Mobile advertising revenues aren't growing as fast as expected, and that could spell trouble for a bunch of venture-funded startups
Ads on cell phones have long been hailed as the next big thing. But flipping through industry forecasts, Didier Kuhn says, "I don't believe the figures I am seeing." And he doesn't mean that in a rah-rah kind of way.
Kuhn, CEO of a mobile advertising company acquired by Microsoft (MSFT) in May, views most analyst predictions as way too rosy. Gartner (IT) expects $11 billion in global revenue from ads on mobile devices by 2011, up from less than $1 billion a year now. Strategy Analytics sees an even bigger $14.4 billion revenue pie by then, accounting for a fifth of all online ad spending. These forecasts are "incredibly steep," says Kuhn, relieved that his company, ScreenTonic, has Microsoft to watch its back as the market develops. "It will take slightly more time for the industry to grow."
Wireless Carriers: Not So Eager
Mike Baker, vice-president in change of Nokia's (NOK) ad business, also sees a longer wait, suggesting it will take at least five years for the industry to surpass $10 billion in annual revenue. "The near-term visibility is cloudy," he says.
Realistically, no matter how often you see people checking e-mail on a BlackBerry or surfing the Web on an iPhone, the vast majority of consumers are just beginning to use their phones for functions, other than calling, that are conducive to ads. Today, only some 16% of U.S. wireless users access the Web on those devices at least once a month, according to JupiterResearch. It doesn't help that the U.S. economy is being buffeted by the mortgage crisis and housing slump.
Wireless carriers, meanwhile, have been slow to embrace ads, fearful their customers will be driven away (BusinessWeek, 11/26/07) by floods of text-message spam or banners and pop-ups crowding such a tiny screen. As a result, only 10% of nearly 2,000 Americans surveyed by Jupiter earlier this year said they'd ever received a text message from a business. "Advertisers are just now testing and learning," says Baker. That testing could take a while: After all, it took advertisers 10 years to dive with both feet into a medium called the Internet.
Venture Capital Spree
But despite the likely delay in a mobile ad boom, investors have been pouring millions of venture capital into this nascent business: Last month, a startup named Amobee drew funding from mobile carriers Vodafone (VOD) and Telefonica. Also in November, Draper Fisher Jurvetson invested $2 million in mGinger, and Millennial Media raised $15 million from a group led by Charles River Ventures.
This rush likely was instigated in part by a series of acquisitions in the sector. In September, Nokia bought Enpocket, a provider of a mobile ad platform. In May, Time Warner's (TWX) AOL unit purchased Third Screen Media, a mobile ad broker. That same month, Microsoft acquired ScreenTonic. Financial terms of these deals were not disclosed.
Problem is, many of the big players, such as Nokia and Microsoft, have already placed their bets, so the funding and takeover spree may turn scarce for scores of other small mobile ad startups. "The technology in most of the startups isn't very different," says Baker. "I don't think there's a lot of extra value" in more purchases for Nokia. Most of the startups enable advertisers to contact users via SMS and multimedia messages. Many promise to insert ads into mobile music, video services, and mobile games.
That said, there are potential acquirers out there. Google (GOOG) still doesn't have the technology to serve SMS and multimedia ads onto mobile phones. "We'll continue to invest," says Dilip Venkatachari, a product management director at Google. So may traditional ad agencies and media companies that haven't yet developed a mobile play. But Nokia's Baker says many of these companies are choosing to develop the capabilities internally rather than through acquisitions.
Any unaffiliated startups will face an uphill battle competing with handset makers and the Internet giants that have already jumped into the mobile advertising market. Yahoo! (YHOO), which boasts 500 million users of its online services, is now showing mobile display ads in 16 countries, working with huge carriers such as Vodafone. "For us, this is a very strategic area for the company, where we invest a lot of people and dollars," says Gary Roshak, Yahoo's vice-president for mobile advertisers and publishers.
With the market not growing as quickly as expected, "it causes a problem for the many startups because they'll need to make their cash last longer," says Baker. As such, industry insiders predict that many of them may be snapped on the cheap in a year or two.
A Google Boost?
Many of the startups reject this glum outlook, pointing to new opportunities such as Verizon Wireless' plan to open its network to more devices and services as a potential kickstart for the mobile ad business. It took CellySpace.com about 1 years to get U.S. wireless carriers to allow its subscribers to receive text messages bearing coupons and ringtones created with the Web site's do-it-yourself software for small businesses. If wireless networks become more open, such approvals may take less time, says Rich Eicher, president of Skycore, the company that launched CellySpace on Dec. 4.
Another possible boost may be the emergence of touch-screen devices like the iPhone, which make it easier to click on an ad, as well as phones based on Google's Android (BusinessWeek.com, 09/06/07), a new wireless software platform designed to enable easier and cheaper development of mobile applications. "Clearly, more openness is going to open up more opportunities," says Paul Palmieri, CEO of Millennial Media, which delivers mobile ads for Ford (F) and Procter & Gamble (PG).
It's too early, though, to say whether networks and phones will become open enough to facilitate a mobile ad boom any time soon. "Right now, what we are really in is the foundation stage, trying to determine how to move into mobile advertising," says Phil Holden, a director of online services at Microsoft.