FEATURE: Dial M for Mobile Advertising

Opus Capital's General Partner Ken Elefant argues that wireless advertising has big potential. This article is the full write-up of last week's shorter summarized version.

The past few years have been hard on the mobile industry. With 3G and fee-based data services a flop, a sagging voice business and average revenue per user (ARPU) stagnant at $58 per month (Strategy Analytics 2005), not much seems to be going right for wireless service providers. But the situation is set to change.

After many false starts, mobile advertising is finally ready for primetime. Long-term success remains uncertain, but mobile advertising's potential has become too great to ignore. Here's a quick look at the market factors that are creating momentum for rapid advertising growth in the wireless world. 

First, and most importantly, mobile advertising promises important benefits to every critical player in the wireless value chain. Advertising creates new revenue streams for carriers, filling a void left by the voice revenue erosion. Moreover, investment in new, ad-supported services (free to user) will likely attract new subscribers and bolster use of existing, fee-based services. The result may very well be an increasing returns scenario for carriers: Free services attract new users, overall revenue expands, and ARPU stabilizes. New ad revenue is icing on a growing cake.

Similarly, marketing on the mobile platform provides an appealing new way for advertisers to connect with their target audiences. Mobile devices, more than any other advertising medium, remain near to their users and dear to their hearts. Mobile may very well provide advertisers the closest thing to always-on and always-near marketing experience. Traditional advertising channels, such as television and print, in contrast, continue to lose their luster as DVR technology and the inability to track results erode effectiveness.

Of course many subscribers will never opt-in to advertising in exchange for "free" (ad-supported) services. That's to be expected. But don't be surprised when millions of younger subscribers, the kind that have grown up with Myspace, YouTube, and Facebook, gladly sign up to receive ads in exchange for data services like streaming video, ringtones and music downloads. According to a 2005 Gartner study, 53 percent of users are interested or very interested in receiving relevant mobile advertising in exchange for free music or video content. Teenagers and young adults often can't afford or don't want to pay for wireless services--that's a key reason that fee-based data services underperformed. But they certainly like to use them. Mobile providers and advertisers can learn much by studying Web 2.0's success in turning traffic into dollars and should be able to capitalize on the more portable business models.

Mobile advertising excites content providers too. It provides another delivery channel, enabling additional revenue streams for content with little marginal production cost. Many publishers have already repurposed their content for the mobile platform, but until now, they've reaped little reward as their fee-based business models never gained traction. An advertising-supported model delivers free content to users, growing the viewer base and expanding overall revenue opportunities for the publishers. Once again, providing ad-supported services on mobile devices may very well produce increasing returns for content providers as viewership expands and demand for their product increases on a variety of medium.

A second important selling point is mobile advertising's ability to precisely target customers and track campaign effectiveness. Imagine the potential for a campaign that relies on a combination of demographics (zip code, age, calling plan and phone type), calling history and patterns and real-time location. Mobile carriers have all of this information. Competitive advertising mediums don't.

More comprehensive customer data means that mobile advertising can provide higher impact marketing campaigns that generate measurable results. According to Third Screen Media, a firm focused on mobile advertising, wireless banner ads are proving to be three to five times as effective as comparable banner placements on the Internet. Once refined mobile advertising techniques--targeted mobile video ads, MMS, and location-based services--are factored in, wireless ads may even outperform those numbers.

That's not to say there aren't short-term barriers. Privacy, screen size and customer mistrust of advertising on a previously ad-free device will all pose significant challenges. Mobile users have legitimate privacy concerns about carriers tracking their physical locations and mining calling history in an effort to better target ads to their phones. To be sure, better consumer data means less consumer privacy. So advertisers and carriers will have to work together to figure out how to protect user data while capitalizing on its marketing value. Small screen size and reluctant recipients won't make the challenge any easier. Can advertisers really communicate effectively through a 2x2 screen? Certainly creative minds can overcome these challenges, but it won't be accomplished without hiccups along the way.

Another missing piece in the mobile advertising puzzle is the lack of an efficient marketplace for mobile ad buyers and sellers to meet. Without a robust mobile ad market, transactional costs will remain high, and advertisers and their counterpart content providers will continue to rely on more established advertising mediums to market their products and services.

A little history, however, is informative. Internet advertising began to take off only once DoubleClick (Weiss, Peck & Greer, the predecessor firm to Opus Capital, invested in DoubleClick in 1997) established a virtual marketplace where advertisers could easily purchase inventory on which to place their ads.

The market has matured considerably since those early days. Not only do we have established ad networks like DoubleClick, 24/7 Real Media and ValueClick, but Google, Yahoo, and MSN have capitalized on the enormous appetite for search-based marketing and have created their own marketplaces, complete with keyword auctions, to efficiently sell the right to target prospective buyers. In addition, an entire advertising ecosystem has evolved around the web medium, with companies providing everything from campaign management to keyword optimization services.

To succeed in creating a viable advertising market, the wireless industry will need its own efficient marketplace and vibrant network of technology, support and service providers. These needs present enormous opportunity for startups and venture investors looking to focus on the mobile space. Without effective marketmakers and a thriving ecosystem of supporting companies, mobile advertising will never match the growth the wired web has achieved. And you can bet that startup companies will provide much of the innovation necessary to make this happen.

The stage is set for significant mobile advertising growth over the next several years. Research firm Ovum estimates that mobile advertising could generate as much as $2 billion in revenue by 2010. To reach these ambitious projections, however, the market must continue to evolve and overcoming hurdles, such as privacy issues, small screen size, and user reluctance, along the way. And if it does, expect mobile advertising to explode just like its wired Internet-based cousin has done over the past several years.