Going Mobile: How iAd and AdMob Move Apple vs. Google to a New Playing FieldPublished: May 26, 2010 in Knowledge@Wharton
What spending in the mobile advertising industry lacks in heft, it more than makes up for in buzz. Witness Google's recent purchase of AdMob, which brings together the two largest mobile ad networks, and Apple's recent efforts to gain a stronger foothold in the market.
On May 21, the Federal Trade Commission signed off on Google's $750 million acquisition of AdMob, a move that originally created antitrust fears because the two are the biggest players in the market of bringing ads to consumers' smartphones. Fears of dwindling competition were quashed in part due to Apple's own attempts to become a stronger player in the sector. Following an unsuccessful bid to buy AdMob, Apple in January purchased Quattro Wireless, the third largest mobile ad network, for $275 million. Last month, Apple introduced iAd, a service that places ads inside applications running on the company's mobile devices, including the iPhone and iPad.
In a statement permitting the Google/AdMob deal to move forward, FTC officials said they had "reason to believe that Apple quickly will become a strong mobile advertising network competitor," and that any competition lost because Google and AdMob are no longer jockeying to place ads on the former's Android platform will be made up for by rivalry between Android-enabled devices and the iPhone, where Apple will be using its iAd network exclusively.
The battle between two major players could represent a tipping point for mobile advertising, Wharton experts and others say, and suggests that the sector could become a significant money-maker in the future. "Mobile advertising is likely to be the next big thing," says Wharton marketing professor Eric Bradlow. "People are increasingly using their portable devices as computers and will have the same expectations for targeted ads as they do on the web today. What exact form those ads will take is unclear, especially with [the growth of] geo-targeting," or the ability to target a consumer based on where he or she lives, or is spending time at a given moment.
AdMob, one of the largest mobile ad networks, services billions of personalized ad impressions (views). The company reaches 160 countries and provides a suite of data and analytics services to help marketers track the traffic their ads receive. The company was founded in 2006 by Omar Hamoui who, in a past interview with Knowledge@Wharton, compared AdMob's services to the way Google handles ads on the Internet. While iAd will be specific to Apple products, Quattro -- which offers similar services to AdMob -- said at the time of its purchase that the company will continue to offer its network on all devices and platforms.
The motive behind Google's and Apple's acquisitions is clear: Define the market while the industry is young. Mobile ad spending in the United States, including text messaging-based formats, reached an estimated $416 million in 2009, compared with almost $24 billion that was spent overall for online advertising, according to eMarketer, a New York-based business information service. But the company predicts that spending on mobile ads will grow to $1.56 billion in the United States by 2013.
Meanwhile, the mobile ad land rush heightens the competition between Apple and Google, two companies that are already going head-to-head on mobile operating systems (Google's Android vs. Apple's iPhone OS) and the applications that go with those platforms, Wharton experts note. "Google's acquisition of AdMob is a smart move when you consider that Apple is also looking at mobile advertising," says Andrea Matwyshyn, a legal studies and business ethics professor at Wharton. "Google views advertising as core to its self definition. It couldn't cede mobile advertising to Apple."
Two Different Strategies
The companies' approaches to mobile advertising will be heavily influenced by their overall business strategies.
Apple is entering the sector with an eye to how it already markets other aspects of its product line -- charging higher prices, but promising more bang for an advertiser's buck in terms of innovation and the opportunity to reach a coveted consumer audience. The company is constrained in the number of consumers it could reach with iAd because the service is limited to those who own its mobile devices. Google's Android operating system, however, is already offered on a number of different smartphone brands, and the ranks continue to grow. During the first quarter of this year, for example, phones running the Android system outsold the iPhone for the first time, according to NPD group, a research company.
"Apple won't be able to sustain the same reach with just a couple of devices, and advertising is fundamentally a medium about how many consumers you can reach," says Noah Elkin, a senior analyst with eMarketer. "But the profile of iPhone users is so attractive to advertisers that Apple is betting on being able to sell an advertiser on having access to this audience -- that the cost may be a little more, but they are ultimately getting more in return."
