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Google: Mobile Ads, Free Phones

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Google’s CEO Eric Schmidt tells Reuters one day your phone could be free, subsidized by the growth of mobile advertising. That’s a pretty convenient suggestion for the ad giant to make.

Similar models have been suggested many times before; remember Xero Mobile, the MVNO that was probed by the SEC and then weirdly got bought before it even launched — and don’t forget its gaming step-cousin Gizmondo, which literally crashed and burned. Mobile advertising might be on everyone’s minds (and in their readers) this morning, but the question is not will there be a big mobile ad market one day, but how long would it take for the mobile advertising market to grow large enough to support such an environment?

Google itself isn’t moving too fast. The company seems like it has only just started to test out the mobile ad waters and started making more deals with small carriers like Leap Wireless. At the Mobile 2.0 event last week the Product Manager for Google Mobile, Sumit Agarwal, predicted that in 12 to 18 months there would be a healthy mobile advertising environment to fuel product innovation and mobile ad development. Mobile entrepreneurs, especially those running mobile web-based consumer startups at the conference, would love this to be true, so they can justify the same kind of Web 2.0 ad-based investment boom.

Yeah, everyone is talking about mobile ads, even advertisers, but how many are actually investing money in this area? Online ad investment is still relatively small compared to spending in other mediums. Will it be more than 1.5 years for mobile ads to be common place on cell phones in the U.S. — especially a booming environment that will be the cause of a industry-wide shift of subsidized ad-based cell phones? Yes, handset prices are dropping worldwide, so lots of free or low cost cell phones sometime in the future is a good possibility, but those subsidies being driven by mobile ads within a year won’t happen.

The online ad market took many years to mature into an environment where a good amount of web sites could make decent money. Mobile ads will take just as long. If the mobile ad industry is justifying free phones and a mobile dotcom boom within even three years I would be very surprised. Schmidt didn’t give a time line for mobile ad growth, but that’s what startups and investors really care about. Too early or too late and you miss out. What do you think?

40 Responses to “Google: Mobile Ads, Free Phones”

  1. Eric Schmidt is exaggerating, but still largely correct. As we’ve seen with other mediums (papers, magazines, TV, radio), advertising may make some products/services entirely free, but in most cases there’s still a large market for premium or enhanced products and services.

    At MobileRated, we distribute all of our content (mobile games) for free and make our money from advertising. Even though the content is free, links to premium games get excellent click-through rates.

    Mobile ads opens new markets and invigorates old ones – I think there’s nothing to be afraid of.


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  4. Mobile advertising is set to increase in market size, but it will be interesting to see how this new industry will evolve with so many players after the same piece of the pie. You have wireless carriers, search engines/portals, service providers still in disagreement over who controls the ad messages and how they get paid. Customer will never subscribe to any advertising messages. The advertising company will ultimately pay the price but using which ad model? Will it be pay per click, CPM (cost per 1000 impressions) or pay per action? On top of that, as a customer, do you need higher data plans to receive all this data? In North America, mobile internet browsing is not free, you are charged to even receive sms..You better not make the customers pay more to receive advertising data…

    Contextual or location based ad messages will make perfect sense in mobile advertising. If I search for a restaurant and a special offer shows up on my cell phone, then why long as I don’t have to pay to receive that offer..

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  7. Google always surprises us and this will surely surprise not only us but the telco players. Google will face big oppositions from BIG companies (lots of them). But I’m excited and thrilled as I read this article. I can’t wait to see what ads should I see whenever I call someone.. :) Contextual Ads for Voice-Call eh?

  8. I think it’s a fact that mobile ads will play a role, but it won’t work out to wait for mobile ads to become a market and then starting to invest in product development.

    Currently, the mobile ads market is not available very much because there are not many products people love to use.
    First, there need to be the products, than we can start talking about ads.
    It’s a risky business, because mobile internet works quite differently from the normal internet how we know it.

    There will be a different sort of web design, feature decisions, and even products. There will very often NOT be webpages, but downloadable products to minimize the necessary download size for each page. (look at the Java-based Gmail App, Java-based Google Maps, etc.)

    There will be much more standards to organize data (Microformats, etc.) to be able to consume without too many data being downloaded, letting the mobile phone “style” the data.

    This is something difficult for every big company, because they want to brand everything. UI won’t be the differentiator any more, it will be the way products work, and JUST that.

  9. We surely would benefit from a high profile entry into the market by a Google or a Yahoo. But these ecosystems are growing very fast already, and a service like Cellufun has been undergoing tremendous growth despite the fact that no major players are in the field as yet.

