Drivers and Resistors of mobile advertising

Drivers of mobile advertising

The mobile is essentially a personal device usually limited to a single user and therefore facilitates targeted advertising. As such, users have little tolerance for a "one size fits all" approach. The objective of marketers, therefore, should be to effectively reach the target audience while allaying any privacy concerns.

The five key drivers of mobile advertising industry are: rapidly growing mobile penetration rates, increasing global mobile phone shipments, rising global smartphone sales, the rapid growth rate of mobile broadband subscriptions, and increasing 2G and 3G proliferation.

Rapidly increasing mobile penetration rates allow ads to reach a broader market

At the end of 2009, global mobile penetration as a percentage of service population was the highest among all communication channels at 70.2%, while fixed broadband penetration was a mere 6.3%. Internet penetration was also much lower, at 22.1%. The increase in mobile penetration rates is being fueled by higher smartphone usage. The mobile ad industry can capitalize on these trends to reach a wider audience.

Increasing global mobile phone shipments result in wider reach

Global shipments of mobile phones will increase from 1,136 million to 1,405 million between 2009 and 2014 . While the CAGR is projected to be negative, the global mobile penetration rate is already pretty high. In 2009 there were around four billion mobile phones on the planet compared to one billion PCs.

Most of this growth is being fueled by developing countries. For instance, in 2008 the number of PC users in India was 50 million, while the number of mobile subscribers was 380 million (a ratio of 7.6 mobiles for every one PC). The strong growth in mobile uptake in developing countries is driven partly by the lack of fixed landline infrastructure, which is resulting in long waiting times and limited access, whereas mobile telephony is more readily available. Additionally, increasing competition between operators is driving down costs and improving quality, which is resulting in higher penetration rates. The availability of prepaid cards is further increasing this momentum. The rapid growth of the medium clearly indicates that the most effective way to reach a large number of targeted audiences in the future is through mobile ads.

Table 20: Global mobile phone shipments (m), 2009–14
	2009	2010	2011	2012	2013	2014	CAGR 2009–14
Mobile shipments (m)	1,136	1,204	1,234	1,273	1,393	1,405	4.34%
Growth (%)		6.0%	2.5%	3.2%	9.4%	0.9%
Fiscal year end December, 2009.

Source: Business Insights

Rising global smartphone sales are resulting in a richer user experience

Increasing smartphone usage is fueling the mobile handset market growth. As a percent of total mobile shipments, smartphones are projected to increase their share substantially from 7.5% in 2006 to 40.8% in 2012. Additionally, smartphone shipments are growing at a much faster pace than the overall handset market, bucking the global recession. Smartphones are doing what operators have been struggling for years to achieve: driving users towards mobile broadband services. As a result of this, mobile data and average revenues per user (ARPUs) are also increasing. The feature-rich devices and multimedia apps of smartphones facilitate a better user experience. Coupled with the up-market smartphone user base, this represents a substantial business opportunity for the mobile advertising industry.

Table 21: Global smartphone shipments (m), 2006–12
	2006	2007	2008	2009	2010	2011	2012
Smartphone shipments (m)	80	120	140	190	220	380	520
As (%) of total handset shipments	7.5%	12.5%	14.0%	16.7%	18.3%	30.8%	40.8%
Fiscal year end December, 2009.

Source: Business Insights

Rapid growth rate of mobile broadband subscriptions to boost ad revenues

Mobile broadband uptake is increasing, especially in developed countries. High-speed packet access (HSPA) is currently the dominant mobile broadband technology and will remain so until at least 2014, with the addition of HSPA+ extending its capabilities. The introduction of HSPA capabilities in 3G networks has resulted in dramatic increases in non-SMS mobile data traffic, although this remains far lower than fixed line traffic and represents less than 1% of IP traffic worldwide. Mobile broadband subscribers will outnumber fixed broadband subscribers by 2011. However, fixed broadband revenue will be double that of mobile broadband . Global mobile broadband revenue will reach $99bn by 2014, compared to $216bn for fixed broadband. This further indicates the attractive business potential of the medium.

