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Will social payment platforms really work long-term? (Guest post by Jay Weintraub)

My friend Jay Weintraub writes an amazing blog about the leadgen industry at JayWeintraub.com, which I’d recommend you check out. He also runs the LeadsCon conference series. Since Jay is such an expert in the leads space, I recently asked him to comment on the incentivized social offer platforms that have recently seen much success, and assess the pros and cons of the business. His thorough response is below! –Andrew

Conversionomics: Analyzing social cash/alternative payment platform market longevity
by Jay Weintraub

(Advanced/Ad industry readers: Scroll to “Conversion Economics” Section)

A Not So Brief Background
Every once in a while, the world of higher brow internet advertising concepts – social media, engagement, Web 2.0, etc. – intersect with the oft-perceived lower brow world of performance-based advertising. Calling performance-based advertising lower brow does some injustice to one of the more dynamic sectors, but this is the same sector that has figured out how to convince tens of thousands of users daily to sign-up for “free” trials of acai berry and colon cleanse products via the flog. It is also the same sector that despite the legal and regulatory hurdles (including millions in fines) thrown at it for its marketing of ringtones continues to generate well north of one million new cell phone pin submits (monetary transactions) monthly for other mobile subscription services. If it doesn’t seem intuitive that this almost anything goes wild west of arbitrage would intersect with the heavily funded world of higher brow online advertising, you’re not alone. It was purely accidental but perhaps not unexpected at some level, especially when we consider the underlying trend that tends to attract performance marketers – massive amounts of inventory that very few have a grasp on how to monetize. That description fits social media to a tee.

In the display world, surplus inventory tends to get lumped into the bucket of remnant ads. In this case, the surplus is only remnant because few outside of performance marketers have started to figure it out. The social media inventory being referenced here doesn’t include the MySpace login screen or other areas that a) have enough scale and b) have won over the trust of agencies. We are talking about inventory that to some doesn’t differ that differently from user generated content, application traffic. We could write a whole piece on how the dominant ad networks missed the boat on monetizing app banner traffic. Each app has made room for standard ad units, and taken together, resemble any other collection of publishers. The networks would even have greater data available for optimization but alas no cookies, on which most of their optimization platforms are reliant. Had these networks become the dominant players, we would still see the same result, though – a limited revenue stream for the app owner. None of which is new, especially to this audience. It does, however, set the stage for the unexpected rise of the more dominant player in app monetization, a group that taken together makes almost as much money monetizing app traffic as Facebook does monetizing their internally controlled impressions.

If we are honest with ourselves, it is fair to say that no one would have guessed just how lucrative monetizing app traffic would be. The data might now tell us this, but ask someone if they’d sign-up for Dish TV in order to earn points to dress their baby or buy their friend, and the rational person would say no. Sure, they might do some things in order to earn more points – send invites to their friends, come back daily, etc., but jump through enough hoops for a mob-themed fantasy game enough to earn its founders more than one million monthly? No one saw that coming. Plenty of companies are profiting from this discovery – be it app makers themselves like Zynga or especially the new breed of companies that enable this commerce, the alternative payment platforms which include the likes of OfferPal Media, Super Rewards, Peanut Labs, Gambit, etc. Only now are those not directly tied to this ecosystem starting to grasp the scale that some of the companies have reached (>$100mm annual run rates). They are profitable, enjoying hockey stick like growth curves and great valuations by the venture community. They are also, for the time being, indelibly tied to the performance-marketing space, as that is from where the vast majority of their ads come. Why? Because ultimately, the alternative payment platforms are a form of incentivized ads.

History Repeated?
Among almost all forms of performance-based online advertising, not many have enjoyed the fame and notoriety that incentivized marketing has. Its initial rise to prominence took place in a similar setting – a media recession with a surplus of untargeted inventory available. The incentive promotion ads, think “Free iPod” offers, did what other types of online advertising could not. They took someone who hasn’t expressed any intent about a product or service and turned them into customers for a variety of products and services. Those who mastered this made large sums of money, so much so that they can afford to purchase other companies with a better public image, e.g. Intreprid Investments buying Q Interactive. Those who mastered it even better, found themselves in the cross-hairs of the FTC. Distilled to its core, though, the incentive promotion companies operated on a simple principle – users want something, e.g., an iPod, and they will jump through hoops (complete offers) in order to get it. At that level, it doesn’t seem conceptually different than the alternative payment platforms. This newer generation of companies uses the same ads, the same tracking methodology; they just get their users through a different way – app traffic instead of banner/email/search traffic.

