Advertisers cautious of move to mobile

This is a movie that the internet industry has seen before, says Joe Kennedy, chief executive of Pandora, the US internet music service that counts itself among the top five beneficiaries of mobile advertising.

Internet users may be flocking to mobile devices, but profits have been scarce as many advertisers remain wary of the new medium.

Mobile internet use accounted for 10.1 per cent of media use in the US at the end of last year but attracted only 0.9 per cent of the total money spent on advertising, according to US research firm eMarketer. Pandora, which sees 70 per cent of its use on mobile but gets only a third of the advertising yields there compared with what it receives on the web, is one of many advertising-based internet companies to suffer.

This makes the emergence of the mobile internet a replay of the Dotcom era, claim Mr Kennedy and other executives: advertisers will inevitably follow, once the medium matures.

"There's nothing different here from what happened with the internet," he adds.

Wall Street and Silicon Valley are both hoping he is right – and that the mobile world is not destined for its own version of the Dotcom bust before the promised pay-off arrives.

For now, advertising rates are "terrible", with CPMs, or cost per thousand views, running at 35-40 cents, says Matt Murphy, who runs the mobile start-up fund at venture capital firm Kleiner Perkins. That compares with rates that are as much as 20 times higher for premium web sites. With advertising the lifeblood of much of the PC-based web, that has left a yawning chasm for many companies to cross before they can cash in on the latest internet boom.

"A year from now, the vast majority of traffic [for many internet companies] will come from mobile," says Mr Murphy. "They can all see the writing on the wall."

Thanks in part to lower advertising rates on mobile, the average amount of money Google makes each time a user clicks on an advert has fallen in each of the last three quarters, with the decline accelerating to 16 per cent in the latest quarter. Facebook, meanwhile, revealed that the 16 per cent growth in its daily user numbers in the US and Europe in the latest quarter was entirely due to mobile, where it has just started experimenting with advertising. As a result, in the same quarter that the company made its debut on Wall Street, the number of adverts it carried in the US actually fell.

Like Mr Kennedy at Pandora, most internet executives claim that this is a temporary state of affairs that will end once the industry finds advertising formats better suited to the medium and develops new infrastructure and techniques, from analytics and data on the performance of mobile ads to new forms of targeting.

"We basically as an industry took the desktop model and placed it on top of mobile," says Carolyn Everson, head of advertising at Facebook. The social networking company chose instead to hold back and introduced mobile advertising only in March of this year. Its chosen form – ads known as sponsored stories that are placed in users' newsfeeds – is going down well with both consumers and advertisers, she claims. However, at about $500,000 a day, it has a long way to go to become a meaningful new source of revenue.

On Tuesday, Facebook announced its second mobile experiment, letting app developers pay to have users directed to a mobile app store to download their software. This "pay-per-download" model is well suited to mobile devices and is already turning out to be one of the most effective forms of mobile advertising, says the partner at one of Silicon Valley's most prominent venture capital firms.

This points to a range of new direct-response methods that supporters claim are well suited to mobile, from click-to-call (charging advertisers when a user responds to a message by calling a phone number) to tapping on an advert for a new movie and having the launch date entered into a mobile diary.

Despite the perennial optimism that pervades the internet industry, however, mobile advertising faces inherent limitations, and not just because of the smaller screen sizes and limited user attention.

On mobile, advertisers lack an important tool for assessing relevance because they are unable to place cookies on mobile devices to track users' interests and support the kind of behavioural targeting seen on the web. The location information sent out by mobile gadgets promises to replace this with a valuable new form of data, but for now, most companies say they are holding back from trying to apply the information because of the lack of accepted norms for how to use the information without infringing privacy. "Society is still working that out," says Mr Kennedy of Pandora.

As a result, most new internet start-ups try from the outset to diversify beyond advertising, says Mr Murphy, of Kleiner Perkins. Ecommerce companies have so far made the transition to mobile with less disruption: eBay last month cheered Wall Street with the news that it is expecting $10bn in purchases on its site to take place from mobile devices this year, double the level of 2011.

Subscriptions businesses are also taking hold, with users proving more willing to pay for the convenience of tailored services on mobile than they were on the Web, according to Mr Murphy. Companies such as online storage company Dropbox, note-taking app developer Evernote and music service Spotify have all found that the mobile world creates a new demand for premium services.

Mobile advertising, the biggest prize, may eventually follow – but the smartest mobile companies are not waiting to find out.

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