meeker

Mobile Advertising:
The $20B Opportunity Mirage

There are a lot of questions left to be answered about Facebook’s IPO fiasco, but one thing we know is this: As consumers shift their use of Facebook from PCs to smartphones, investors worry about lower mobile advertising revenues. Is this a temporary situation that will be remedied when usage patterns settle, or do investors have a right to be concerned? Must the advertising industry learn to adapt to a permanently leaner income stream from smartphones?

Let’s start by taking another look at Mary Meeker’s latest Internet Trends presentation from last week’s All Things Digital conference. On slide 17, she projects a $20B opportunity for Mobile Advertising in the US:

When Meeker uses the word “opportunity”, she means “unfulfilled potential”: Mobile Ad Spend in the US alone should be $20B larger than it is. For reference, Google’s latest quarterly revenue was about $10B worldwide.

$20B is a big number, and it got me thinking. How is it possible that the industry’s richest and most sophisticated players are unable to grab such a big pile of money? They have the brains and the computers, they’re aware of the situation…Is there a deeper problem?

A too-easy answer is the market’s age: Mobile advertising is still in its infancy. But that’s an indefensible excuse: The first iPhones shipped in late June 2007, the Smartphone 2.0 era is now five years old. Both Android and iOS are prosperous platforms with bulging App Stores, they sell tens of millions of devices every month, close to half a billion this calendar year. Brand managers, advertising agencies, search engines, social networks, a myriad of vibrant startups keep trying, but mobile advertising barely moves the needle.

We get closer to the heart of the matter when we look at a common thought pattern, an age-old and dangerously misleading algorithm:

The [new thing] is like the [old thing] only [smaller | bigger]

We’ve seen this formula, and its abuse, before. Decades ago, incumbents had to finally admit that minicomputers weren’t simply small mainframes. Manufacturers, vendors, software makers had to adapt to the constraints and benefits of a new, different environment. A semi-generation later, we saw it again: Microcomputers weren’t diminutive minicomputers but truly personal machines that consumers could lift with their arms, minds, and credit cards.

The “Tech-savvy We” should know better by now; We should have learned, but the temptation — and the lazy easiness — of the “X=Y but for the form factor” algorithm continues to derail even Our most “different thinkers”. When the iPad was introduced, a former Apple Director described the offering thus: “It’s just a big iPod Touch” (which proves nothing more than that Steve Jobs didn’t burden his Board of Directors with loads of information).

At the D8 conference in 2010, in front of an iPad-toting audience, a bellowing CEO dismissed Apple’s tablet as just a PC, minus the keyboard and mouse. (And I’ll share the shame: On April 3rd 2010, I looked at my new iPad through PC goggles and lamented the Mac features that were “missing” from my new tablet.)

Now we have advertising on smartphones, and we’ve fallen into a comfortable, predictable rut: “It’s just like Web advertising on the PC, shrunk to fit.” We see the same methods, the same designs, the same business models, wedged onto a smaller screen.

PC advertising has successfully navigated different screen sizes. On a large screen you might see something like this:

Plenty of space for both advertising and content. Even on a smaller screen, the ads are unobtrusive:

But on a smartphone, this is the advertising that’s supposed to entice us:

…and this is the NY Times, one of the better mobile apps.

Mobile ads aren’t merely smaller, they have less expressive power, they don’t seduce…and they’re annoying.

Of course, there’s more to the smartphone misunderstanding than the fairly obvious screen size problem. There’s also a matter of how we use our computing devices.

When we sit down in front of a laptop or desktop screen, our attention is (somewhat) focused and our time is (reasonably) committed. We know where we are and what we’re doing.

With smartphones, we’re on the move, we’re surrounded by people, activities, real-world attractions and diversions. As yet another Mary Meeker presentation suggests, time spent on mobile devices is fragmented:

We’re not paying (a loaded word) the same type of attention as we do on a PC.

Business Insider features an InMobi report on mobile ads, with the following comment [emphasis mine]:

Those ads were served across 6 billion mobile devices. That’s less than $1 per device, per year—a tiny sum. That tells you how far mobile advertising has to go, and how massive it will become in the next five years.

The dollar-per-device statement is a fact, the assumption of “massive” growth is wishful thinking.

When I hear that there’s a mother lode of advertising revenue in location-based ads that are pushed to my mobile phone as I stroll down Main Street (with my permission…I hope), ads that offer succulent deals in the stores and restaurants I’m about to pass, I wonder: Do we want barkers on our devices? Is this the game changer for mobile advertising, yet another kind of spam? LBA may be a hot topic among marketers but the public is dubious, as this MobileMarketer article soberly explains:

The reality is that this scares consumers, rather than excites them. Mobile marketers need to realize that what gets them and their peers fired up does not necessarily move consumers in the same way.

And this…

According to [Rip Gerber, CEO of Locaid Technologies, San Francisco], marketers create their own privacy obstacles when they forget relationship, relevance and preferences in favor of short-sighted metrics.

If the industry hasn’t cracked the mobile advertising code after five years of energetic and skillful work it’s because there is no code to crack. Together, the small screen, the different attention modes, the growing concerns about privacy create an insurmountable obstacle.

The “$20B Opportunity” is a mirage.

JLG@mondaynote.com

Mobile + Cloud + Social

These are the three interdependent forces that power the biggest wave of growth, change, and destruction I’ve seen since I have been allowed to take part in the high-tech industry.