Given the boom and bust that the original innovators of incentivized marketing have undergone, the big question for many tracking the unexpected popularity of the real Incentivized Marketing 2.0 is what does the future hold in store for them. It is a topic that entrepreneur Niki Scevak, and the most widely quoted blogger (from Andrew’s blog to Venturebeat) for someone with supposedly fewer than 200 RSS readers, discussed in his fantastic post, “The Impending Doom of Facebook Apps.” At the heart of the issue – quality. The incentive promotion space gained a reputation for burning through advertisers due to its horrible quality. Users who signed up for offers didn’t really want the offer. They just wanted their now not so free good. And a whole cottage industry even sprung up on how to game the system to get your iPod or other electronic for as little real money as possible. Is the same fate to beset the alternative payment platform space? Says, Niki,

    “The consumer behavior has changed only subtly from five years ago: instead of completing a laundry list of offers to qualify for a $150-250 value product, each consumer is completing a small number of offers for a smaller economic value to be used in the game or application.
    But just like credit card companies and Netflix were happy to give the free ipod guys a shot, they are also happy to completely shut down the channel as well once it proves it doesn’t work. As the category of leads/customers grows, the more important it will be for more senior marketing folks to take a real look at the quality of leads provided through Facebook games and apps. And they’ll find the same result of quality they did back in 2004-5: a whole heap of shit.”

Types of Offers
Front and center in the ecosystem are the ads that these “Managed Offer Platform” companies (a term coined by Offerpal Media) run. At the end of the day, they pay the bills. In the world of online advertising, ads tend to fall along one of the following payment metrics – per thousand (CPM), per click (CPC), or per action (CPA). Those in the offer platform space focus on the last, per action. But, per action is a broad term encompassing the following subcategories – per sale (CPS) and per lead (CPL), the chief distinction being that the former requires data plus credit card whereas the latter requires just a user’s data. To confuse the situation further, we could create a whole new category of CPA ads based around subscription services (a form of cost per sale) – one that includes payment with credit cards, e.g., Netflix or the (potentially) more sinister free trials (acai berries for example.) This subscription category also includes services where the transaction occurs using the mobile phone (ringtones, quiz, crush).

In case you haven’t installed an app that uses one of the offer platforms, here are some sample ads that you would see. This example looks at ads as a user tries to earn Lunch Money, a virtual currency managed and tracked by alternative payment platform company OfferPal Media. You will see examples for per lead (auto insurance), mobile subscription (IQ Challenge), credit-card subscription (Netflix), per sale (Zone Alarm), and even one incentive promotion 1.0 offer (free laptop). Here there are:

Take the IQ Challenge!
Quiz Ad – Todays high score is 125. See if you can beat it? Compare your score to others in the IQ Challenge community!

No credit card needed to receive L$ within minutes.

L$ awarded after submission of a valid mobile number and PIN confirmation.

Price – 7.05

Netflix DVD Delivery Service – Free Trial & GET L$!
Try Netflix DVD home delivery for FREE and get some L$. No coupon codes allowed! If you use a coupon code, your L$ will not be awarded.

Purchase required to receive L$ within minutes.

L$ awarded upon registration for home DVD delivery. New members must order and receive initial movie order or L$ will be reversed.
Price – 15.00

Get Free Auto Insurance Quotes and easy L$!
Direct Insure Online offers exciting new insurance quotes fast, free and easy. Just fill out a simple form and get up to FIVE quotes which can help you save money on your Auto Insurance.

Free! No purchase required to receive L$ within minutes.

L$ awarded upon Complete insurance quote request. Fraudulent information will lead to expulsion from application.

Price – 3.78

Share your thoughts on Laptops, and get one for FREE!
Answer a short survey on laptops and receive one for FREE! Participation required.

Free! No purchase required to receive L$ within an hour.

L$ awarded after submission of a valid email address, personal information, and navigation to the final offers page where you must click on an offer.
Price – 3.00

Make your PC Safe and FASTThe Most Complete Internet Security. Need home protection for up to 3 PCs? Get the ZoneAlarm Internet Security Suite 3 User-Family Pack for just $10 more!

Purchase required to receive L$ within minutes.

L$ awarded when you buy now.
Price – 19.80

The “Price” reflects what the user earns as a result of their efforts. In this case, Lunch Money (L$) gets awarded in the millions, but we rounded down to the nearest million. And, for those who do not want earn their lunch money, they can purchase them. The rate is $9.99 per 100 million L$. It’s a data point that might not seem like a lot but provides us with a very important starting point for assessing quality.

Conversion Economics
In the world of performance-based advertising, the price per action correlates directly with quality. The higher the quality, the greater the payout. Let’s look at two examples, one from the lead generation world and one from the subscription world. In the lead generation space, e.g., auto insurance, the data purchased by a lead buyer has no real value to them. It only matters if the leads turn into policies. The greater the lead to policy ratio, the greater the value the buyer can and will pay for that lead. In the subscription world, the signup has some value, for users must enter valid credit card data, but more often than not, the advertiser must pay an initial bounty that exceeds what they earn from that initial charge. The longer the average user stays subscribed, the more the advertiser can afford to pay.