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  12. Hi Alan,

    The phones aren’t giving away in the UK, the contract price reflects the cost of the handset. Have you noticed that the better the mobile the higher the monthly contract costs. It’s a clever marketing rouse to make the not so savvy consumer sign up to a 12 month contract for £20/25 p/month, which is a £240/£300 deal. Going back to my earlier points with Nokia, in £s the average they get per handset is £45. 2 months and a bit of a contract and that cost to the operator can be written off.

    Using the Carphone Warehouse site I’ve just selected a Nokia 6680, 3 provide it on their tariff for free … but only on an 18 month contract @ £20 p/month (£360 for the yar). You get no free texts with that and I know from the market and my own use that texting is massive, and this is a multimedia phone. KA-CHING to 3!

  13. Phones are already given away free, in the UK at any rate.

    Phones are often given away free today if you sign up to a contract, or switch suppliers.

    Advertisers would have to subsidise calls on top of this to add any benefit.

  14. … and the average revenue that a US network provider would look to see each month is $67, based on current averages.

    Over a year, to be an average outfit, the advertising revenues would need to be $86.62 for the handset & $804 for the usage, total of $890 per user per year! This is to be average.

    Let’s say the theoretical advert network revenues 10c from each text ad, they’d need to send 8,900 to the user in a year, that’s over 24 a day. I’m assuming a clever system would stop texts at night to prevent churn from people ditching their annoying 24/7 alarm clock, which could lead to a text every 3/4 hour during the day. Will users want to see the same ads? Probably not, so can the company find 8,900 new advertising campaign a year? Maybe.

  15. It is indeed all about personalisation and profiling. When an advertisement is timely, relevant, expected, valued, personalised (etc. etc.), it is not unwelcome. Dumb ads appearing billboard-style on your screen are unwelcome. We are already subjected to 5,000+ advertising messages every day, and we filter the rubbish.

    The trick with mobile advertising is to treat it as a part of a wider range of channel-to-market activities for brands (interaction, payments, direct marketing, loyalty programs, etc.), knowing full well that brands will embrace mobile as a viable media when the value proposition makes sense compared with more traditional channels.

    This isn’t about free phones. It’s about subscribers’ propensity to use mobile for commercial interaction with brands instead of using other channels, and the willingness of said brands to switch their spending to mobile away from other channels. The potential for personalisation and profiling is better with mobile than with any other media. This ought to be inevitable, therefore. The risks are that the channel is trashed by fraudsters and scammers and rogue entrepreneurs making a fast buck, or commoditised by the media buyers due to the networks not rising to the challenge and actively supporting the value chain with the products and services they need to make this a welcome reality.

  16. Analysts are speculating that the holiday rush will push the global handset market to more than 1 billion units shipped in 2006; that’s 1,000,000,000 brand new mobile phones.

    Nokia employs 3,682 people within its handset business and over the 3 months of July / Aug / Sep it revenued EUR 5,949,000,000 (USD 7,641,371,520) from selling just mobile handsets. It’s reckoned that they have 36% of global market share and that in the same period they shipped 88,200,000 handsets. That works out as revenue of EUR 67.44 per handset.

    So, is mobile advertising going to provide an average of EUR 67.44 / USD 86.62 per user for Nokia? The flashy expersive devices with multi million pixel cameras etc will certainly require an even greater payback than the average (the average includes low cost handsets made for emerging markets). I’m sceptical that once the money filter through the chain it will leave much for the handset makers, so they’ll still need paying a top up, where from though?

    But then again, simpler ideas have been laughed at as laughable and now we’re all wired up across the globe.

    (1 Euro = 1.28448 US Dollar)

  17. This will never happen. A national telephone network requires a level of investment and maintence far beyond anything Google has done to date.

    Last time I checked, I didn’t see the cable TV operators offering free cable, and they are pretty good at selling TV ads. Why isn’t cable TV free, two reasons: 1) CATV networks, especially with all the upgrades, don’t build or repair themselves, 2) consumers are OK with paying for this service.

    The same is true of phone service. Nobody outside techland expects these services to be completely free, and below a certain threshold, the customer does not think much about their monthly spend.

    I expect what will happen is that an operator like T-Mobile will offer unlimited US/Canada calling for a flat monthly fee under $100/month. The operators are smart about pricing things so they look good to most consumers, without giving away the store.

    Metro PCS already offers unmetered cellular service for $40/month in the SF Bay Area including unlimited long distance, a little more than a dollar a day. There is no reason the other operators can’t copy this model, and probably will sooner or later.