In the beginning (or mine, anyway), back in 1968 when I was, miraculously, offered a salary to be part of HP France there was the mainframe. IBM – “The Company” — reigned supreme, a dynasty that seemed unassailable. The IBMer wore a suit and tie when approaching the punch card feeder. Big Blue’s competitors, the BUNCH, were also called the Seven Dwarfs because their combined market share couldn’t compare to IBM’s dominance.

A few years later, the dress code relaxed a bit and Digital Equipment Corporation’s minicomputer displaced mainframes. IBM still exists, of course, although under a different guise, but DEC is no more. They were acquired by Compaq in 1998, killed by the Personal Computer.

The PC era lasted longest of all, more than 30 years, partly due to Moore’s Law: “The microprocessor shall double its power every 18 months”, and then repurposed as a transmission medium with the advent of the Internet. Thanks to the standardization enforced by the Wintel duopoly, the industry manufactured hundreds of millions of PCs, giving rise to an inexpensive clone organ bank that largely displaced higher lifeforms such as Sun servers (the company that once claimed to ‘put the dot in dot.com’). As an example, the five million servers deployed by Google use a combination of such parts — and private versions of Linux.

Referring to the PC era in the past tense is contentious. In a now famous post, Frank Shaw, the literate head of Microsoft’s Corporate Communications, contends that  ‘the 30-year-old PC isn’t even middle aged yet, and about to take up snowboarding’. I’m writing this on an Intel-powered personal computer and don’t feel particularly necrophiliac. But the marketplace has spoken: The PC is, at best, stalled. Looking at last quarter’s Microsoft numbers, shipments to business customers are still growing, about 5% year-to-year, while the consumer market is flat. (From Gartner, more details on the PC sales slowdown here.)

Contrast this with the rise of Google’s Android smartphones, Facebook, Twitter, Apple’s iOS devices (iPhone, iPad, iPod Touch), Zynga, LinkedIn… And the fate of the incumbents, Nokia, Palm, RIM, Microsoft… They’ve all been displaced, ‘‘flummoxed” in Steve Jobs’ words.

We just got the latest Mary Meeker presentation, now on the Kleiner Perkins web site as she joined the grand Valley venture capital firm, a great combination of PR and talent acquisition. Mary Meeker’s opus is 66 slides long and covers so much ground it could become overwhelming, but it’s worth your time. The range of topics is impressive: e-commerce, the global race to adopt mobile devices and apps, on-line payments, social networking as a pervasive wave of opportunity spanning the online experience. She ‘posits that the mobile revolution is still in its infancy and poised for tremendous growth’.
Regarding the changing of the guard:

She then points to the new entrants clobbering the smartphone incumbents:

But, there’s more than clobbering, there’s location. When it comes to operating systems, ‘Made in USA’ – and, more specifically, Silicon Valley, the Detroit of computing – still means something:

As much as I like and admire her presentations, I’d take a slightly different angle.

First, as Horace Dediu meticulously points out in his Asymco blog, I’d emphasize the startling creation and destruction of value that has taken place in the past four years, since Apple and Google have entered the field. (For a slightly less analytical and more animated take, there is also Brian Hall’s Smartphone Wars, occasionally NSFW, never dull.)
Calling what’s taking place “the biggest wave of growth, change and destruction” is no hyperbole: One company, Apple, went from zero to $70B in mobile revenue in 4 years; another, Google, propelled its Android platform to the top of the smartphone class; Samsung ships more phones than anyone else; Nokia lost its crown, it sales went down 13% year-to-year last quarter; Palm is no more; and Microsoft Windows Mobile sales are so small the company omits them in its latest quarter release, merely mentioning ‘favorable reviews’, confirming Ballmer’s earlier statement: “In a year, we’ve gone from very small to … very small.” This from the man who once predicted Windows Phone would get a 40% market share in 2012. When Nokia finally starts shipping Windows Phone 7 devices, we’ll see how Microsoft manages in the unusual role of being number three in a race.

Second, the combination. While both mobile revenue displacement and growth are impressive, the real revolution is in the Mobile + Cloud + Social explosion.
Why does Google ‘‘give away’’ Android, both the OS and applications? Android is a Trojan Horse that protects Google’s one and only business model, advertising, on mobile devices: Cloud + Mobile.

Facebook, an interesting challenge to Google, isn’t just a Social company, it could only reach its current 800 million registered users by deploying a scalable Cloud infrastructure.

Apple, rightly described as focused on great devices (read “hardware”), could only succeed with the iPod because of its iTunes service in the Cloud. This is the same iTunes that gave birth to the iPhone App Store, the great game changer, the Cloud service that morphed smartphones into app phones. Apple’s Cloud maneuvers haven’t always been felicitous — the company struggled with MobileMe — but they never gave up. We’ll soon see if the newly available iCloud, with its original approach to local caching and synchronization finally ‘‘Just Works”.

Lastly, emphasizing Meeker’s point about geography, inside a tiny circle, ten miles in diameter, we have three cities: Mountain View, Palo Alto and Cupertino. Google, Facebook, and Apple. Three companies redefining the future of computing, the new Mobile + Cloud + Social wave.
In the history of computing, there’s never been so much power concentrated in such a small area.

JLG@mondaynote.com