Mobile Advertising: Check In, Then, Check Out

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Internet advertising has grown at a better than 17% CAGR over the past decade to comprise 10% of the US market, or ~$24 in 2010.  Comparatively, mobile advertising remains small – eMarketer estimates just $750M in mobile ads for 2010 (likely not including mobile search).   However, from this small base, US mobile advertising is expected to grow to $5B or roughly 15% of total on-line advertising by 2015, with global projections 3X higher.  With the proliferation of smartphones and tablets, we believe that the market can maintain better than 20% annual growth through the end of the decade, eventually overtaking on-line ad spending intended for a stationary audience

The biggest driver for the mobile market has been dramatic growth of smartphones and tablets.  The total number of US smartphone subscribers is expected to nearly double from 60M 2010 to 109M in 2015.  Similarly, the iPad launched in 2010 with nearly 15M units sold worldwide.  A flood of competitive Android-based products are coming to market, with Gartner projecting more than 200M total tablets to be sold world-wide in 2014.  Assuming the US to be roughly a third of the global market, the American installed base of tablet users could also push 100M by mid-decade

The emergence of apps as the primary content delivery mechanism on a more standardized population of smartphones and tablets has made serving this rapidly expanding community with advertising a simpler proposition.  Ads can be sold and served beyond carrier and device limitations, potentially reaching the full installed base of a specific OS platform.  With Apple and Google having established large and relatively cohesive mobile communities accessible via common app stores, mobile audiences have reached critical mass for advertisers

Mobile has several intrinsic benefits for advertisers.  First, it is even more targeted than traditional internet advertising, as mobile platforms are not typically shared by multiple users and demographic and platform information about the user are available.  Second, the ability to pinpoint the location of a mobile user is invaluable for delivering advertising close to the time and place of a purchase decision.  Third, the pocket portability of mobile devices allows the paperless delivery of tickets and coupons for direct redemption, and eventually, of mobile payments at point of purchase.  These advantages increase the precision and effectiveness of advertising, enabling delivery to the right audience and increasing the potential of completing a sale

Both Apple and Google have made mobile advertising a strategic priority, evidenced by Google winning a fierce bidding war between the two for mobile ad pioneer AdMob in late 2009.  Apple countered by acquiring AdMob’s primary competitor Quattro Wireless and rebranding it as iAd.  Google has revealed that it generated roughly $1B in mobile ad revenue in 2010, half from the US, while Apple has not indicated its progress with iAd

Characteristically, Google’s mobile advertising strategy has been broad, coupling mobile search with app linked display advertising across its own and its competitors’ platforms, while seeking to partner with app developers, content providers and carriers to establish an entrenched end-to-end advertising and mobile payments ecosystem.  Apple has been more targeted, seeking to establish a high premium for access to its famously rabid customer base, with significant restrictions on the ability of its app, content and carrier partners to participate

In contrast, Facebook has been quiet on the mobile front, with no discernable revenues, but this could soon change.  The social network juggernaut has begun to push its 200M mobile app users to use its Places “check-in” facility, and recently acquired “stealth-mode” hyper-local advertising Seattle start-up Rel8tion.  Moreover, HTC recently announced a trio of Android-based smartphones with dedicated Facebook buttons

Many wireless network operators are exploring ways to gain a viable stake in mobile advertising.  AT&T has announced a mobile software development kit (SDK) to leverage its yellow pages asset in pursuing the local advertising market.  Telefonica is attempting to create a 25 country one-stop shop for advertising in its served markets.  While Apple appears to be unwilling to cut operators into its advertising strategy, Google seems willing to leave a modest role for them.  The recently announced Microsoft/Nokia alliance would seem to be even more open to sharing the advertising opportunity with its carrier partners, who will be vital if the platform is to survive, much less thrive

Location-based services (LBS) start-ups will also vie for the nascent mobile advertising market.  The $6B+ valuation placed on Groupon, and the buzz around companies like Foursquare, Yelp, and Gowalla reflect the extraordinary potential of tying on-line advertising and promotion directly to physical buying experiences.  These businesses could revolutionize local advertising and promotion, and co-opt tens of billions of dollars in spending that is not well documented in national advertising statistics, thus adding to the potential of the whole mobile advertising market.  Google has already made a run at Groupon and Facebook acquired the aforementioned Rel8tion, while Amazon has yet to “check-in” to the local LBS market

Handicapping the battle of the titans, we believe that Google, followed by Facebook are best positioned to capture the mobile advertising opportunity.  Apple will be aggressive, but is limited by its closed ecosystem and premium pricing philosophy.  Amazon has the business assets to make a play, but has been slow out of the gate.  We are not optimistic that carriers can insert themselves in this market, but believe that one or more of the LBS companies may break-out to independent success

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