    Once you get into that price range, the monthly spend is noise level compared to other things, like utility bills, car insurance, gasoline, etc.

  18. You guys at OM are right about most things but wrong about this one I reckon: ads on every other platform have come through once someone finds the right way to do it (non intrusive, relevant etc). The mobile internet is building up a head of steam and as other comments have said, it’s the most personal, convenient medium; right now most phones are ‘phones’, but soon when most phones are used for net activity (email, browsing, news reading, finding local information (the BIG one) and more, the current pay models could quite easily be changed to an advertising driven model: subscription phone services are just a way to tie customers in – as long as the ARPU’s work out I think its completely doable and soon: so it’s just a question of when the population gets used to net phones. I probably spend more hours online on my smart phone than on my laptop; I’m certainly connected to it for more of the 24 hours of the day. I commute into London and there’s more and more people online via phones; the numbers have increased massively the last 6 months even. And this is with people paying a massive premium for this mobility and access. I think any of them would swap the monthly bill and up front hardware cost for a free one. The change is coming I reckon…

  19. I believe mobile advertising will be a viable option for advertisers. My concern is more about Google, who continues to expand into every sector based on Advertising dollars. The number of advertisers has certainly increased and the market has expanded (thanks to Google) but there are only so many dollars to spend, and these dollars are not immune to economic changes. In fact, advertising is often an early victim to budget cuts when the economy slows down. The USA is walking a fine line which borders a possible recession. If the economy retracts, all these young innovative advertising channels will suffer. Consumers will certainly want the free phone, but would there be sufficient ad spends to subsidize it.

  20. Interesting comment by Google. If mobile ads will lead to free phones, why has successful advertising models not led to free PCs or TV sets. Strange extrapolition if you ask me.

    Yes, phone are getting cheaper yet the more you need on your phone (f you go for Smartphone or for pocketPC phones the more expensive it gets). The CEO of Orange was in the Valley recently and he commented that they found consumers don;t want cheap phones even in developing countries. The cheap $20 phones being promised are not as successful as expected.

    Secondly, I would say as phone become the 3rd screen and personal, I really don;t see how people will like to be bombarded by ads in exchange for free phones or free calls.

    As it is, I live also in Asia where phones are subsidised by the phone companies (often I pay $0 or $50 for a good phone) and many users had complain to their regulators about being spammed even by their own phone companies through SMS.

    Sure it will be interesting to see if and when mobile advertising will play a role e.g. reducing costs of calls, help increase ARPU for mobile operators or enable adding on free or cheap Wi-fi over mobile phones in addition to GSM, 3G etc..but that again is a different story.

  21. This is an interesting question. I feel as though an ad on a cell phone maximizes the annoyance factor because the screen is so small, and cell phones typically cause immediate action on the part of the user… So either you get interrupted from whatever you are doing to answer an ad, or you get distracted or delayed from what you’re doing to bypass an ad… Very annoying. Also, what will the ad look like? People need to be using some application on the phone in order to serve a relevant ad, how will you serve an ad if the phone is being used as a phone? Most businesses don’t have WAP sites and most phones have tiny screens, so it will take some time before browsing a website on your phone catches on. They could just give you a blurb about the business and a phone number, but what is the input to the query? Do they send the number you are calling to some database that analyzes the business type then give you the competition? I don’t think people will want to listen to an ad every time they send or receive a call… so where are the ads? Business listings could have success in the mobile market, but only if you ask to find a business, which not everyone does… and that’s not Google’s strong point right now anyway. Perhaps this will be appealing to some people, but I doubt it will ever eliminate the paid cell phone market altogether. It reminds me of those companies that used to offer free internet by putting banner ads on your desktop…

  22. Im already seeing my own adds on my own phone. Thats always a funny thing to see. I think this is going to happen sooner than later, much like the cost of computers coming down by suppliers adding all that software for users in exchange for $$. Hopefully our phones wont be bogged down by this though as the competition in the mobile space heats up im sure companies will do whatever it takes for their products to be in the forefront.

  23. I think it’s “When” not “if”. The key is to make the ad as relevant as possible. Here’s the quote from Oliver Starr on Mobile Crunch. “The “third screen” is clearly the most personal, direct and thus valuable arena left for the advertiser. Cracking the code that makes this a viable place to explicitly target consumers by delivering advertising so targeted that the handset user actually welcomes it is the grail that all the competing parties – the carriers, the advertisers, handset manufacturers, etc. are seeking.”

    Someone is going to figure out how to pull this off. And here’s my 2 cents – it’s going to include real time location information.