Why did Applovin buy Adjust?

Yesterday, Applovin, the mobile ad platform and games publisher that is rumored to be going public in 2021, announced that it has acquired Adjust, the Berlin-based mobile advertising attribution company. Terms of the deal were not disclosed, although I have been told by a number of people that the cash price was substantially less than the $1BN amount that is being circulated. Note that Adjust raised $227MM in June 2019 — just one year before Apple introduced ATT at WWDC 2020 — and has raised a total of $250MM to date.

On New Year’s Eve 2019, in response to an open invitation for 2020 prognostications, I predicted that Applovin would buy an attribution provider with the goal of becoming a self-attributing network. My thought at the time was that Applovin, with its ad network and ever-growing games portfolio yoked to an attribution mechanism, might command enough clout to demand that advertisers allow it to attribute the installs it delivers to them. The role of attribution in the mobile ecosystem has changed enormously since then, of course.

Attribution companies sit squarely at the center of the blast radius of the impending ATT privacy policy changes being implemented by Apple. These companies will see their iOS attribution businesses wither over the course of 2021, and Android may not be far behind. In IDFA deprecation: winners and losers, I assessed the damage to attribution companies (“MMPs,” or mobile measurement partners, as they are called in industry parlance) as “Extreme” across three dimensions.

Given the deteriorating market conditions for attribution companies, why would Applovin buy Adjust?

I have three, non-mutually exclusive theories.

Financial Engineering

Adjust has significant revenues, and while its growth trajectory has changed dramatically since ATT was announced, many of its customers are locked into lengthy contracts and will still require attribution services for their Android traffic for the foreseeable future. In buying Adjust, Applovin has likely acquired ARR currently near $150MM ahead of its IPO. This purchase may simply be a case of financial engineering: Adjust’s SaaS revenue likely generates an advantageous valuation multiple for Applovin, which is on a growth trajectory.

Applovin appointed a former KKR financier to become its CFO and President back in 2019, and so Applovin has the internal transaction experience required to successfully execute these kinds of deals, as with its recent acquisition of MZ. At an attractive-enough price, Applovin could have generated nearly-immediate accretive value from its acquisition of Adjust on a time-adjusted basis, given its impending IPO.

Building an App Ecosystem

It’s important to recognize that Applovin is really two companies: a games publisher and an ad network. As I described in Ad tech companies will become gaming companies in 2021, gaming companies will be driven to internalize core advertising technology as ATT is rolled out because efficient portfolio management — portfolio retention and cross-promotion, yield management, and re-engagement — will become a competitive advantage as user acquisition becomes much less efficient.

Applovin the games publisher is certainly served by having an ad network and attribution system at its disposal for the purposes of strategic cross-promotion. Applovin’s games portfolio — its subsidiary studios as well as those in which it merely is an investor — is a large and diverse mix of genres, styles, and monetization depths.

While the IDFV may provide publishers with some ability to run cross-promotion between apps, as the IDFV can be used as a means of validating installs when a user has been cross-promoted from one app to another, a fully-owned, proprietary attribution stack is even more valuable for that purpose.

This use case has nothing to do with Applovin the ad network: if Applovin’s owned-and-operated properties store data in a proprietary data warehouse, and Applovin’s wholly-owned Adjust property has access to that data, and that data is only used for serving ads within Applovin’s first-party ecosystem of games, then it seems unlikely that Applovin would be prevented from using Adjust to probabilistically attribute users when cross-promoting them between apps. This would also obviate the need for Applovin to publish all of its apps from within the same App Store account, as is required to utilize the IDFV as a unified identifier.

Note that Apple has been incredibly explicit about the fact that fingerprinting contravenes ATT policy. But as was pointed out in Fingerprinting with iOS 14: Reality or delusion?, Adjust’s position is that fingerprinting used for “probabilistic matching” is ATT compliant. And if this “probabilistic matching” is done entirely within the context of a first-party ecosystem for cross-promotion, and it’s all managed completely within one data environment with no third-party interloping or involvement of third-party SDKs, it’s not unreasonable to assume that this approach could escape Apple’s wrath. Or simply be undetectable.

Note that I don’t believe that fingerprinting is a viable strategy for advertisers to use in attributing installs from third-party sources in the post-ATT environment. But what’s described here is different: it’s Applovin using a proprietary platform for attributing installs from one first-party product to another.

Conversion Value Management

Adjust has stated that it plans to remain independent from Applovin in the wake of its acquisition. And as all MMPs transition their iOS offerings to data administration concerning SKAdNetwork conversion_value management (mapping events, firing the conversion_value, etc.), they’ll all have centralized datasets detailing which networks, and which source apps, drive conversions for their clients.

Adjust is no exception. And while some game publishers may not appreciate that their attribution solution is owned by a competitor (Applovin), the switching cost of moving to a new attribution provider is quite high. Applovin will have full visibility into which games are driving conversions for Adjust’s customers, and may be able to use that information to benefit the advertising campaigns for its own games.

It’s possible that the last two hypotheses are unworkable or unrealistic and that Applovin’s motivation in acquiring Adjust is merely anchored to valuation math. But if Applovin could pull off the construction of a fully-functional app ecosystem by layering content atop an ad network and conjoining its properties via attribution, it could unlock a tremendous amount of value.