform and machine learning and algorithms that we've built, you're obviously seeing a software platform that's growing much, much faster than any other platform in our industry. And so you can tell that a 10x ratio of lookalikes to actual [1P] data works. "

With 200m MAU’s, APP has enough scale in 1P data to build effective lookalike audiences. As long as APP can maintain ~200m MAU’s, it seems that acquiring more 1P inventory is not required. So focusing on APP’s 5% 2022 revenue growth guide for 1P could be misleading. The real driver of earning power is the software revenue which is reported net of the publisher take rate and has over 70% incremental margins.

Last quarter, APP increased the software revenue guide to $2bn in 2023 which is ~30% above the Street estimate. Underneath the moving pieces, APP owns one the fastest growing publicly listed ad networks globally. And this software revenue has a moat derived from a combination of 1P data and access to the majority of in-app mobile ad bidding globally:

"Today the majority of ads go through the AppLovin pipes on Google Android and Apple iOS, giving AppLovin view on every bid, giving them perfect visibility. Combine that visibility with their data advantage, it becomes difficult for new entrants to the market to compete, but will also allow them to scale their business significantly in the next few years."

Having the most visibility into the bidding data reminds us of a comment by Jeff Green, CEO of The Trade Desk, in 2019:

“The buy-side is forever in the power position. I look at what today is 10 million QPS (queries per second), but on the sell-side, they look at a fragment of it. And so the data asymmetry between buy-side and sell-side is humongous and that creates a power position as it relates to price discovery for the buy-side. And especially as TV comes online, because people are protecting their content, there will be more fragmentation. We will have to do more integrations. That creates more barrier to entry and that creates more asymmetry between the buy-side and sell-side.”

The MoPub acquisition gives APP access to the majority of global in-app bidding which, when combined with 1P data, provides a strong advantage in the mobile advertising ecosystem. All of this has been architected by APP’s founder over the last decade.

Investing alongside an owner-operator who has proven to make multiple, bold strategic moves to cement the company’s position is certainly not a bad bet. However, the fact the whole mobile ecosystem is built on top of Apple and Google can pose an existential threat to the terminal value of all mobile advertising assets. AppLovin’s CEO seems to built a business that mitigates this risk.