In Part 1 of Monetizing Mobile, I discussed Facebook’s (NasdaqGS: FB) decision to make “sponsored stories” in the news feed the “cornerstone” of its mobile strategy. My skepticism of this mobile strategy is based on the fact that the Facebook advertising platform was developed for a desktop PC with wide swaths of open “real estate” to the right-hand side of news feeds and discussion posts, not a mobile device with small video screens. Furthermore, the text-centric communication function of Facebook is not conducive to advertising, which needs rich media images to attract users and get them interested in buying something. Sponsored stories risk the exact opposite – cluttering up the essential communication function of news feeds and make them less attractive to mobile users. According to digital marketing agency Organic Inc.:

The dilemma for Facebook now is the more successful sponsored stories are in terms of driving their revenues, the more intrusive they will be into the user experience.

A recent Reuters online poll found that four out of five Facebook users have never bought a product or service based on anything they saw on the website, and 34% of users are spending less time on the website than six months ago. Could an increase in the use of annoying advertising on the site be a chief culprit?

To be fair, preliminary data shows the click-through-rate (CTR) for Facebook’s sponsored stories to be higher than for other types of ads on Facebook, so there is some hope. Facebook is also trying to improve the visual experience on mobile devices through its recent purchase of the creative team at Spool, but while this may increase the amount of time mobile users stay on the Facebook website, it doesn’t solve the mobile monetization issue.

Geo-Location Targeting is the Future of Mobile Advertisements

So what does work in mobile advertising? The answer involves tailoring advertising to either:

1. websites that help users find information they are searching for, or
2. products and stores that are physically located near the mobile user and easily accessible while the user is out and about

Examples of companies that are exploiting the first mobile niche include Google (NasdaqGS: GOOG) with its search website, as well as Amazon.com (NasdaqGS: AMZN), eBay (NasdaqGS: EBAY), Expedia (NasdaqGS: EXPE), and Kayak Software (NasdaqGS: KYAK) with shopping-specific and price-comparison websites.

The second mobile niche promises the most growth because it remains mostly unexploited: geo-location targeting. Mobile’s primary strength: location, location, location!  People use their smartphones when they are out of the house and traveling. Doesn’t it make sense to target retail opportunities that are close to where a person is actually located?

According to a white paper by mobile advertising firm Adfonic, mobile display advertising is “growing at a phenomenal rate” and “mobile geo-location advertising will be a big number in 2015.” Consider the following facts:

• 94% of purchases are still made at physical locations. That means geo-location will be considerably more appealing to retailers than developing a transaction-enabled mobile site or app.
• 50% of all iPhone iOS and Android data traffic is available to mobile ad networks for geo-location targeting purposes.
• More than 50% of smartphone users have performed “shopping activities” (e.g., price comparisons) and 38% have actually made a purchase using their smartphone.
• 16.7 million US mobile subscribers used location-based “check-in” services on their phones in March 2011, of which 12.7 million check-in users were using a smartphone.
• 80% of US consumers are prepared to share a little of their location data provided they get something back in return and their data is not shared.
• 39% of consumers said coupons for nearby stores was one of the most appealing aspects of location-based advertising.
• Location-relevant ads increase the digital mobile advertising average mobile click-through rate (CTR) from 0.5-0.8% to 1.5-2.0% and up. The increase in CTRs is even greater when compared to desktop Internet usage: 10 to 20 times greater!

Despite the higher CTRs, the cost per 1000 impressions (CPMs) for geo-location targeted mobile advertisements is between $3 and $5 ($0.30 cost per click) which is similar to the cost of standard mobile advertisements. This is likely to change as clients are better educated on the improved performance of geo-location targeting. For example, Adfonic envisions the CPM for such advanced ads to eventually increase by 100-fold to $300 or higher, with the CPM varying by the physical distance away from the store the mobile user is located at the time she receives the advertisement.

According to Mary Meeker of venture-capital firm Kleiner Perkins (slide 16), mobile monetization is currently focused on the sale of proprietary device-linked apps (71% of revenues), not advertising (only 29%). This lopsidedness currently benefits Apple and its app-heavy iPhone, but advertising is likely to become a much-larger slice of the mobile profit pie as web-based apps using HTML5 steal customers from proprietary device-linked apps. Meeker says that the opportunity for mobile advertising in the U.S. is huge at $20 billion — given that total Internet advertising amounts to $30 billion and mobile advertising is currently only $1.6 billion (slide 17). Whereas she thinks that mobile advertising will naturally increase over time with mobile Internet usage, others think that mobile usage is so different from desktop usage that mobile advertising needs a catalyst and that catalyst is geo-location targeting.

Just as desktop Internet advertising didn’t take off until downloaded “cookies” allowed advertisers to target users based on their browsing history, geo-location will allow advertisers to target mobile users based on their, well, location:

The guys who understand the concept of mobile best are the street vendors in New York City. They set-up carts on the street corners and they sell all sorts of items like DVDs and sunglasses and purses. But when they feel a few drops of rain, they all quickly flip their carts over and start selling umbrellas. This is a brilliant sales strategy because they are adjusting their marketing based on what people are doing (walking around NYC) and what is happening around them (it is raining) to deliver a message and product that really resonates.

The opportunity is immense, but location is not without its problems. The industry is immature and running these campaigns is not easy. There are privacy considerations that advertisers need to be mindful of. The tools to track and report on metrics are still being developed. But fundamentally, to get real performance from mobile and to unlock the pent up budgets of advertisers, we need to truly understand what makes mobile unique and play to its strength. Location and portability are that opportunity.

Local Advertisements Are More Profitable in Mobile

No wonder then that Facebook is unwilling to rely entirely on sponsored stories for its mobile strategy, but is reportedly also eager to develop a location-based ad program. Apple is also furiously trying to expand beyond proprietary apps into mobile maps and search but can’t dislodge Google.

The big winner in mobile advertising is likely to Google because it is the leader in maps and search – both natural venues for mobile applications. In fact, Google recently announced improved local ads for its mobile maps service. Whereas 20% of total searches on Google are local, double that number (40%) are local in mobile search. This explains why Google established its Local Extensions service for national advertiser clients and why its mantra is:

“”mo’ lo’ means mo’ dough.”

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