Facebook and Zynga's thumbs in the mobile dike

Buying into the mobile opportunity vs dominating it; No one has emerged but someone will

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If you ever watch a teenager, or anyone under 30 years old, watching television, you've witnessed the uniqueness of mobile devices. Most likely, the TV is elevator music in the background while the main entertainment is in their hands.

It is why mobile lives in a stratum of its own - somewhere between TV and the PC. And, it is why mobile talent is in demand.

Inside of a month, two major mobile acquisitions were made. Facebook this week bought Instagram for $1 billion and Zynga acquired OMGPOP for $200 million. While the moves give the two social giants inroads into mobile, one can't help but ask: Are both companies just merely putting their thumbs in the massive mobile dike?

Clearly, mobile is one of the biggest opportunities ahead of us. In my experience, however, with each new opportunity emerges a new leader. 

The fact that the companies paid dearly for incredibly young upstarts underscores the fear they must have about the ability of these start-ups to grow exponentially, unleashing a torrent of destruction upon mobile competitors along the way. That a product run by 13 people could be worth $1 billion is as amazing as it is replicable. Just imagine what 15 people could do. 

Given just a small window of time alone, these upstarts could have become formidable threats.  After all, Zynga redefined gaming after having been just founded four years ago. Its market cap is $8.35 billion, more than 50% higher than the $5.4 billion market cap of Electronic Arts, once the leading gaming company. 

Yes. I know. Mobile has been an "around-the-corner" opportunity for more than a decade. But now the market is starting to finally take shape and it's doing so at an unprecedented rate.

Mobile adoption unprecedented 

Consider, it took radio 38 years to reach 50 million users, TV 13 years, cable 10 years and five years for the Internet, according to a Morgan Stanley report from June 1999. Mobile adoption rates for single products have dropped down to a couple years. 

It took Apple's iPhone iPad (arguably the first true tablet) seven quarters to surpass 50 million sold, according to Shaw Wu, at Stern Agee Group. 

From a penetration standpoint, about half of American adults now own smartphones. In the US, the number of Americans who own a smartphone stands at 46%, according to a March Pew Research report, and 49% if you look at a Nielson report. As for tablets, they're also rising in penetration. In January, Pew found that tablets went mainstream as nearly 20% of American adults started using some form of tablet.

Moreover, the time spent on mobile is rising as people are spending more than an hour a day on their mobile devices (though this sounds pretty low), which is more than people spend reading magazines and newspapers, but less than time spent listening to radio, on the computer and watching TV.

Additionally, nearly nine out of 10 tablet and smartphone owners say they are on their devices while watching TV.

And yet despite the ubiquity of it all, we're just at the nascent stages of monetization.

At the moment, there are an estimated 835 million smartphone subscribers in 2011, only 14% of the 5.6 billion phone subscribers around the world, meaning the market opportunity is still significant, 
according to Kleiner Perkins’ Mary Meeker.  And, advertising on mobile, while growing quickly, is still small. The U.S. mobile advertising market, driven in large part by tablets and smartphones, is estimated to reach $2.6 billion in 2012, up 80% from last year. The market was $769 million in 2010, according to eMarketer.  This means, mobile advertising is about where online advertising was back in 1999.

All this to say that the mobile market is ripe for innovation. So, it's no wonder both Zynga and Facebook are doing what they can to stay ahead of the curve, especially now that Zynga is public and Facebook's IPO is teed up for May. Just a whiff of hyper-growth could add billions to their market valuations, as public shareholders have an insatiable appetite for future earnings, and will pay up if they see it.  

Just take a look at how the public markets received the latest mobile offering. Millenial Media, a mobile advertising network, doubled in its March debut. 

Not surprisingly, there's a flurry of acquisitions, as companies seek to beef up their mobile talent. In March alone, there were 40 mergers and acquisitions, according to Rutberg & Co., including Facebook and Zynga's acquisitions, as well as SingTel's $321 million acquisition of Amobee, Amazon's $775 million cash acquisition of Kiva Systems, and Green Dot's $43 million cash acquisition of Loopt. Big Fish Games also snapped up Self Aware Games, the No. 1 grossing paid app on the iPad. 

In the same Rutberg report, it's noted that there was $340 million in new financings across 61 private mobile companies in one month alone. This highlights the number of new hopefuls vying to be the next Instagram or OMGPOP. 

We all know the majority of these companies won't be left standing in a few years, but it's not implausible for another to rapidly emerge to usurp the lead that these two companies were able to garner in a short amount of time. Consider, OMGPOP's Draw Something reached 50 million downloads in 50 days since its February inception, becoming the fastest selling game on iTunes. About a week prior to the Zynga aquisition announcement, the game had bumped Zynga off the top charts on Facebook games. Draw Something took the No. 1 position from Zynga's Words with Friends, according to AppData. What made Draw Something even more impressive was that its 10.8 million daily active users were on mobile, while Words with Friends' 8.6 million users came from both Web and mobile.

With adoption cycles collapsing, who's to say another upstart can't hit the same feat in less time? 

To be sure, OMGPOP did have many attempts under its belt. Since being founded in 2006, it had raised $16 million in venture backing, of which it used in its entirety to build mobile games, which ultimately never amounted to much, until Draw Something came to be. No doubt these experiences were not discounted in the buyout price.

Instagram is a relative newbie by comparison, having been founded in October 2010. At a mere 17 months old at its exit, Its value inflated by $58 million for each month it existed. 

The only acquisition that is even more impressive is YouTube's quick launch-to-exit story, which starts with the company's founding in February 2005, and sale to Google 21 monhts later for $1.65 billion. And, that acquisition turned out to work for Google as YouTube maintains its dominance as one of the leading video distribution platforms online. 

A different platform

But mobile is an entirely different animal than the Web. It's a different platform; a different screen; a different purpose; a different context; a different user interface; a different experience. This is what makes new markets, like mobile, exciting, alarming and scary. 

Sure, Facebook and Zynga will likely do well in maintaining some leadership role in mobile content and services. But will they, and can they dominate? Or is the leader of the mobile world still in elementary school?

I've seen these acquisitions before, where the old and new combine in attempt to become a major force in a new world. They rarely ever play out the way they're intended.

Remember when AOL bought Time Warner for $160 billion in 2000? It was to combine the online pipes (AOL's dial-up) with Time Warner's content. It sounded like a formidable force. The only problem is that we found out later that you can't just port offline content online. The Web is a different medium than TV and magazines. What we indulge in online today was not even a thought back then. And, of course having dial-up customers wasn't enough of a competitive advantage to be the on-ramp for all Internet usage. (Interesting tidbit: Time Warner's market cap today is $34 billion.)

In mid-2005, when MySpace was all the rage in the social networking world,it was scooped up by News Corp's nearly $600 million. But a social network is not a media company, in the traditional sense. A social network is an utility with many different attractions and purposes. You can't program a social network to work the way traditional media works.

There are countless examples of incumbents floundering when it comes to transforming themselves. 

When services and commerce transitioned to the Web, Netflix overtook Blockbuster and Amazon beat out Wal-Mart. Apple is leading in the new mobile era over Nokia, Motorola, Samsung and Sony, while Google has trumped Microsoft in the operating software game on mobile. The Huffington Post is helping to creative disruption of the traditional newspaper industry. 

It's the nature of innovation. The established almost never understand the complexities and nuances of the new platform. They also never look for newer, faster, cheaper ways to develop, build and deliver a product or service, thereby leaving always leaving the door wide open for upstarts.  

(image source: flickr, visual photos.com)