Bloomberg BusinessWeek reported that Apple is expected to charge about $10 per 1,000 times an ad is displayed and $2 each time it's clicked on by a user, which works out to about $30 per 1,000 impressions. AdMob charges $10 to $15 on average and is paid for either ad impressions or clicks, as opposed to both, the magazine reported.
During the introduction of iAd last month, Apple CEO Steve Jobs demonstrated the type of media-rich promotions the company is hoping to bring to mobile devices. As an iPhone screen was displayed for the audience, he clicked on a banner ad for the movie Toy Story 3 that stretched across the bottom of a search results page listing entertainment news. The ad took up the phone's entire screen and included video clips, a game and a way to search for theaters showing the movie.
"The idea of ads as content has been ... bandied about by advertisers for a long time but has never really been brought to fruition because consumers just see them as ads," Elkin states. "Apple's proposition [is] that it's going to create ads, but people will want to click on them because they are getting something valuable in return."
Matwyshyn says it should be interesting to watch how Apple and Google compete and shape their respective strategies for mobile advertising. "Apple's approach is less predictable," she notes. "If Apple comes up with something uniquely innovative with promotional opportunities, it could be perceived as a benefit by consumers, and Apple could gain users." At the same time, Apple could alienate users if it comes on too strong with mobile advertising.
Although Apple is hoping to cash in on the allure of its customer base, users of the Android platform have a similar profile, Elkin says. They are affluent enough to afford a smartphone and tend to be highly engaged with the devices.
"Google controls close to 70% of [computer] search; that's the core part of their business and I think they recognized that, with the iPhone and the growth of mobile apps, app stores and ad-supported apps, Apple has really hit on something," Elkin notes. "They realized that in addition to [focusing on] search on mobile devices, there was this important display ad medium, whether it was on websites accessed through a mobile browser or apps that are supported by display advertising. [Mobile advertising] was a market they couldn't ignore."
The AdMob acquisition gives Google "the dominant position in the mobile advertising space," says Kartik Hosanagar, an operations and information management professor at Wharton. "This not only opens up a new growth opportunity for Google but also has great synergies with Google's existing offerings. Google can now offer advertisers a single platform to access the lion's share of search and mobile ad inventory."
In a blog post, Susan Wojcicki, vice president of product management at Google, wrote that growth in mobile advertising "is only going to accelerate," and publishers, developers, marketers and consumers should all benefit. The combination of AdMob's network with Google's Android operating system, search advertising, analytics and DoubleClick, which serves online display ads, offers a powerful ecosystem to advertisers, says Hosanagar.
Meanwhile, Apple is trying to leverage its market advantages to take hold of a similar opportunity. "There's a lot of money to be made here," says Kendall Whitehouse, director of new media at Wharton. "Apple is already a content gatekeeper on its mobile platforms, and moving to advertising is a straightforward transition.... Apple's vertical integration with the iTunes store, mobile devices and the Mac gives it a strong hand in moving into advertising."
But Elkin points out that both companies' models have advantages and limitations. "Having an open platform is an advantage; it makes it easier for partners to work with Google [including] handset partners and ad networks.... The downside of it, and this is where Apple's value proposition lies, is not having control over the experience from beginning to end. Of course, having so much control has its downside, too, in terms of what the consumer ultimately gets and also the perception that you're not really free to do what you want, whether you're an advertiser or a consumer."
Despite the companies' different approaches, it is doubtful either will cede control of the mobile advertising space, Hosanagar says. "Given Apple's penchant for control over its full ecosystem, I doubt Apple is going to watch someone else extract all the ad dollars that will be generated on its platforms."
Why Mobile Advertising
How big is the growth potential for mobile advertising? Big enough to be a potential game-changer for the companies, Wharton experts say.
"Mobile advertising certainly represents the biggest growth opportunity for Google," says Hosanagar. To date, Google has mostly been a one-trick pony, with most of its revenue deriving from Internet search advertising. With the purchase of AdMob, the company's future growth could revolve around mobile advertising.
The combination of Google and AdMob will derive revenue from five primary sources, according to Caris & Co. analyst Sandeep Aggarawal. The merged companies will service mobile advertisements and deliver ads within mobile applications, paid search results on mobile phones, text messaging ads and recommendations to download particular applications.
