The New Advertising Age

The story behind the startup that grew to become the biggest mobile technology acquisition in Google's history begins five years ago in a small dorm room on the campus of the University of Pennsylvania. At the time, Omar Hamoui was pursuing an MBA degree at Penn's prestigious Wharton School while struggling to kick-start fotochatter, a mobile social networking startup that lets users share photos with friends. The challenge was reaching consumers: Online advertising for a mobile service was not only impractical, it was also prohibitively expensive--Hamoui calculates that the time and money spent marketing the company translated to customer acquisition costs of $30 per user. So he turned to the emerging mobile web instead, paying sites a penny per click to promote the fotochatter solution. "About 10 percent of people who clicked the mobile ad signed up for the service," Hamoui recalls. "Our customer acquisition cost dropped from $30 to 10 cents overnight."

The lessons Hamoui learned from marketing fotochatter led to the January 2006 launch of AdMob , a mobile platform that allows advertisers and publishers to navigate the discovery, branding and monetization complexities hampering their own efforts to target wireless subscribers.

"I was a single individual trying to do something in mobile," says Hamoui, CEO of the company, which is based in San Mateo, Calif. "I became frustrated because I didn't have a deal with an operator or a handset maker. I needed a way to connect with users. AdMob was started to help people with interesting ideas bring them to fruition."

AdMob now serves more than 10 billion banner and text ads each month across more than 15,000 mobile websites and applications, with a client list that includes Coca-Cola, Procter & Gamble, Adidas and Paramount Pictures. In early November, Google announced an agreement to acquire the firm for a staggering $750 million in stock, the digital services giant's third-largest deal ever, behind Internet advertising solutions provider DoubleClick ($3.1 billion) and video aggregator service YouTube ($1.6 billion).

Privately held AdMob doesn't disclose revenues, but J.P. Morgan estimates that the company generates between $45 million and $60 million annually. Based on those figures, the Google deal was priced at a multiple of as much as 16.7 times revenue--the kind of valuation that evokes the gold-rush heyday of the dotcom era.

Research firm IDC estimates that together, AdMob and Google control a 21 percent share of the U.S. mobile advertising market. AdMob's closest competitor, mobile advertising network provider Millennial Media, accounts for 12 percent, followed by Yahoo at 10 percent and Microsoft at 8 percent.

Most analysts agree that the AdMob deal not only signals validation for the mobile advertising segment as a whole (research firm Gartner reports mobile ad spending worldwide increased 74 percent in 2009, to $913.5 million), but that it's also likely to set off a wave of me-too acquisitions as Google's rivals look to balance the scales. Apple was the first to respond, scooping up mobile ad network Quattro Wireless in early January for a reported $275 million.

While mobile still represents just a fraction of advertiser budgets--research firm eMarketer estimates that U.S. mobile ad spending reached $416 million in 2009, compared with $24 billion for online marketing--Hamoui contends that businesses of all shapes and sizes must now give the channel their undivided attention, especially with more traditional advertising mediums on the decline.

"If online advertising is important to your business, then mobile represents a huge opportunity as well," he says. "Mobile is going to be without dispute the next media platform people will consume in significant numbers. Companies who begin to use mobile advertising now are going to benefit substantially over their competitors."

What sets mobile advertising apart from traditional ad media such as newspapers, radio and television--and even the Internet--is its reach and its relevance. According to the International Telecommunication Union, there are 4.6 billion wireless subscribers worldwide: Mobile phones outnumber television sets by 3 to 1 and outpace the total desktop and laptop population by almost 5 to 1. No less significant, mobile is a two-way medium, enabling advertisers to directly engage with users via formats such as opt-in SMS bargain alerts and search queries alongside display ads, pre-roll video spots and in-application ads.

Because consumers carry their handsets with them everywhere they go, advertisers can introduce time- and location-sensitive promotions that target customers anytime and anyplace, including the point of sale.

"Mobile can deliver consumers' feet right into your store," says Paul Palmieri, president and CEO of mobile advertising network Millennial Media , which announced a $16-million Series C venture financing round a week after the Google/AdMob deal. "Mobile is an even bigger opportunity than online. You don't have your laptop open when you enter a retail location. But you do have your smartphone."