Table 22: Global fixed and mobile broadband subscribers (m), 2009–14
	2009	2010	2011	2012	2013	2014
Fixed broadband subscribers (m)	507	559	604	646	689	731
Mobile broadband subscribers (m)	299	473	719	1,054	1,526	2,039
Fiscal year end December, 2009.

Source: Business Insights

Figure 34: Global fixed and mobile broadband subscribers (m), 2009–14

Table 23: Global consumer fixed and mobile broadband revenue ($m), 2009–14
	2009	2010	2011	2012	2013	2014
Fixed broadband revenue ($m)	144,102	161,288	175,063	188,239	201,937	216,266
Mobile broadband revenue ($m)	23,771	33,115	43,669	58,549	77,172	98,808
Fiscal year end December, 2009.

Source: Business Insights

Increasing 2G and 3G proliferation boosting the industry

The International Telecommunication Union (ITU) estimates that by the end of 2010 there will be a total of 5.3 billion global mobile subscriptions. Out of this, 4,360 million will be 2G and 940 million will be 3G. While 2G subscriptions will grow at a CAGR of 13.7%, 3G will register much higher growth rates at 44.3%. Furthermore, in 2010 143 countries were offering 3G services commercially, compared to 95 in 2007. The next generation in wireless platforms is 4G. A number of countries such as Sweden, Norway, Ukraine, and the US have already started to offer this technology. Higher speeds coupled with increased data capabilities will support rich media and video advertising, further boosting the industry's growth.

Table 24: 2G and 3G mobile subscriptions (m), 2005–10
Mobile subscriptions (m)	2005	2006	2007	2008	2009	2010	CAGR 2005–10
2G	2,300	2,800	3,100	3,600	4,000	4,360	13.7%
3G	150	250	375	460	580	940	44.3%
Fiscal year end December, 2009.

Source: ITU

Figure 36: 2G and 3G mobile subscriptions (m), 2005–10

Resistors

Apple, Google, and Yahoo are currently placing one or two ads on the top of a mobile screen and another two or three at the bottom, which requires a user to scroll down to view them. Additionally, most of the display ads are placed in a long narrow bar format, resulting in poor visibility. All of these factors limit the earnings potential of these ads. However, companies can offset these losses by devising better pricing models. Ad network company AdMob estimates that mobile costs per click averaged about $0.11–0.12 and mobile costs per mille (CPMs) around $12–14 in 2009, clearly indicating that display ads fetch higher revenues than search. However, the challenge is that the higher load time is discouraging users from clicking on display ads.

Lack of a standard mobile platform

Unlike in online advertising where every ad has a prescribed standard size and format, in mobile advertising no such standards exist. This is because of the differences in handset screen size and supporting technologies such as MMS and WAP 2.0. Additionally, for color images typically portable network graphics (PNG), JPEG, graphics interchange format (GIF) and bitmap (BMP), including WAP BMP (WBMP), are used, which could further impact picture quality. As such, the biggest difference between mobile display ads and online display ads is that mobile ads are not sold by unit size. To overcome this challenge and create a better experience for both users and advertisers, the size of mobile web banners are optimized to best fit the handset on which they are viewed. In cases where the ad-serving system cannot identify the device’s capabilities, the default standard is applied.

Multiple player value chain

In the case of mobile advertising, operators possess a large degree of control over content distribution, a constraint that is not faced by online advertising since anyone can publish content without first making a deal with an internet service provider. Although the revenue split among players in the value chain varies with brand equity, value-add attributes, and proximity to the customer, it is estimated that content owners receive 30.3% of revenues, designers/developers receive 14.2%, publishers 6.3%, hosts 26.7%, and marketing/delivery players 25.3%. The higher share of content owners such as Apple and Google is causing discontent among other players, since mobile ad revenues are much smaller than online ad revenues.

Connectivity is still a challenge

Even today, in spite of the vast improvements in technology, users continue to face network overload problems at busy times due to bandwidth constraints. This technical constraint is not only limiting the maximum volumes of ads that can be delivered by a network, but also affecting the overall picture quality, which in turn is hindering the growth of the industry.

