Facebook Must Revamp Mobile Ads to Compete with Google
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The mobile ad market is but a brief wind compared to the tornado that is online advertising.
Of the $166 billion in U.S. ad spending, the mobile ad market is expected to garner less than 2% of all marketing spending, only a $2.6 billion pie. This puts the industry in a tough spot, because smartphones and tablets now comprise more than 10% of Internet traffic, making user growth far higher than dollar growth.
According to The Wall Street Journal, a TV ad for “Two and a Half Men” runs $33 per 1,000 households. Online, the average ad for Yahoo.com costs $6.45 per thousand. For an iPhone, however, the charge is $2.85 to show the ad to 1,000 users.
A major reason that ads cost far less on mobile devices is because they have the potential to be less effective. For example, ads can clutter a small 4-inch screen, annoying the user, and users can accidentally click an ad, charging the advertiser.
Despite the difficulty in mobile ads, however, a few firms have successfully moved from static side-page ads and have brought innovation to the space.
A New Game Needs New Rules
The mobile ad market is a totally new game, and as such, it needs new rules. Currently, about 50% of mobile ad spending goes into search ads. If this trend continues, and if the mobile market thunders ahead, expect to see Google (NASDAQ: GOOG) rake in enormous profits. Google owns a 95% share of all mobile-search revenue. This reason alone makes Google a compelling investment.
Aside from this type of search, however, four other companies are trying – and succeeding – using different approaches to advertising.
Comcast (NASDAQ: CMCSA)
Comcast is using phone ads to its advantage – it placed ads that link not to a web page, but instead to a call directly to Comcast. The move allows the company to change from web-page based selling to other forms, like people-to-people. Comcast says that mobile users represented roughly 10% of its online sales, and that its mobile ads had click-through rates four times higher than PC-based ads. That’s huge.
Comcast’s move is intelligent – the company sells higher-end products, and thus it is capitalizing on a trained sales force instead of static text.
Pandora (NYSE: P)
I find Pandora ads to be the most interesting. When I listen to Pandora’s free streaming, the service interrupts every few songs and plays a short audio ad – similar to its desktop version. This is a great move for two reasons.
First, I often plug in headphones and use Pandora when I am doing physical work, meaning that I am focused on whatever message is coming through the ear buds. Second, Pandora also has full-screen ads, and I must look at them before I make any changes to the station or to the song. However, I rarely need to interact with Pandora’s interface, and thus they don’t bother me. Also, the ads are fairly relevant.
Amazon (NASDAQ: AMZN)
Amazon’s Kindle runs advertisements when users let it go to sleep. The ads fill the entire screen and stay populated for a long time, giving Kindle users numerous chances to see the ad. The downside of this approach is that the ads are not action-oriented – there is no “call to action” driving users to a landing page. However, the static display ads are exactly what some advertisers want.
For Kindle owners who do not want to see ads, they may opt-out by paying Amazon $15. But for the many who keep it, Amazon’s advertising goes to cover the costs of the Kindle, because Amazon sells it for a small or even negative profit. For Amazon, ads go a long way in making its Kindles profitable over time.
Facebook (NASDAQ: FB)
Facebook is still struggling to find its identity in the mobile ad space, and its revenues have been hampered by users shifting from desktop usage to mobile usage. To profit in the coming mobile era, Facebook needs to make a few changes. First, the company can copy a play out of Pandora’s book. The social giant can display full-screen ads as users go through pictures, showing an ad perhaps every 15 or 20 pictures, for example.
Also, Facebook could use YouTube’s model, playing a 10-second video before progressing to the next screen. This approach would be more difficult, since mobile users may not want sound coming from their phones, and because users interact with the screen constantly, but testing the concept would at least give Facebook some data from which to base the decision.
Mobile’s Future
If mobile ads hope to pick-up, the industry will have to overcome small screen sizes and clunky fingers that erroneously click ads. To turn mobile into the ad industry’s next profit machine, companies will have to experiment with the best way to display advertisements, and advertisers must become more creative in how they design ad layouts, landing pages, and call-to-actions.
With just 2% of all U.S. marketing dollars, mobile advertisements represent a small industry – but for the companies that can be first to market with innovative ads and creative solutions, they are entering on the ground floor of major future profits.
Know What You Own
After the world's most-hyped IPO turned out to be a dud, most investors probably don't want to think about shares of Facebook. But The Motley Fool has outlined some things every investor needs to know about the company in a new premium research analysis. Access the report now by clicking here.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, 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.
