Native Advertising: No Longer Taboo

Considered taboo just a few years ago, native advertising has become commonplace and a tremendous source of profit for Facebook Inc (NASDAQ:FB), Yahoo! (NASDAQ:YHOO), and smaller native advertising companies like Izea Inc (OTC:IZEA). "Native ads are hot right now and it's easy to see why," says Yahoo!, which is trying to christen 2015 The Year of the Native Ad. The native ad industry has doubled in two years to approximately $4.3 billion as of 2014.

Yahoo! reports that "more than 60% of consumers have a favorable view of native ads." According to its 2015 survey, 79% of its marketers were planning to buy native ads in 2015. OPA and Sharethrough report that native mobile ads drive 500% higher click through rates than mobile banner ads and are viewed 53% more frequently by consumers.

It might surprise readers to learn that the chief revenue officer at Forbes, Mark Howard, has publicly stated that Forbes' native ads (sponsored articles) reach a comparable number of readers as unsponsored articles. "There's no statistically significant difference," Howard said. "The social Web is a meritocracy," he continued, implying that readers rarely care if what they're reading is sponsored or unsponsored by a brand.

According to the most comprehensive native advertising study to date, IZEA and Halverson Group's The 2014 State of Sponsored Social Study, native ads are currently the most effective type of advertising versus TV, radio, magazine, newspaper and online display ads. (Native ads rank 7.2 on a 10pt scale, versus 4.78 to 6.54 for the other formats.) They study found that a majority of U.S. marketers now have dedicated budgets for buying native ads.

Far from taboo, native ads are multiplying every few years. A study by eMarketer estimates US native ad spending will exceed $5 billion by 2017- twice the amount spent in 2013 and triple the amount spent in 2012. Yahoo! is more optimistic, citing another study by Kelsey claiming that the native ad industry will be worth $9 billion by 2018.

Angel investor Jason Calacanis notes how history has repeated itself, "Native Advertising was Custom Publishing in the 90s and Sponsored Programs in the 50s." Interactive Advertising Bureau's Peter Minnium agrees, "Content advertising is not a fad. It's actually a core part of the maturation of digital advertising."

Yahoo! has bet heavily on native ads, openly admitting that they are much more effective than conventional display ads. Yahoo!'s platform, Gemini, offers both mobile search and in-stream native ads. Mayer noted that Yahoo!'s mobile advertising business now ranks third in the world as of Q1 2015. Yahoo! acquired an innovative mobile ad delivery platform, BrightRool, in December 2014.

Facebook recently reported that its mobile ad revenue, including native ads, doubled from within the past 12 months to $2 billion. This growth allowed the company to beat analysts' Q4 2014 estimates, reporting $0.54 per share in profit on $3.85 billion in revenue. By 2017, one-third of the global population will use smartphones. BizReport claims 64% of smartphone users have made a mobile purchase after seeing a mobile ad.

Some of Facebook's native ads are autoplay videos. RBC estimates that Facebook will sell $700 million worth of autoplay native video ads in 2015 alone.

The New York Times has a native ad platform, Paid Posts, which has grown by at least double-digit rates every quarter since inception. It generated approximately $18 million from native ad sales in 2014.

The Need to Reach Billions

The growth of native ads is unassailable, yet one of the remaining difficulties with native ads is reaching scale. It has been historically difficult to buy billions of ad impressions through handwritten blog posts or personal photos. Big advertisers are accustomed to mega-marketplaces like Adwords; they have struggled purchasing similar quantities of native ads.

A study by The 614 Group affirmed that 52% of marketers say that reaching scale is their "No. 1 job" as native advertisers, despite 69% of all marketers believing that native advertising is more cost effective than other ad types.

One of the solutions to this problem is IZEAx, a platform for purchasing large quantities of native ads. IZEAx boasts 243,000 registered users who have a combined fan and follower base of 2.3 billion people, or 1/3 of the world. Currently one of the world's largest native advertising platforms, IZEAx has inferior scale to only the native ad platforms within mega-social networks like Facebook.

"In order for this space to grow, we need to make it easier for brands and their agencies to buy social sponsorships efficiently and at scale," says CEO Ted Murphy. IZEAx has increased revenue substantially every quarter since inception. Murphy projects 177% bookings growth for IZEA in 2015 alone.

Other native ad networks are siloed within individual social networks, such as Yahoo!'s Gemini, Facebook's Boost, the Times' Paid Posts, and Twitter's MoPub.

Overall, Yahoo! seems to be on trend with its "Year of the Native Ad" mentality this year. If 2014's native ad industry of $4.3 billion grows anything close to $9 billion by 2018 as Yahoo! expects, all of these companies will have plenty of positive shareholder reports along the way.