Companies like Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) make their money primarily from advertising -- and with so many people online today, the market is huge. The mobile ad market alone stood at roughly $4.1 billion at the end of last year, up from $1.5 billion at the end of 2011, but that is just scratching the surface. As large as that pie is, it accounted for less than 2.5% of all ad spending in the U.S.
That could all be changing.
Targeting People on the Go
Companies are finding new ways to target mobile customers. Providing ads to mobile customers has historically been an uphill challenge. Mobile applications are typically immune to the little snippets of software websites install to track the online activity of users, called "cookies." The result has been that many mobile ads are not as relevant as those users receive on desktop computers and laptops, and, as such, not worth as much. In order for mobile ads to flourish, they need a way to become more relevant.
To this end, cross-screen identities have made some headway -- like when you use your Facebook account to log into another application. It has enabled advertisers to get a better idea of user interests, but the picture is still largely incomplete. Advertisers need to know user demographics as well as when they are actually online to better target mobile users. Point in fact, while mobile ads accounted for almost 25% of Facebook's revenue in the fourth quarter that bump only came after the company made it possible to send ads to people across devices.
New Ways of Ad Targeting
Google, which currently has more than half the mobile ads market with revenue of $2.2 billion, is taking the issue of targeting to heart. In February, the company rolled out a new offering it calls "enhanced campaigns." The idea is to let advertisers create campaigns that target specific locations, as well as certain dates and times. Google Enhanced Campaigns also lets advertisers choose whether to target the ad to mobile users or desktop users.
Other companies, such as Tapad, are using traditional demographics-based models to predict buying behavior. In the case of Tapad, the company examines users' browser histories, flags several visits to a particular site or page as a buying intent, then couples that information with other demographics to create segments it then sells to advertisers.
Mobile ad technology provider Drawbridge uses a sort of triangulation to determine whether an anonymous mobile user is the same person as a known desktop user and targets ads accordingly. For instance, Expedia hired the company to deliver mobile ads to those users who had visited the online travel booking website recently. "We have seen a direct positive relationship between spending on app downloads and someone consummating a transaction," said Jeff Warren, Expedia (NASDAQ:EXPE) vice president of mobile and online partner marketing. "Technologies like Drawbridge give me a bit of a prayer but it is still early days."
Obviously, mobile ad campaign methods are not perfect and, as such, they have been met with their fair share of criticism.
"While [Google's] Enhanced Campaigns may seem to provide greater management efficiencies and improve mobile traffic, our customers have expressed worry that this change may in fact bring inefficiencies for more sophisticated advertisers or those with specific targeting needs," said Microsoft (NASDAQ:MSFT). "With enhanced campaigns, fine-grained targeting by operating system, device model and carrier is no longer available," explained Bing Ads Platform Manager Dare Obasanjo. "More importantly, tablets and desktop PCs are now treated as a single entity. It is no longer possible to target an iPad or Kindle Fire user differently from a user of on Dell or HP desktop PC."
Surely something is better than nothing.
While the technologies in play are still very young and there could be some growing pains as companies figure out what works and what doesn't, income from mobile ads could increase exponentially over the next few years. For companies like Facebook and Google, which already have a strong standing in the mobile ad community and are actively pursuing innovations in advertising, the gains will surely be felt. After all, from 2011 to 2012, mobile ad revenue increased nearly threefold. It could easily follow the same trajectory this year.
Then, there is the benefit for companies, like Expedia, which are using the better-targeted mobile ads to trigger purchases by focusing on when users are on their mobile devices. Obviously, any aid in prompting an impulse purchase is bound to be felt on the bottom line as long as the increase in revenue outweighs the price of the technology.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.