Paying Attention to the Poor – Digital Advertising in Emerging Markets report

Today Caribou Digital releases a report, in partnership with the Mozilla Foundation, into what we consider a much neglected area.  We have seen phenomenal progress in the adoption of feature phones, smartphones and eventually internet services in emerging markets, and this has long been heralded as a boon to social and economic progress.  As adoption has grown and internet access reaches ever further to the unconnected, we have also seen a lot of innovation in new models of internet access delivery – the drones, balloons, white-space spectrum and satellite projects we profiled in our recent research into these innovations.  Fundamentally, though, the assumptions around what business models will support emerging market digital businesses have remained largely the same, and these markets have looked to the global giants of Silicon Valley for their underlying revenue streams.

This assumption that Silicon Valley business models will transfer seamlessly to emerging markets in Africa and South Asia has concerned us for some time.  These models often require vast scale to achieve the network effects and economies they require to turn a profit, and an audience at a certain level of income.  Our concern has been that we know that market scale exists in emerging markets, but we’ve not been sure that income levels support that scale.  Equally, we’re concerned that the global platforms these revenue models require are based in developed markets and are not fit for purpose in emerging markets–and if they are, will only be viable if provided by the global giants who can offset losses in developing markets with profits from developed countries, tilting the balance of power even more further in their favour and preventing local innovators from competing against them.

We initially investigated these digital economy revenue streams in our report last year with the Mozilla Foundation on the Winners and Losers in the Global App Economy.  In that report we showed that the billions of dollars flowing around the globe from app and in-app payments tend to wash up in a small number of largely developed markets, mainly the U.S.  We demonstrated through our analysis how difficult, or impossible, it was for a developer in a local app store without access to a developed-market bank account to even register for revenue sharing, let alone scale their app audience in the brutal Pareto’s principle-driven global app store market.  This prompted us to ask the question–if digital entrepreneurs can’t support themselves in emerging markets via app store income, can they at least subsidise their services via digital advertising?  This is the revenue stream that has driven Google and Facebook to being two of the largest companies in the world.  How viable is digital advertising in emerging markets as a business model to support digital services?

Our analysis highlights tremendous challenges facing digital businesses relying on advertising. First and most fundamentally, populations with low amounts of spending power are less valuable to advertisers, who simply won’t pay as much to reach them. We demonstrate this via a small study using Facebook’s advertising tool, where we showed the disparity of cost-per-click (CPC) rates between developed markets such as the U.S. ($0.77) and markets such as Nigeria ($0.04). At a macro-economic level, overall advertising spend is closely tied to a country’s economic activity (e.g., GDP), so while digital advertising is growing almost everywhere, it’s doing so by taking share from traditional media such as print. For many of the smaller economies, there’s simply not enough money flowing into advertising of any kind to support a thriving digital ad industry.

Just as importantly, digital advertising faces additional challenges due to the limits of how people experience the internet. Much of the population in emerging markets must contend with low-end devices, expensive data, and unreliable networks, which limit their ability to engage with digital content and services. These constraints make it more difficult for publishers and advertisers to reach audiences with cohesive and scalable digital campaigns.

To illustrate these challenges, we use Facebook’s advertising tool to conduct an analysis of the firm’s business worldwide. Our estimates highlight the dramatic differences in profitability across developed and emerging markets, and suggest that many of the latter are likely unprofitable. This is due to the lower rates that advertisers are willing to pay to reach these audiences, but also because hundreds of millions of Facebook users are using limited versions of the product (data-saving or zero-rated versions) and thus can’t be monetized at near the same rate as typical users.
We hope our analysis prompts other researchers and institutions to pay more attention to the fundamentals of digital advertising in emerging markets, and we see both more innovation in the market to discover what revenue streams can support digital services and also a critical engagement with the promise of advertising as a means to support services.  Firstly, a lot of the investment into internet access innovation in these markets is currently driven by Facebook and Google, and we have genuine concerns as to whether their advertising revenue streams can support the investment needed to connect the last few billion people on the planet to the internet.  The internet in emerging markets may look more like a transactional economy driven by fintech rather than an attention economy driven by advertising–which may mean looking East for viable, transferable business models, taking inspiration not from Silicon Valley but the likes of Tencent, Alibaba, and others who have a far higher proportion of transactional revenue driving their business models.
Also, if fintech products will be the driver of sustainability for internet services in emerging markets we need to ask how well those businesses can shoulder the burden.  In our current research into digital financial services, we see a lot of players aiming for zero-cost transactions in P2P markets, and an increasing credit bubble driven by new alternative data-driven lending models.  Future research from Caribou Digital will go into this in more detail to ask whether transactional revenues can carry the burden of sustainability for internet businesses.
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  1. […] markets in Africa and South Asia has concerned us for some time,” write the authors of the report Paying Attention To The Poor — Digital Advertising In Emerging Markets. “Equally, we’re concerned that the global platforms these revenue models require are based in […]

  2. […] internet only flourish in developed economies? Are the next billion destined to limited access? In Paying Attention to the Poor: Digital Advertising in Emerging Markets, new research by Caribou Digital and Mozilla, we explore the reasons why digital advertising […]

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