vungle-vidVungle CEO and co-founder Zain Jaffer recently became a father. Watching young kids try and touch a static screen, or swipe at a newspaper, it hit him repeatedly just how drastically the relationship between young consumers and content has changed. But for how interactive and entrenched in multimedia that relationship is, online advertising is still largely a static medium.

Jaffer’s company has been putting video ads inside apps since 2011, focusing its business until now on running short 15-second app trailers inside other apps. It has grown quickly in three years, coming to serve 1 billion ad impressions each month inside 5,000 apps.

Today, Vungle is taking this a step further and launching its own mobile app video ad exchange, where brands can run 15-second videos inside mobile apps.

The logic behind the ad exchange is flawless. It creates an infinitely bigger playing field for Vungle to operate from. From a business standpoint, the problem with app install ads has always been that Vungle only makes money when someone chooses to download an app, Jaffer says. It may serve up to 1 billion ads, but can only cash in on a small percentage of those. By selling brand ads, it makes money off every impression it delivers.

To launch this, there were two challenges: First, Vungle needed the infrastructure to deliver video ads, which it has been building up for years. Second, video ads on mobile are generally bad, so the company had to work extensively on making the experience of watching them less terrible, Jaffer says. It has several pending patents for new technology it has developed for this. Videos need to have high resolution and be able to work on all of the different mobile screens we use. They need to be able to load quickly and Vungle has developed a method where ads will download in the background of a game, before you view them. They’ve put brand safety controls in place, so the right ads go into the right apps and they’ve standardized the format for how mobile ads can be traded.

The opportunity is huge for Vungle’s new ad exchange, but the fight ahead could be intense. The market for TV advertising is $74 billion in the United States, according to Nielsen. Worldwide, Jaffer says that the market is worth $200 billion. For online video, it is just $5 billion.  And TV remains dominant even if our relationship to the content we watched has changed irrevocably. It is a lucrative space for online advertisers to chip away at. But here, Vungle is setting itself up to swim with sharks. Facebook has News Feed videos now and is setting up an ad network to sell ads based on its data inside other apps. Instagram has video functions now, and Twitter is also looking to support timeline videos.

For Vungle, three years of history and $25.5 million in investment is a good start. But as it sets out on this new exchange, it is going to have to hold its own against vastly more powerful competition. Its competitors can offer to sell video ads too, using big pools of user data to minutely target relevant customers inside apps that hundreds of millions of people use compulsively.

Jaffer, naturally, thinks there is a bright side to this. “What we are doing is being validated. When we started people would say, why are you focusing on apps? Why are you focusing on video? That was frustrating. Now people are realizing the potential here,” he says.

Facebook is doing Vungle a favor, Jaffer claims. The market for mobile video ads is in its infancy and the more Facebook is out there selling 15-second video ads, the more it educates the market for them. Vungle is live in 5,000 apps, but it can’t get to everyone, he says.

“Then there’s just the fact that Facebook is a great company, but we’ve been around, we understand the challenges of video and we’re laser focused on it. Publishers come to us and say that we want what Facebook is offering, but you guys understand how that really works with video,” Jaffer says.

Jaffer comes from the line of thinking that apps have the potential to be bigger than the Internet. With the video ad exchange, he sees Vungle as setting itself up in a neighborhood where house prices are only going to keep rising. “You have the potential be delivering ads in apps on Roku, Xbox. What we’re trying to do here is profound,” he says. The only problem is that to really cash in long-term, Vungle will have to hold the line against some deep pockets.

[illustration by Brad Jonas for Pando]