Mobile advertising - where is the money?

Mobile advertising is a hot space right now. Google are in the process of buying AdMob with a valuation of $750m - for AdMob revenue are in the $50m-$100m range - so at the mid point that's around 10x earnings. A great exit for the founders of AdMob. At the same time Apple is buying Quattro Wireless for around $275m, for a company with between $20m and $30m revenue.

These numbers make for very impressive VC returns, and are a credit to all those involved in AdMob and Quattro Wireless, and clearly indicate a belief within Apple and Google that mobile advertising is going to be a big revenue source in the future.

So we should be able to easily find examples of mobile advertising that work well for companies and brands - after all there must be many.

Sat in London, where there is a major media market, many advertising agencies, and we have great mobile networks and great consumer adoption of high end mobile phones you'd expect that I'd be able to point to many examples of success. Luckily I can think of one example - Flirtomatic a mobile flirting site. Now Flirtomatic may not be a major brand that you have heard of - but they are successful in driving traffic to their mobile site, and converting customers into paying users of the service.

What about other major brands? ITV, Sky, Tesco, Nescafe, Vodafone, Nokia? Remarkable by the absence of success stories there. Yet this is in a market where we are growing to over 50% of consumers will be buying smartphone devices this year.

So what's wrong? Simple experiments demonstrate the problem. Even within a contained ecosystem (the iPhone) advertising does not prove a very cost effective way of driving traffic. Estimates based on my experience are that the cost per download of a free application is around £6 ($9) per download, and the cost per download for a paid application is around £11 ($16). Business models in mobile that have consumers paying upward of £10 per application are hard to come by - and compare poorly with the web where cost per click is sub $1.

So how are AdMob and Quattro Wireless going to turn their initial customers who are generating today's revenues into repeat customers who scale to $billions in revenues for them? The evidence so far is that what they won't achieve that.

It's instructive to look at the internet advertising market - $5.4bn for the first half of 2009. The IAB produce a report on internet advertising let's look at the split of the different types of advertising

Then we should consider, from the same report that the top 50 companies account for 89% of all internet advertising spend. So without those big brands seeing the return on investment from mobile advertising it is going to remain a small fraction of the overall advertising market - hardly enough to justify the investment that Google and Apple are making.

So - how can mobile advertising improve? The clue is in the above pie chart. Context is king. Mobile phones are all about convenience - that's why you use your mobile to call someone when you have a landline on your desk. It's why you check your email on your mobile phone when your laptop is a few steps away from you. So anyone seeking to have a successful advertisment on mobile needs to understand the context of how the device is being used.

Most business plans that include context and mobile tend to include the phrase "Location based services" in their plan - and sure, for a minority of cases mobile phones are uniquely used in places where location is important - mobile applications like FourSquare and Flook take advantage of this feature. More poorly served is the majority case where the mobile phone is in one of two locations - home and work. Yet people still pick it up and use it there. Smart solutions like Live Talkback can be used both when outside (for on location events) or at home (for broadcast events)

The really smart solutions for advertising will start to understand much more of the context around individuals - and will pick the right time to engage users with advertising - maybe mobile has something to learn from TV advertising here - will your mobile phone have an ad break?

Comments

[Jane Sales]

Hi Matt,

Thoughtful article as ever! You mention my own application flook in the context of location-based services - I agree that location is key to our offering, but so too is our suitability as an advertising platform.

Our thesis is that most ideas on mobile ads are just plain wrong. The SMS as you pass Statbucks? Is there a person on the planet who wouldn't be annoyed at being interrupted? And any ad that takes screen space from your valuable application is also an irritation - the bigger the disjoint between the subject of the ad and the subject of the app, the bigger said irritation.

Flook is about swiping through full-screen "cards" that are attached to a place. In an upcoming release, we'll be adding the ability to home in on cards that particularly interest you, whether by category, or by author or by keywords.

Imagine you have narrowed in on the food & drink category as you look for a bar nearby - and then come across a happy hour offer. We think this combination of "pull" and "relevancy" puts us in a unique position.

Sales pitch over :-)

[Matt Millar]

One of the things you have been smart about is you've integrated local advertising into the very core of your offering. Whether it's an individual advertising how smart they are in discovering an interesting thing, and sharing that, or a business advertising it's offer to people in the local area - it's the same. Advertising is the medium!

However for anyone to make money out of that there needs to be a level of education and understanding in the market that "what works on the web" doesn't necessarily work on mobile. Flook demonstrates really well that maybe the _right_ way to do location based advertising is to take your lead from billboards and posters.