The 2007 introduction of the iPhone was the tipping point for the mobile web, mobile advertising and AdMob. The Apple-produced smartphone illustrated to consumers the full technological promise of the mobile platform, introducing an intuitive, immersive user experience that made obsolete the myriad interface obstacles that for years slowed mobile data's maturation. The launch of Apple's App Store virtual marketplace a year later forever altered the distribution and sale of mobile software. Within 18 months, the storefront was responsible for more than 100,000 iPhone applications and 2 billion downloads, giving rise to a vibrant software developer community encompassing more than 125,000 registered programmers.

AdMob was quick to seize on the App Store opportunity: Within weeks of the storefront's July 2008 introduction, the firm rolled out a global iPhone 3G ad marketplace complete with new interactive formats designed to exploit the iPhone's capabilities and mobile context. As of late 2009, iPhones yielded more than 2.5 billion ad impressions per month across the worldwide AdMob network, more than any other device.

"We were the first company to create ad units for iPhone applications--developing formats for mobile applications was not a common point of view back then," Hamoui says. "At that time, most people in mobile were skeptical of anything new, because so many things that were tried didn't go as planned. We made a considerable bet early on, and it paid off."

Even more than large brands and publishers looking to elevate their profile in the wireless ecosystem, independent developers seeking to monetize their mobile efforts represent the target audience Hamoui envisioned when AdMob first took shape. In addition to ad-serving solutions encompassing 160 countries, the company offers AdMob Mobile Analytics tools to give mobile site owners and developers insight into their traffic and usage patterns, and each month it releases its Mobile Metrics Report to chart the trends shaping the industry. "Less than half of our business comes from Fortune 500 companies. Most of our customers are small businesses, like app developers or digital startups," Hamoui says.

Says Jason Spero, vice president and general manager of AdMob's North American operations: "Omar is happier when we bring in a six-person shop as a client than a Fortune 500 company. He still sees himself as a small developer."

Of course, small developers don't generally sell their companies to Google for $750 million. The AdMob acquisition surprised many onlookers: Google has long been a vocal proponent of mobile advertising--in 2008, Google CEO Eric Schmidt predicted on CNBC's Mad Money that mobile ad revenues would eventually outstrip conventional web advertising--but the company's efforts previously focused on in-house initiatives, such as Google AdSense for Mobile (enabling online AdSense program partners with mobile sites to add contextual advertising to their pages) as well as mobile coupons served in conjunction with its Google Local Search service.

The AdMob acquisition "is an indicator that this market has arrived, as well as an indicator that this market is different," Palmieri says. "Investors have always asked us the same question--'Why should I invest in your company if Google says mobile is no different from the web?' But their engineers could not build for mobile, which is why they bought AdMob. It's an admission that mobile is not the Internet. It's its own market."

The deal also signals to advertisers that the mobile advertising waters are safe to enter, says Ujjal Kohli, CEO of premium mobile video applications provider Rhythm NewMedia in Mountain View, Calif. "We're past the stage where people have concerns over whether users are going to be pissed off over ads on their phone--it's just as good or bad in mobile as anywhere else," Kohli says. "Google's purchase will bring on brands sitting on the sidelines. Many middle-market advertisers who were waiting until mobile advertising became commonplace are already Google advertisers."

Google promises the AdMob deal will benefit publishers, developers, consumers and advertisers alike by enabling delivery of more relevant and compelling mobile ads. It contends the acquisition will make ad-supported mobile applications a more viable option for developers (alongside pay-per-download and in-app transactions), adding that integrating its advertising technologies with the AdMob platform also will yield superior ad performance across both apps and websites.

Perhaps most important, AdMob's solutions offer unprecedented access to usage behavior data spanning multiple mobile operating systems, including the iPhone and Google's own Android platform, indicating how consumers are engaging with applications and the ads within them--undoubtedly a huge competitive advantage in Google's escalating skirmish with Apple. (At press time, the Federal Trade Commission was still reviewing the Google/AdMob deal, much as it did Google's DoubleClick acquisition two years earlier. Conventional wisdom suggests the agreement also will pass regulatory muster, because the two companies' digital advertising solutions are so similar.)

The Google agreement "is great validation for what our team has built," Hamoui says. "It's also great validation for mobile."

Even without Google's endorsement, the future of mobile advertising is undeniably bright. With consumers spending more of their lives on the go and less of their time in their homes and offices, both traditional and digital media are beginning to adapt their content for a mobile audience increasingly reliant on smartphones, netbooks, e-readers and portable gaming devices for their news and entertainment. Mobile commerce also is surging: Phone-based purchases exploded on Black Friday 2009, with mobile payments processed via PayPal up nearly 650 percent over the previous year and mobile page views for U.S. retailers increasing an average of 388 percent, led by Best Buy (792 percent), Wal-Mart (740 percent), Sears (492 percent) and Macy's (447 percent).