"There are close to four billionmobile phones globally vs. only 1.2 billion computers," Aggarawal wrote in a research note. "Google generated $1.00 in paid search revenue per PC in the installed base in 2003, [a figure] that reached $21.50 by the end of 2009. Even if Google can generate $1.00 per mobile phone in the installed base by 2013, it can be a $4 billion revenue opportunity." In addition, the ability to better target users with mobile ads means that Google's advertising partners could more easily convert clicks to actual purchases. "What you see in the Google and Apple moves is the importance of data and analytics," says Steve Ennen, managing director of the Wharton Interactive Media Initiative. "With mobile advertising, you can see what users are actually doing [behaviorally]."
It's unclear whether the relationship between Google and Apple will be further strained by their respective forays into mobile advertising. Google's services power multiple features on the iPhone, ranging from search to YouTube to Google Maps. While those features may continue, Apple may move to control more of the advertising revenue derived from those services. "On the advertising side, both Google and AdMob make significant revenue from iPhone and apps," Aggarawal wrote. "We believe that Google's and AdMob's combined revenue [from] Apple is around $150 million to $200 million."
While both Google and Apple see mobile advertising as a future growth market, the industry is still emerging. United Kingdom-based Juniper Research estimated in June 2009 that mobile advertising will be a $6 billion market worldwide in 2014. However, that sum will only account for 1.5% of the global spending on advertising in 2014.
"Both acquisitions are about the ecosystem and the move to mobility," says Ennen. "This moves beyond just smartphones to the iPad and other devices."
Wharton management professor David Hsu agrees, noting that interest in mobile ads will grow along with the rapidly expanding smartphone market. "Moves like Wal-Mart discounting the iPhone 3GS to $97 will have a substantive impact. And that's just the hardware side," he says. "The carrier fees for data access are still not necessarily accessible by the majority of the population, but that's likely to change. People will become more accustomed to accessing data on the go, and it's on those platforms that mobile ad networks become quite important."
AdMob founder Hamoui was in Hsu's classes as a Wharton MBA student when he came up with the idea for the ad network. "That was in 2006 and, just a few short years later, Apple and Google are fighting over the company," Hsu says. "I think that shows how quickly movement within the space is [happening] with respect to its development."
A Challenge of Location and Context
Advertising within mobile applications will be "as big as [its ability to be] contextual and targetable," Bradlow notes. By harnessing the data related to location and customer habits available from smartphones, Google and Apple can do a better job of positioning ads as a helpful tool for consumers, rather than nuisances that get in the way of a search or the use of an application.
But the companies may find that the mobile ad market is more complex than that of traditional Internet advertising. For one thing, ads are only one way to generate revenue in the mobile arena. "The reason advertising was so successful on the web was that it was the only game in town for monetizing content," says Whitehouse. Mobile users are already paying to load their phones with applications, ringtones and music; bombarding them with ads as well may be perceived as too pushy, he adds. "People will tolerate some mobile advertising, but there may be barriers to user acceptance at the beginning. Marketers will need to make sure their ads aren't too intrusive."
Matwyshyn suggests that mobile advertising could overcome some of those roadblocks by combining promotions with a social networking component that would "encourage consumers to make a decision on one vendor over another." As an example, she pointed to Groupon, a website offering markdowns on restaurants, attractions and services that are activated only after a certain number of consumers commit to purchasing. Those who have already signed up for the site are encouraged to invite friends to do the same in order for everyone to earn the day's discount.
The more Google and Apple understand their users, the more intimate mobile advertising will become, notes Hosanagar, who describes mobile advertising as "a combination of location and context." Companies are getting more adept at delivering ads based on a user's location, but are still learning how to offer discounts within the context of a consumer's activities at that location. "It does not help to show an ad from a neighborhood restaurant or salon if they are not relevant to my current context," Hosanagar points out. "Am I sipping coffee at a cafe? Or in a meeting with colleagues from work? Or looking for dining options? The context part can be inferred from the content being browsed -- something Google does well -- and also from user-specified updates like those on [location-based social networking sites like] Foursquare. At the end of the day, being able to combine location with context will drive consumer response in mobile advertising."