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In order for advertisers to communicate and effectively reach their targeted audience, multiple channels are now essential to any ad campaign. With the proliferation of smart-phones and tablets only expected to grow, the mobile advertising channel will increasingly expand. Nonetheless, as seen with Facebook's inability to quickly monetize its user base via the mobile channel, mobile advertising is different kind of beast.

While mobile ads are generating click-through rates well above those seen on PCs, because they are completely new, the jury is still out in regards to their overall effectiveness. Advertisers fear users may eventually learn to avoid new ads. After all, banner ads had click-through rates above 5% when they began in the 1990s. Now they languish around 0.2-0.3%. This leads us to some important questions: What will ultimately become the best way for advertisers to reach consumers on the mobile channel and how can investors play this expected trend? Let's examine what our research has revealed.

At present, Google Inc. (NASDAQ:GOOG) is the crowned King of Mobile by both advertisers and the stock market alike. Google's 2009 acquisition of AdMob now seems to have been quite prescient. With nearly 25% of Google's U.S. search ad dollars to be spent on mobile by the end of this year, it is clear the company's viability and future success lies with mobile. With the ever increasing popularity of its Android platform, its attractiveness to advertisers has grown considerably. Ads are now arriving on your Android phone, slyly sneaking into both games and apps, and also into your mobile browser. No matter what you think of these tactics, the market has recently voiced its opinion: no longer a runner-up to Facebook, Google should now be viewed as the leading player in mobile advertising. They will be hard to catch.

Besides purchasing Google stock outright, what other ways can investors play the secular trend that is mobile advertising? Before answering this question, it makes sense to examine some of the challenges the mobile ad space presents to advertisers. First, advertising options are more limited due to the smaller screen size. This makes it hard for a brand to launch massive campaigns on smart-phones like they can the PC. Another challenge resides in the simple fact that the consumer is usually on-the-go when engaging with a mobile advertisement. Therefore, he or she is much more likely to gloss over the advertisement or, at minimum, be less engaged than the advertiser would like.

What, then, is the best route for advertisers to connect and engage the consumer on mobile devices? There seem to be four conduits: Mobile Search (which we already covered via Google), Apps, QR Codes, and SMS messaging. Let's take a look at these one at a time.

In the app space, Millennial Media Inc. (NYSE:MM) is a recent new I.P.O. The company provides mobile advertising solutions worldwide, allowing developers to utilize their apps to display banner ads, interactive rich media ads, and video ads through its platform. In a recent interview with CNBC, the company's CEO, Paul Palmieri, stated:

"The average click-through rate online is about seven-tenths of a percent. The average click-through rate on mobile devices is 0.8 to 1 percent. It's still about having the right ad in the right place. When you show them an ad they like to click on, we can show them more of the same types of ads."

Positive commentary aside, even with growing its top-line by over 75% last quarter, Millennial Media is still losing a lot of money. Is the company sacrificing margins to simply gain share? We are not sure. What we do know, however, is the market is not yet impressed with its strategy. The stock is down almost 60% from the highs registered on its first few days of trading.

Perhaps the market is simply skeptical of companies relying upon apps to serve as the conduit for directing mobile ads. While the explosion in apps should continue, consumers inevitably seem to download too many of them to their smart-phones, most of which they never end up using. With this being the case, successfully targeting consumers could prove very difficult if these same users are not consistently utilizing and engaging with these respective apps.

What about QR codes? They are seemingly everywhere. But we wonder just how effective an approach QR codes really are, now that the initial novelty has worn off. Consumers want quick access to coupons while shopping. Being re-directed to a site via a QR code seems like a dangerous path for advertisers, with the chances of losing a customer's attention, very high. QR codes also fail to successfully target consumers efficiently. As such, we wonder if they will ever deliver for advertisers.

While lacking the rich media content found in other advertising formats, advertisements delivered via text/SMS may well offer brands the highest potential for success. According to a mobile advertising report from Juniper Research, advertisers could spend as much as $7.4 billion a year on mobile messaging by 2017. Because they are familiar to consumers, ads delivered via the SMS format resonate well with consumers. This trend should only improve as triangulating technologies, which pinpoint the location of ad recipients, will eventually augment SMS ads, making them a more powerful proposition for marketers.

Mobile short codes work in a similar vein as 1-800 numbers. A certain set of digits will correspond to letters that spell out a brand or company name. After seeing the ad, the consumer will enter the code on their phone or take a picture of the image. They will then receive a text with a special promotion/offer. The process is already comfortable for consumers, a big plus on a go-forward basis as more brands consider their mobile ad spend conduit of choice.

Through its patented platform, Single Touch Systems (OTCQB:SITO) provides retailers and advertisers access to consumers via these mobile short codes. Although the company is small, its technological prowess has been validated by the fact it provides messaging for the likes of both Wal-Mart Stores Inc. (NYSE:WMT) and Hibbett Sports Inc. (NASDAQ:HIBB). According to Forrester Research, Wal-Mart Stores and 3M have partnered to put messages on displays within their stores. Consumers are then instructed to dial #wmt to opt in to promotions like receiving quarterly reminders to replace their air filters with coupons for 3M products.

Ninety percent of Single Touch's revenue is recurring. With revenues growing almost 50% year-over-year for the first three quarters of its current fiscal year, the company anticipates that it will be cash-flow positive by the end of 2012. We see revenues moving close to $10M in its next fiscal year. These numbers may indeed prove to be conservative if the company can expand its client base and increase the ad spend by existing clients through their platform.

The odds of this happening seem strong. In a recent campaign for Hibbett, Single Touch helped the company enjoy a significant increase in discount redemptions and achieve an increased basket size. In one ad Hibbett ran for Reebok, the click-through rate topped out at just above a 6%. While this is only one campaign, it does appear to suggest that ads delivered through SMS have more of an impact with consumers. Perhaps this is due to the familiarity with receiving texts or is it maybe because the Single Touch platform is able to reach the right consumers more adeptly than other modes? We look forward to seeing further results in due time from Single Touch.

In addition to its compelling growth story, Single Touch boasts an extensive patent portfolio library. SITO's patents cover two basic activities. The first 8 patents revolve around accessing information on a mobile device via its "Mobile Abbreviated Dial Code Platform." A second set of 10 patents cover sending information to and between mobile devices, including 4 patents on "Streaming and Routing Media." Given the recent premiums the market has awarded companies with strong patent portfolios - think Vringo or Google's acquisition of Motorola - it is quite possible Single Touch's patents could, in and of itself, be worth a lot more than its current market-cap of $40 million.

In the near-term, the SITO has a settlement conference date set for August 26th with StarStar vanity number vendor, Zoove. In this case, the judge presiding over the matter has essentially recommended that Zoove settle with Single Touch, which suggests a positive catalyst could arise for the stock very soon. With this in mind, investors could view SITO's patent portfolio as a very valuable embedded call-option.

To recap, when looking to invest in the secular mobile advertising trend that is now upon us, Google is the obvious choice. For investors with an aggressive bent and a higher tolerance for risk, SITO offers a compelling micro-cap opportunity as well. With shares trading 75% off of their highs from almost two years ago, a new and seasoned management team in place for over a year, and a strong patent portfolio to complement a growing top-line, the downside appears minimal and the upside could be quite huge.

Source: Google And Single Touch, 2 Ways To Play The Explosion In Mobile Advertising