5 Things Everyone Ought to Know About Mobile Advertising

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mobile computing is one of the fastest growing industries in the tech sector. Analysts expect tablet sales to rise 56% in 2012. Apple (NASDAQ: AAPL) and Samsung combined sold over 80 million smartphones in the last quarter, and total smartphone sales were up 46% from the same period a year ago.

Advertisers understand that mobile computing is the future. Here are five things everybody ought to know about mobile advertising.

1.  Banner Ads and Interstitials Don’t Work on Smartphones.

Advertising on a mobile device presents a certain set of difficulties. Advertisements become more disruptive to the user experience due to smaller screen real estate. Annoying banner ads and interstitial pages prevent users from getting the information they expressly took out their smartphone for. Instead of piquing users’ interests, banner ads become a point of frustration.

These types of advertisements are much more useful on browsing devices such as desktops, where users are more likely to stay on pages for longer and explore different areas of the web. One study showed users spend 66% more time on a page through desktop use versus mobile use.

Additionally, most users are not looking to buy products through their smartphone browser. On top of ineffectively monetizing mobile browsing time, this factor also leads to the inability to track an advertisement's efficacy accurately.

For these reasons, advertisers are not willing to pay as much for a mobile ad as a desktop ad. Google (NASDAQ: GOOG) has seen this affect its earnings the most. Last quarter, the company reported a “deceleration in the growth of desktop queries.” The results are clear. Google’s cost-per-click (CPC) has fallen for four straight quarters, as advertisers are only willing to pay about half price for a mobile ad. Relying on volume to make up the difference in margin will only suffice until mobile search queries begin to peak.

2.  Native Advertising Does Work.

Native advertising is the innovation that took Facebook (NASDAQ: FB) from practically $0 to $153 million in mobile ad revenue in just two quarters. Native advertising is the integration of ads with the user experience. In Facebook’s case, it put “sponsored stories” in users’ news feed. Likewise, Twitter adopted a similar method of monetization.

Moreover, Facebook uses its social network infrastructure to distribute advertisements. First, the website shows ads to users who have chosen to be fans of the advertising company on Facebook. When a user likes the ad, the website distributes it to the user’s network of friends. Facebook states that more than 50% of users clicking on advertisements are from friend referrals, not fans of the company.

In addition to native advertising, Facebook also started storing users’ credit card information so they can make purchases with one click. This reduces the friction of conventional online shopping, and is a trick Amazon.com has used for years. Lower friction coupled with higher page views translates into a higher CPC for Facebook as advertisers are better able to monetize their ads.

3.  Location-based Advertising Will Work.

Smartphones are cleverly outfitted with tiny GPS chips that can tell us exactly where we are in the world. Interestingly, that same technology can tell advertisers exactly where we are too! It can tell them all sorts of information about our daily habits, such as our route to work. Targeting users based on geo-location isn’t new, but it is something that has lots of room for improvement.

Google, which rolled out location-based advertising over two years ago, is beefing up development to improve its functionality. With the accuracy of GPS, Google can help advertisers reach consumers closer to the point of purchase. For example, T-Mobile utilized this technology to advertise to consumers close to its stores. The company achieved a click through rate (CTR) of 13%, which is 3 to 4 times the rate when advertised out of context.

I see great opportunity here for a company like Pandora (NYSE: P). Over 40 million people use Pandora’s internet radio on their mobile device. With the increase of in-dash car systems supporting the service, there’s a great opportunity for the company to use geo-location to advertise vendors found en route to the driver’s destination.

Apple is another company that could capitalize on location-based advertising. Aside from its plans to introduce a new ad-supported music streaming service next year, Apple already introduced a new app called Passbook. Passbook is a place to digitally store all of your coupons and loyalty cards. Apple uses the GPS in its iPhones to push notifications to users’ screens when one of the offers in their Passbook is nearby. However, Apple could utilize the GPS in its iPhones to push new offers to users based on their location and habits.  

4.  Google Wallet and Apple Passbook Allow Advertisers to Track Ad Efficacy Better.

As I mentioned earlier, users are unlikely to purchase products through their mobile web browser. This leads to problems tracking the effectiveness of an advertisement. Google Wallet and Apple’s Passbook provide a solution.

Entering your credit card information into Google Wallet does two things. First, it reduces the amount of friction in making mobile purchases. This is how Facebook found success in increasing conversions. Second, it allows the company to track purchases made in brick and mortar stores. Likewise, Apple can track which coupons users are taking advantage of in its Passbook app.

These data will allow advertisers to produce better campaigns and Google and Apple to charge more for advertisements. However, Google Wallet adoption has come slowly. Google is attempting to increase its number of users through constant improvements like its plan to introduce a Google Wallet credit card.

5. Real-time Bidding is the Future of Ad Pricing.

Real-time bidding (RTB) is a relatively new technology that allows advertisers to target individual users based on very specific data. Advertising companies send all the data they have on a user accessing a page to advertisers, who then bid in real-time how much they are willing to pay for an advertisement for that specific user. The data may include information such as gender, age, ethnicity, location, local time, search history, transaction history, and the web page on which the advertisement will appear.

Of course, this is all handled by computers and occurs in milliseconds. The advantage here is that ad campaigns become more cost effective. The more data a company has on a potential ad viewer, the better they can configure costs. Overall, for companies like Google and Facebook, this improves ad revenue, as companies will pay more for better-targeted ads.

Google leads the way in this technology, whereas Facebook only started integrating it this summer. It’s evident, however, that in order to compete, mobile advertisers need to effectively integrate RTB technology.

Mobile advertising is a crowded industry. With more and more mobile users entering the market every day, companies are fighting to provide the most effective form of advertising for both users and advertisers. While Google still leads the way, Facebook is quickly grabbing market share. The addition of a big player in Apple may present a serious challenge for both. With the shift toward mobile computing, I expect the pool to become even more crowded, forcing companies to improve and innovate to stay afloat.

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adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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