The ROI of iAds – A Lot of Unanswered Questions

Early last week I wrote a long-ish piece on the iAd – in which I both criticized and praised Apple for “re-gifting” a mobile ad format that already existed. Since then I’ve spoke with Apple’s head of corporate communications, as well as several other potential clients and agencies. I didn’t learn a lot from Apple, but I did get some context for this next installment.

Apple’s genius has always been in seeing the value of something that already exists, and taking that value to a new level (the Mac, after all, was inspired by Xerox’s work. And the iPhone? Anyone remember the Treo?).

But while we can be relatively certain that the iAd will be a quality experience, the great unknown remains return on investment: Will buying iAds be worth the price? As I write, marketers are evaluating Apple’s pitch and trying to determine if it’s worth the rather steep initial price of entry. Many have already jumped in. But others are still questioning the investment.

My conclusion? If you’re an ROI driven marketer that craves certainty and are relatively risk averse, stay away. There are more unknowns than knowns in this program, at least for now. We will know a lot more in two weeks, when Apple convenes its developers’ conference, but by then, it’ll be too late to join the launch party.

However, if you’re already a savvy mobile marketer who likes to spend into innovation, or if you have inclinations that lead you to purchase a Superbowl ad, then the iAd is quite possibly tailor made for you.

Here’s what we do know about the iAd:

* Apple is in market selling iAd launch packages for $1mm or more, depending on exclusivity terms. However, several clients I spoke with claim to have gotten into the launch for the “low hundreds of thousands of dollars.”

* Apple will charge one cent per impression (a $10 CPM) and $2 per click. These charges will back into the minimums described above for the launch program.

* The iAd unit is a banner which brings a user into a rich media webview. This is not a new format, but given the iAd is exclusively this format and will be identified to consumers as an iAd, it does claim the high ground.

* At launch, Apple will execute all creative, with client oversight and approval. This will change over time.

Assuming a 1% clickthrough rate (which is a reasonable expectation, given the iAd’s relative novelty and industry standards which can range as high as 2%), the iAd will drive a “cost per engagement” of $3 – two bucks for the click, and one buck for the 100 impressions, one of which drives that click. That’s a $50 CPM, comparable to what high end premium publishers charge on the web or in television.

So is that engagement worth $3? Depends on what you do with it, of course. Compared to search, where cost per clicks range from five cents to $25 or more, it’s all relative to what you are trying to accomplish with the attention you’ve just paid to capture. Of course, with search, the market is mature and lead conversion is a science. A search click can convert directly to a sale, and often does. So is an iAd worth the same?

We’ll get to that. But first…let’s talk about what we don’tknow about the iAd.

Here’s that list:

* The exact data Apple is using to target. Sources tell me Apple has told them many things about which iTunes store data is used in its “targeted special sauce,” but the consensus is that Apple is using the list of apps a person has downloaded to create cohorts – IE, folks who download business applications, or lifestyle (Food, Shelter, Health and Beauty, etc.).

* Whether and how Apple consumers have been made aware of that data use. Privacy is a rather big issue at the moment, as we’ve learned from Facebook. I’ve pored through the iTunes Terms of Service, as well as Apple’s privacy policy, and I can’t quite figure out if it covers this data use as is. If it does, I doubt consumers are aware they are being targeted. This is a potential issue for marketers, who don’t want to be caught up in another privacy tempest. (I’ve asked Apple about this, but so far no response.)

* What inventory will be available, and on what terms. I’ve heard conflicting stories about whether iAds will be directed (IE you can select which app your ad runs on) or if it will be a blind network (where you can’t). The consensus is that it will not be directed, at least not at launch. This is a very key point, given the next unknown:

* What publishers will be in the iAd network. Are they the same ones that currently run Quattro ads (Apple bought Quattro, for those just catching up.) This is a crucial question for app makers, especially premium publishers like the NYT or Conde Nast, who plan to sell their own app inventory directly. If Apple’s targeting gets too close to promising marketers that their ads can run on premium publishers’ sites (for example, if the “food” cohort insures that an advertiser runs on Conde Nast’s Epicurious app), then publishers like Conde Nast will most likely pull all their inventory from iAd. Which begs the next question:

* Will Apple have enough (of the right kind of) inventory. And what is the makeup of that inventory? Can that inventory satisfy marketers’ targeting needs? With a $3 CPE, savvy marketers are going to want very specific inventory. If I’m a consumer packaged goods giant trying to create brand preference for a particular brand of detergent, I’m probably going to want my message in front of women of a certain age and certain household income, ideally women who can be tagged as the “CHO” – Chief Household Officer. If I’m marketing a movie aimed at kids, I’ll want kids and their parents who match the movie’s ideal audience. Will Apple be able to offer enough inventory that delivers ROI on these audience cohorts?