Resistance from ad companies

Discouraged by the small revenue streams, ad companies are hesitant to adopt the medium and still do not consider it as an alternative to online ads. To overcome this problem, operators should consider offering them higher revenue shares. Though advertisers and ad companies are expressing an interest in mobile ads, they are still unable to fully comprehend the industry structure in view of its fragmentation and keep pace with the rapid technological changes. Furthermore, ad companies have limited knowledge of network technologies, handset specifications and OS platforms, which is further constraining the adoption of the medium. This is resulting in the current mobile ad spending being limited to a few million dollars.

Key players

Apple designs, manufactures, and markets personal computers, mobile communication devices, and portable digital music and video players. It also sells a variety of related software, services, peripherals, and networking solutions. With a closed proprietary app ecosystem built around its iPhones, iPods and iPads, and having launched its own ad network iAd, Apple is positioning itself to be a major competitor in the mobile ad space.

Launching iAd platform to boost mobile ad business

In April 2010 Apple launched iAd, a service that enables developers to include ads inside their apps. In addition to established players such as Nokia, RIM, Google, and Microsoft, Apple is also competing with established mobile ad networks such as Millennial Media, JumpTap and the Google-acquired AdMob. Apple will share 60% of the app revenues with developers, while retaining the remaining 40%. Armed with $600m-worth of mobile advertising contracts in H2 2010, the company is firmly placed on a high-growth trajectory.

The company is primarily positioning its iAd platform against Google's AdMob. Apple has revised its iAd terms and conditions, prohibiting third-party handset vendors and distributors and other OS platforms from advertising through its iAd platform. Although this ban equally applies to Microsoft and Nokia, Google is the most affected since AdMob places more ads on the platform than the other two. However, while Google has criticized the ban, Apple is yet to implement it.

Additionally, some marketers are experiencing delays in their ads' time to market periods on the iAd platform because Apple is closely involved in the creative and content aspects. This is resulting in a gestation period of eight to 10 weeks (from brainstorming to completion).

To better target its audience, Apple is studying the buying habits of its 150 million apps and iTunes users to generate behavioral profiles. It will then use this information to design more effective promotional messages to challenge Google in the mobile ad space. On its company website, Apple states that its "standard targeting options" include attributes such as demographics, application preferences, music passions, movie genre interests, television genre interests, and location. Notably, for the first time, the privacy policy of the iPhone 4 enables Apple to collect anonymous real-time location data on its users.

Moreover, Apple gathers a separate stream of data on its user’s activities, location, and buying behavior from its hardware devices. All these factors are raising serious privacy concerns. Additionally, as Apple caters to an exclusive clientele, it is unable to generate the sales volumes required to derive adequate scale economies.

Acquisition of Quattro Wireless enables Apple to battle Google

In 2010, Apple acquired mobile ad network Quattro Wireless for $250m to counter Google’s acquisition of AdMob and drive its mobile advertising business. Quattro is a platform that delivers ads on devices such as the iPhone. This acquisition enabled Apple to quickly scale up to launch its own ad platform, iAd.

iPhone Apps and iPad fuel growth

Apple is estimated to have sold 50 million iPhones so far, while its App Store has generated $2.4bn in revenues. In July 2010, Apple sold around 225,000 apps to its users. Its apps range from novelties and games to media sites, navigation tools, price aggregators, personal finance trackers, and even religious offerings (iTalk to God is immensely popular). App prices range from $0.99 to $899.99, but the average is $1.49. Additionally, many are offered free. Some ads are even disguised as apps in order to reach the target audience. The App store is transforming into a digital dollar superstore, which is attracting many impulsive buyers. The tremendous growth of apps has resulted in the emergence of a cottage industry around the iPhone where developers are devoting themselves only to building apps.

However, an app has to distinguish itself among the tens of thousands of app available at the app store, to be financially viable in the long run. While developers typically spend months and thousands of dollars to develop an app, it may end up with a shelf life of as little as two weeks. Gaining critical mass in such a dynamic market remains a challenge for developers.

Apple has created a mobile ecosystem – a “walled garden” – which it strictly monitors for content. Although Apple says that its platform is open, the company largely controls the application approval process and has many rules on how other players can operate on its platform. For instance, it has restricted the use of Google’s AdMob program on devices using the iOS platform. In June 2010, across Apple's three online stores – iTunes, App Store, and iBookstore – the company sold more than 150 million apps, while the number of downloads passed the five billion mark.