We can now at two examples from the subscription world that appeared as choices for the user wanting to earn their Lunch money – Netflix, which requires a credit card, and IQ Challenge, which requires a mobile subcriptions. Netflix pays the user 15mm L$. (As an aside, that L$ doesn’t have a corollary with real dollars is very wise.) That price is after the payment platform makes its money. In the default situation, this means a 50/50 split between the app owner and offer platform. Assuming that to be the case with Lunch Money apps, the rate to the platform is 30mm. But, what is 30mm L$ in actual dollars. One way to figure it out is to use the hard currency L$ ratio for a clue – $9.99 for 100mm L$. That implies the Netflix offer has a value of roughly 1/3 or $3.00. As a user, you’d be much better off paying $9.99 for 100mm L$ than converting on Netflix for 15mm where you will receive a charge of at least 9.95 on your credit card. The challenge with this math is that the dollar/point ratio doesn’t always give us a good sense for the actual economics. If anything it shows us the propensity for users to select an offer over paying hard dollars. If the system were truly aligned (ad dollars and offer dollars), the user would probably receive at least 100mm because Netflix pays Offerpal at least $20 for that user. At $20, the publisher receives $10, with $10 being roughly equaly to 100mm L$ according to the exchange rate. Right now, though, users don’t understand the offer economics the way someone in the performance marketing space would, so they wouldn’t naturally look to question the point spread.

The second example, mobile subscription offer IQ Challenge, pays 7mm L$. By knowing the market rates, we can back into a dollar per point value. In the affiliate space, this offer would pay between $6 and $10. Given this is incentive traffic we will assume the low end, $6 of which the publisher would see $3. The publisher received $3 and the user earns 7mm, showing an exchange rate of just greater than 2 to 1. It is still not commiserate with the 10 to 1 ratio when directly purchasing L$. But, it is enlightening when we use this price point to try and estimate what Netflix might pay. If the mobile offer pays $6 for for 7mm to the user, then Netflix could pay as little as $13 for 15mm to the user. The wrinkle in the analysis is that that many of the offers do not come direct from the advertiser.

Traffic Blend
Despite their growth, the jury is still out on the offer platform companies’ traffic quality. We know that they are better than the free iPod offers, but the $64,000(000) question is how much better. Is it Scenario A, where they are closer to the incentive promotion space or Scenario B where they are either somewhere in between, perhaps even closer to true intent than they are incentive promotion.

Scenario A:

Scenario B:

Regarding overall quality (and thus, viability), the jury is still out because, not surprisingly, the results are all over the map. There are specific examples from those praising it and those lambasting it. Adding to the confusion, not all advertisers who receive traffic from the platforms realize that they do. This does not mean deliberate deceit, especially on the part of the offer platforms. But, it doesn’t imply complete ignorance either. The CPA Networks (aggregators of CPA offers) that supply them the offers also don’t know the traffic quality yet either, so they hedge their bets. They make sure that the traffic from the “apps” (both the applications and the alternative payment platforms) doesn’t comprise too great a percentage of the total traffic to a given advertiser. That way if the traffic isn’t as good as they estimate, it won’t hurt their relationship with the advertiser. They do this too because many networks know their advertises wouldn’t necessarily give permission to run on the apps, so they take the ask forgiveness route. While it might seem better to operate on full transparency, there are some quirks which prevent a fully transparent system from being the best solution.

When we say the platforms aren’t completely ignorant, it is because they know they have more traffic for a given advertiser/campaign than a given cpa network gives them. As a result, for some campaigns, they end up getting the campaign from multiple providers. Unlike Trialpay, who largely doesn’t play in the app space, those in the app space still rely on third-party providers. That is to say that while they do have direct relationships, it’s not unrealistic to assume that more than 50% of their revenue still comes from third-party providers. Complicating matters further, the platforms might have Netflix (as an example) direct but also run it from a third-party company. This happens all too commonly in the performance marketing world where one company has a lower limit than what they can deliver and another a greater. Plenty of offline parallels exist for that, but whether it is a good or sustainable practice online remains to be seen.

I find it hard to believe that the quality could be entirely bad or that the traffic round-robin (taking ad from one network x%, same offer from another y%) that effective to cover truly bad quality. Another option is that it could be that bad, and that there is enough overall budget spread among networks to cover-up the quality here. Again, with an industry contributing north of $200mm per year among what is ultimately a narrow set of advertisers, the cover-up doesn’t explain things fully. Is it bad but too small to get noticed? Good and built on a solid foundation? Good but still up-in-the air (because of this segment’s youth and the continuity advertisers receiving the traffic having multi-month periods for determining quality)? I’d say somewhere between the last two points.

