3 Popular Ways to Fail at the Mobile Ad Business
Demitri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In The Simpsons Movie, there’s a scene where an advisor to the Schwarzenegger-like U.S. president is asked to give his boss advice as certain doom approaches the fictional town of Springfield. The advisor’s suggestion was classic Simpsons: “Sir, I've narrowed your choices down to 5 unthinkable options.”
That’s exactly the way I see the rush to find an ad-based business model that can survive the consumer stampede to mobile devices. There's no good model there right now. And while there are plenty of options for creating one, none of them are particularly strong.
To start with, mobile ads aren't very effective. As Bart Simpson might put it, they “suck.” Compared to traditional digital advertising, mobile ads have to contend with much less display space, fragmented delivery networks, and poor tracking metrics. It’s no wonder then, that Google (NASDAQ: GOOG) warns investors in its SEC filings that:
"the margins on advertising revenues from mobile devices...are generally lower than those from desktop computers and tablets. We expect this trend to continue in the near future."
Mobile ads aren't generating nearly the return that desktop digital advertising does. And these ads are probably still benefiting in a big way from their novelty. After all, desktop ads used to enjoy click through rates (CTR) of up to 5% when they were first plastered all over the web. But now that they've been around a while, these ads tend to get a CTR of more like 0.5%.
Still, mobile is the future of consumer tech, and is drawing usage away from desktop devices. That means companies have every reason to try to make a lemonade stand out of these lemons. So here's my advice to mobile ad delivery competitors. I've narrowed down the choices to three unthinkable options:
Unthinkable option 1: Ignore your advertisers
Tripadvisor (NASDAQ: TRIP) has taken this route; call it the "we'll monetize later" plan. The online travel research site, which gets most of its revenue from advertising, has decided to keep ads out of its flagship mobile apps so far. As the company explained in a recent quarterly report, "we have designed our mobile product to be user-friendly and have chosen not to monetize that platform to its full potential at this time."
While this choice may help a company maximize consumer engagement and grow to a critical mass, it's obviously not sustainable as an advertising business model. And the strategy confirms the key weakness in the mobile ad business: that mobile ads hurt usability and risk alienating users.
Unthinkable option 2: Milk your customers
If you use the service, then you already know that streaming music provider Pandora (NYSE: P) has decided to take that risk, choosing to fully monetize its mobile service by peppering its customers with ads. Ad delivery jumped by 112% last quarter, easily outstripping the 80% rise in listener-hours.
Wall Street has applauded the spike in ad revenue, with the company catching two upgrades last week. But those extra dollars come attached to a much lower per-ad payment, a trend that can only accelerate as Pandora’s customer base keeps migrating from desktops to mobile devices.
And even with the big jump in ads per hour, the service is still firmly in the red. Pandora just confirmed its guidance for an operating loss of between 4 and 8 cents in 2012. If there is a key to a profitable mobile ad business model, the sheer quantity of ads isn’t it.
Unthinkable option 3: Invent a better ad
But if serving up more ads won’t work, maybe producing higher quality ads will. That’s the tack taken by Facebook (NASDAQ: FB), with its sponsored stories, and Apple (NASDAQ: AAPL), with its interactive iAds.
Apple entered the mobile marketing arena hoping to dramatically improve its economics with rich media, and engrossing ads. The company has trumpeted interactive spots, like this Land Rover ad, that promise to deliver much better user engagement than the tiny banner ads that make up most mobile marketing. But the results haven't been nearly as strong as Apple had hoped, and the company has had to retreat a bit from the market.
Facebook hasn’t fared much better with its own innovative approach. The company’s sponsored stories are a new type of ad, featured in a user’s news feed and accompanied by a list of all the user’s friends who have “liked” that product. The “stories” are a win for advertisers, both for their prominent placement and for their friendly appeal, as they seem more like a suggestion coming from friends than an ad blasted out from a faceless corporation.
Still, this option hasn’t revolutionized the industry either, with many unconvinced that there’s much potential in this platform. As one advertiser has complained, these ads still suffer from the same weakness that's kept mobile marketing an elusive business for years. The way this marketer put it, its just “more fluff than substance.”
Ouch! Or, in the immortal words of Homer (the Simpson, not the Greek), “doh!”
SigmaSwan owns shares of Apple. The Motley Fool owns shares of Apple, Facebook, Google, and TripAdvisor. Motley Fool newsletter services recommend Apple, Facebook, Google, and TripAdvisor . 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.