What’s working in mobile advertising — and what might work in the future

As Mary Meeker, the Queen of the Internet, made clear earlier this year, mobile is on the wrong side of a monetization gap. While consumers are spending more and more time on mobile devices, advertising revenue there is still lagging well behind traditional online — some $30 billion was spent in online advertising last year in the U.S. vs. $1.6 billion for mobile ads. Ad rates on mobile are 5 times lower than on desktop.

Mobile AdvertisingAdvertisers are expected to chase the eyeballs to mobile, though to what extent and how quickly is unclear. Mobile presents particular challenges for advertisers because they don’t have the same retargeting tools (like cookies) that they have online, the screens are smaller, and ads have the potential to be more intrusive than on the desktop. For now, marketers are spending more on ads for smartphones than for tablets, because more people own the former than the latter. But some of the metrics suggest that tablets may have better monetization potential. Click-through rates for the iPad, for example, are twice that of the iPhone, according to Inneractive, a mobile ad exchange, and thus the ad rates are also higher for the iPad.

Whether mobile ads ever catch up to online advertising in revenue will have huge ramifiations for big companies like Facebook (s fb), Twitter and Pandora (s p) whose audiences are rapidly shifting to mobile devices. Currently, the sectors that spend the most on mobile advertising are telecommunications, retail and restaurants, automotive, finance and education, according to Millennial Media. Many brands, however, are still just experimenting with mobile and are spending a very small percentage of their ad budget there.

Here’s a look at the main categories of mobile advertising, as well as some emerging strategies that publishers and developers are banking on to help close the monetization gap.

Search advertising

emarketer, mobile advertisingStill the big dog in mobile advertising, bringing in about half of all mobile ad spending. That is likely to continue as consumers turn to their smartphones as a research tool while on the go. As Google pointed out, the smartphone is often the first step in a longer research process that continues on a tablet or computer. Mobile search is also valuable for advertisers because most consumers are very intent-driven when they search on a mobile phone and are likely to complete a task after searching.

Google said that 9 out of 10 mobile searches by users have resulted in an action such as a purchase or a visit to a business. While Google, which pretty much owns this category, can obviously benefit from growing mobile search, local search engines like AroundMe and location-based services like Foursquare may also see a lift. The rise of mobile apps may also threaten Google as more consumers get their mobile queries answered through a dedicated application.

  • Amount forecast to be spent in the U.S. in 2012: $1.28 billion*
  • Companies with the most revenue: Google (95 percent of the market).

Rich media and video ads

Medialets, rich media mobile advertisingThese offer advertisers an often pricey way to take over a screen and give consumers what can be a more immersive experience. Advertisers can use video, animation, photo galleries and interactive elements, which can make mobile advertising more akin to a TV commercial or a slick magazine. Opera Software, the mobile browser company, reported in July that users who clicked on a rich media ad spent an average of 52 seconds viewing a video and 1 min and 25 seconds interacting with photos. Opera noted that advertisers have started using rich media and video ads more frequently this year than traditional banner ads.

  • Amount forecast to be spent in the U.S. in 2012: $647.1 million*
  • Companies with the most revenue: Apple iAd, Medialets, Crisp, Celtra

Banner display ads

Mobile advertisingSome of the most popular ad units in mobile are banner display adds, but in terms of ad spending, they were eclipsed by search ads last year. Display ads are still very prominent, in part because advertisers can buy in standard formats, like they’re used to doing online. But the units are problematic on small screens because they can trigger more accidental clicks.

And if advertisers keep the banners small to avoid turning off users, then they can run into another problem — namely that they’re harder to make engaging and thus easier for readers to ignore. A traditional online banner ad may fetch $3 to $5 for every thousand impressions, which is still a lot more than mobile banner ads, which receive $1 or less on a smartphone, the New York Times reported. Banner ads won’t fade overnight but they are losing favor with advertisers. Opera Software said that static and expandable banners went from 66 percent of ads in January of this year to 36 percent in June.

  • Amount forecast to be spent in the U.S. in 2012: $457.5 million*
  • Companies with the most revenue: Pandora, Google, Twitter, Millennial Media, Apple and Facebook

Those are the major mobile ad types that are growing. Below, are some other formats where the spending is smaller but that publishers and developers have high hopes for.

Location-based advertising 

Location-based mobile advertisingOne of the most promising parts of mobile advertising because it leverages the mobility of smartphones and tablets. But the early efforts have been slower to take off, in part because ads delivered via geo-fencing or proximity don’t necessarily catch people at a time when they want to act or don’t factor in a person’s preferences. Providers like Sense, JiWire and WHERE are getting smarter about mixing location data with behavioral profiles to deliver more relevant ads to people.

Companies like Waze, a crowd-sourced navigation app, and Roximity, which hooks into in-car entertainment systems, are showing how drivers can also be targeted with location-based ads in their car. There is a danger in being too pushy with location-based ads, and creeping out users who don’t know their location is being tracked. BIA/Kelsey forecast that U.S. mobile local ads, based on a user’s location, will grow from $664 million in 2011 to $5.8 billion in 2016.

  • Early leaders: JiWire, WHERE, Sense Networks

Native advertising

Facebook, mobile adsThe latest rage for companies like Facebook, Twitter and Tumblr. Unlike with standard ad units, publishers help advertisers create messages and content that work within the flow of their platforms. By using the existing units of content, like a tweet or update, advertisers have an organic way to advertise through mobile that is harder to ignore.

Facebook said it now gets 14 percent of all of its revenue via mobile sponsored stories and install ads, which appear right in the news steam of its mobile apps and website. EMarketer estimated that Twitter would make $129.7 million in mobile advertising this year, more than Facebook. The challenge with native advertising is that it can be hard to replicate across different publications and often requires more work to cater to each platform.

  • Early leaders: Facebook, Twitter, Tumblr


There are some other approaches that show that it’s not just about placing a basic ad somewhere in an app or website. Kiip (see disclosure below) rewards people after achievements and milestones during games and apps. Pontiflex lets people sign up to receive ads and offers from brands they select. Appssavvy allows advertisers to place ads alongside activities inside apps and websites. Tapjoy helps people earn in-app rewards for watching videos, installing apps or subscribing to services. Conduit is creating lock-screens for Android devices that can be branded and potentially carry advertising.

*figures from eMarketer

Disclosure: True Ventures is an investor in Kiip and the parent company of this blog, Giga Omni Media. Om Malik, founder of Giga Omni Media, is also a venture partner at True.