Standing Hypothesis
First, the bad news. Pricing will probably go down. The “app” ecosystem makes more than it probably should on per unit basis. The good news is that the traffic quality in my opinion more closely resembles Scenario B than Scenario A. In other words, I do not foresee the impending doom of Facebook apps or the companies that help them monetize the traffic. The not so eloquent answer as to why they won’t die comes from the world the world they mirror at some level – the good ol’ incentive promotion space. It is an industry that just won’t die, and it continues to morph as the audience and traffic sources change. If it can survive, how is it that the offer platforms, with their much higher intent, would not? Assuming you want a real answer and not an “if they can so can you” response, here are two other reasons:

  1. One to one – while app users are still participating in offers in order to earn soft-money, which by its definition is not only incentivized but also lower intent than a consumer choosing to seek out the service, there is a big difference between how users engage with these offers versus those that are part of the free iPod offers. Users engaging in the app process pick a specific offer from a list of offers. While still somewhat limited, it is still a choice. In addition, users aren’t being asked to jump through major hoops. Contrast that with the free iPod approach where much of the disconnect comes from users being funneled through a flow in which they see more than a hundred opt-ins, none of which actually help them achieve their end goal. Plus, once they finally get to the final page, instead of being a simple process, it is quite cumbersome (number of offers, additional people, etc.) and designed for breakage. They make more if you don’t finish; not so with the offer platforms. They only make money if you do complete it.
  2. Accountability – in the incentive promotion space, users enter skeptically and/or with false expectations. Additionally, the incentive promotion path doesn’t have a connection nor does it really try to build a connection with its usres. The exact opposite is the case in the app environment. The user has a vested interest in the app. It is tied to their personality, their profile. The action that they take or don’t take reflects directly on them. Want to cheat the system? You will get caught. But, that is not always a strong detterent because people don’t realize that. So, the offer platforms have become very explicit and obvious regarding the requirements for credit. Take Netflix for example, “Purchase required to receive L$ within minutes.L$ awarded upon registration for home DVD delivery. New members must order and receive initial movie order or L$ will be reversed.” Very clear. So too is the one for Zone Alarm, “Purchase required to receive L$ within minutes. L$ awarded when you buy now.” Perhaps my favorite are seeing the incentive promotion guys’ language, “Free! No purchase required to receive L$ within an hour. L$ awarded after submission of a valid email address, personal information, and navigation to the final offers page where you must click on an offer.” Good luck. Where things get tricky is with lead generation (my area of specific focus). Here, the users have a better chance at gaming the system, and it partially explains why few true lead generation offers exist. The one from above, has the following disclaimer, “Free! No purchase required to receive L$ within minutes. L$ awarded upon Complete insurance quote request. Fraudulent information will lead to expulsion from application.” But, no matter how strict the language, it doesn’t require much sophistication for valid look fraudulent data to be entered.


Saving Grace
Whether the current model employed by the alternative payment platforms stays this course almost doesn’t matter. At some point, it’s expected that users should wise-up and realize that they can play better games for free elsewhere. Not all will, but the enthusiasm and take rates we see now won’t hold. But again, that won’t impact the longevity or long-run success of these payment platforms. App developers and offer platformas can help slow any decline by not being – creating a balance between what they ask users to do with what the users get in return. One could argue that users must do a little too much, and that relatively speaking, they get so little in return. Convering on two higher value offers would get a person a full game on XBox 360, but luckily for this ecosystem, users aren’t rational and thinking about alternatives when in the midst of impulse and ego driven actions.

Ultimately, the platforms have an incredibly valuable asset that assures them a role in the barely developed world of social media monetization – access. They own prime real estate, and if there is one thing that the ad networks have shown, it truly is location, location, location. It is why an ad network with poor tech but great inventory will outperform one with amazing optimization but lesser traffic. Whether they intended to be or not, as opposed to the banner ad networks that work with app publishers, the offer platforms are the real gate keepers, and they can transform themselves much the way the old incentive guys have as the traffic and advertise base changes. And luckily for the platforms, they will have no shortage of mediums with which to play – social media, iPhone today, game consoles tomorrow. While intent may still always be questioned, their relevancy will not be.

About the author: Jay Weintraub works in and writes about the performance-marketing ad ecosystem. He runs the largest conference servicing the online customer acquisition industry – LeadsCon. His next event, LeadsCon East takes place August 17 – 18, 2009 in New York City at the Marriott Marquis Times Square. You can also find a collection of his writings on his personal blog, JayWeintraub.com.

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