* What is the right creative given the constraints of mobile devices? While Jobs showed some pretty cool executions, the truth is that those executions are still unproven (even though they’ve been available well before Apple gift wrapped them.) There’s still a lot to learn about what works, and in what context.

* How long exclusivity will last. Apple is selling iAds as category exclusive for a short period of time, but the company seems willing to let some marketers buy longer exclusivity based on investment levels. However, my sources seem to find a consensus around a period of six weeks to two months. By early Fall, I’m told, all bets are off for exclusive deals. Which begs the question – if you can buy iAds in the Fall, why get into large commitments up front?

* Will the FTC train its sights on Apple? While the buzz is about the government’s decision to approve the Google/AdMob deal, Apple may well gain the FTC’s attention should the company slip up on privacy (see above) or make moves that effectively (or directly) eliminate third party advertising networks on Apple devices. Hence:

* Will Apple eliminate third party advertising networks on its devices? I’ve heard all manner of thinking on this issue. It’d be very Apple-like to entirely control the advertising ecosystem on i-devices – much as Comcast does on its networks, or Conde Nast does in its magazines, for instance. But as I’ve argued elsewhere, that’s not very “web-like” – and it raises questions of whether or not Apple has a responsibility, with its own devices, to allow third party ecosystems to thrive (as they currently do). Were Apple to cut off third parties, Apple would be entirely responsible for driving advertising revenue to its app developers. Should it fail to do so, it could really screw the pooch. Not to mention that the lack of third party ad networks like AdMob would limit marketers’ choice and retard innovation.

Recent policy changes from Apple have raised strong speculation that the company plans to kick third parties out. Apple has not responded to my questions on this topic, though I do expect it will address this issue at its developers conference. My own take: I don’t believe Apple will do this, but then again, it’s not out of the realm of the possible. I am certain of one thing: If Jobs had his way, all the other networks would already be gone. Jobs may well use the privacy argument to accomplish that goal – “We’re not sending your data to third party networks so as to protect you.” In the current environment, such an argument could well fly.

Now, to the punchline: Is the iAd worth it, given all we do and do not know about it?

If you’re comparing apples to apples, I’d have to say the answer is no. (We’ll get to the apples to Apple comparison in a minute).

Remember, my estimated CPE is $3 for an iAd. The fact is, you can get a click which drives to an identical rich media engagement on a network like AdMob or Greystripe for up to five times less cost, on average (these figures have been provided to me by those companies). In other words, it’s a lot cheaper to experiment in other ad networks, and they won’t ask for a six- to seven-figure minimum commitment to do so.

On the other hand, $3 is, as one agency chief told me, “an entirely reasonable price to pay” for a quality engagement with the right audience. “We pay similar CPMs on television, and don’t get any engagement,” this person argued. If iAds is truly a premium environment, with premium audience and premium creative that drives premium engagement (and therefore, creates brand preference and/or conversion), the price is entirely reasonable. That’s the apples to Apple comparison – you can spend a lot less, but you’re not going to get the Apple magic.

To me, the question comes down to the long list of unknowns when it comes to that magic. So far, marketers don’t know much, if anything, about the targeting, inventory, or creative that will pay off those premiums. That’s an awful lot of unknowns to be writing seven figure checks against.

My recommendation? If you’re already a confident mobile marketer who is familiar with rich media creative and have a strong sense of the inventory you want, and a strong guarantee from Apple you’re going to get it, jumping into the iAd pool right now most likely makes sense. If you’re not in that camp, I’d wait till the Fall, and start experimenting now on other networks, while they can still offer you strong reach into Apple devices. One never knows how long that might last.