Mobile ads: Not so fast

Mobile advertising revenues are not growing as fast as expected, and that could spell trouble for a bunch of venture-funded startups.

Advertisements on cell phones have long been hailed as the next big thing. But flipping through industry forecasts, Didier Kuhn said, "I don't believe the figures I am seeing." And he did not mean that in a rah-rah kind of way.

Kuhn, CEO of a mobile advertising company acquired by Microsoft in May, views most analyst predictions as way too rosy. Gartner expects US$11 billion in global revenue from ads on mobile devices by 2011, up from less than US$1 billion a year now.

Strategy Analytics sees an even bigger US$14.4 billion revenue pie by then, accounting for a fifth of all online ad spending.

These forecasts are "incredibly steep," said Kuhn, relieved that his company, ScreenTonic, has Microsoft to watch its back as the market develops. "It will take slightly more time for the industry to grow."

Wireless carriers: Not so eager
Mike Baker, vice-president in change of Nokia's ad business, also sees a longer wait, suggesting it will take at least five years for the industry to surpass US$10 billion in annual revenue. "The near-term visibility is cloudy," he said.

Realistically, no matter how often you see people checking e-mail on a BlackBerry or surfing the Web on an iPhone, the vast majority of consumers are just beginning to use their phones for functions, other than calling, that are conducive to ads.

Today, only some 16 percent of U.S. wireless users access the Web on those devices at least once a month, according to Jupiter Research. It does not help that the U.S. economy is being buffeted by the mortgage crisis and housing slump.

Wireless carriers, meanwhile, have been slow to embrace ads, fearful their customers will be driven away by floods of text-message spam or banners and pop-ups crowding such a tiny screen. As a result, only 10 percent of nearly 2,000 Americans surveyed by Jupiter earlier this year said they had ever received a text message from a business.

"Advertisers are just now testing and learning," said Baker. That testing could take a while: After all, it took advertisers 10 years to dive with both feet into a medium called the Internet.

Venture capital spree
But despite the likely delay in a mobile ad boom, investors have been pouring millions of venture capital into this nascent business: Last month, a startup named Amobee drew funding from mobile carriers Vodafone and Telefonica.

Also in November, Draper Fisher Jurvetson invested US$2 million in mGinger, and Millennial Media raised US$15 million from a group led by Charles River Ventures.

This rush likely was instigated in part by a series of acquisitions in the sector. In September, Nokia bought Enpocket, a provider of a mobile ad platform. In May, Time Warner's AOL unit purchased Third Screen Media, a mobile ad broker. That same month, Microsoft acquired ScreenTonic. Financial terms of these deals were not disclosed.

Startup squeeze
Problem is, many of the big players, such as Nokia and Microsoft, have already placed their bets, so the funding and takeover spree may turn scarce for scores of other small mobile ad startups.

"The technology in most of the startups isn't very different," said Baker. "I don't think there's a lot of extra value" in more purchases for Nokia. Most of the startups enable advertisers to contact users via SMS and multimedia messages. Many promise to insert ads into mobile music, video services, and mobile games.

That said, there are potential acquirers out there. Google still does not have the technology to serve SMS and multimedia ads onto mobile phones. "We'll continue to invest," said Dilip Venkatachari, a product management director at Google.

So may traditional ad agencies and media companies that have not yet developed a mobile play. But Nokia's Baker said many of these companies are choosing to develop the capabilities internally rather than through acquisitions.

Any unaffiliated startups will face an uphill battle competing with handset makers and the Internet giants that have already jumped into the mobile advertising market. Yahoo, which boasts 500 million users of its online services, is now showing mobile display ads in 16 countries, working with huge carriers such as Vodafone.