Sixty percent of marketers outside the wireless industry plan to launch mobile advertising efforts in 2010, with 31 percent of agency respondents stating they will invest between $100,000 and $249,000 on their campaigns, according to a Millennial Media report published in November. Brand respondents forecast at least a 15 percent increase in mobile ad spending in 2010. The consumer packaged goods, retail, entertainment, travel and restaurant categories are expected to lead this wave of mobile spending, with "engagement" cited as the most sought-after return on investment.

Roughly 15 percent of respondents told Millennial they will invest more than $ 1 million on mobile advertising this year, with 2.6 percent projecting spending more than $5 million. Moreover, nearly 75 percent of the 100 leading agency respondents said they have already developed mobile campaigns for themselves or for a client--78 percent said the medium met their campaign goals, and an additional 9 percent enthused that mobile performed "beyond [their] wildest expectations."

That's because mobile generates results. Mobile advertising conversion rates average between 5 percent and 7 percent, according to Zohar Levkovitz, co-founder and CEO of mobile ad solutions provider Amobee Media Systems in Redwood City, Calif. In comparison, online conversion rates are historically less than 1 percent.

"What's unique about mobile is that we're asking for users' permission to offer them advertising and giving them something they want in return," Levkovitz says. "We know a lot about users. Just by knowing their location, age and gender, we can supply something that's relevant to them."

Hamoui expects mobile advertising will continue to broaden its reach while sharpening its consumer focus, bolstered by the continuing penetration of next-generation devices. "Soon it's going to be par for the course for all phones to have a full web browser and thousands of applications and an always-on data connection," he says.

Hamoui insists that he will stick around to watch the mobile advertising segment flourish, maintaining that the Google acquisition does not herald his departure from the company he founded nor the industry he helped pioneer. "Google buying AdMob is not the end of the story--this is not going to be a case where within six months, everyone from the original executive team is gone," he says. "There's plenty of work left to do. The journey is a little different now. But it's certainly not over."

Chicago-based writer Jason Ankeny is the executive editor of FierceMobileContent, a daily electronic newsletter dedicated to mobile media, applications and marketing.

How Mobile Ads Add Up For Small Business

Although multinational brands dominate mobile ad spending, many experts believe the segment's next significant evolution lies in local promotions that capitalize on the location-aware technologies so tightly integrated into the DNA of wireless devices. Data published in mid-2009 by media research firm Kelsey Group forecasts that local mobile ad revenue will top $3.1 billion in 2013, up from $160 million in 2008. Kelsey Group adds that mobile search will make up the majority of revenues at $2.3 billion, far outstripping SMS, which garnered $100 million in 2008.

"There used to be only a limited way to do geo-targeting before the iPhone, but now we have next-generation platforms with greater client-side awareness of location," says Jason Spero, vice president and general manager of North American operations for mobile advertising network AdMob. "If you're a regional movie chain or a citywide restaurant chain, there used to be enormous waste in doing mobile ads. But now we can target consumers effectively. For example, a car dealership can pick specific areas where they have coverage and make effective use of their ad dollars."

The problem limiting localized mobile advertising is that so few small, regional businesses have built effective mobile web destinations, says Paul Palmieri, president and CEO of mobile advertising network Millennial Media. "We're at a stage where mobile has enough scale to be relevant not just to large advertisers, but also to small businesses looking to use digital formats to drive customers into physical locations," he says. "Innovative entrepreneurs can gain an advantage by building out a mobile presence before their competitors do. If you're the local pizza guy, you should be building a mobile site right now, before your competitors do. If someone using Google Maps on their iPhone searches for a pizza, you want your locations to come up, and when the user clicks on them, you want them to go to a mobile website people can read."

Nevertheless, small businesses are advertising on mobile, says Ragnar Kruse, CEO and co-founder of mobile ad platform provider Smaato in Redwood Shores, Calif. They're just not the mom-and-pop, brick-and-mortar businesses that once defined the profile. "Most mobile players themselves are [small businesses], like small developers and content providers," he says. "Look at advertising on the iPhone--about 25 percent of ads in apps are for other apps. That's typical on emerging platforms. Look at the way e-commerce started." --J.A.