Facebook is not the only OTT player falling short on mobile ad revenue

By Guillermo Escofet

Concerns about Facebook’s ability to monetize its growing mobile traffic have resurfaced following its first earnings report since its IPO in May. The social media giant posted a 2Q12 loss of $157m, sending its stock price tumbling to $24 a share – which means its shares are now trading at two-thirds of the value they sold for during the IPO.

At the same time, the growth of mobile users on Facebook’s network continued to outstrip overall user growth. Whilst overall monthly active users registered 29 per cent year-on-year growth, to 955 million, mobile monthly active users grew by 67 per cent, to 543 million – more than half its user base. Yet, as Facebook admitted ahead of its IPO, it doesn’t “directly generate any meaningful revenue” from its mobile products and its ability to do so successfully is “unproven” – although it did say in its earnings call yesterday that it had seen some good results from the mobile ads it has been experimenting with lately.

But Facebook is not alone among the big online brands to have disrupted the mobile space in recent years that are coming up short in terms of extracting advertising dollars from their mobile traffic.

Google’s declining CPC
The biggest online advertising brand of all, Google, also published its 2Q12 results in recent days and, although its overall numbers look very healthy, this was the third-time running that it posted a year-on-year drop in its average cost-per-click (CPC) – the money bid by advertisers to place ads on its search results. Its CPC was down by 16 per cent, an accelerating trend that started in 4Q11 with an eight per cent YoY drop.

There are various potential reasons for Google’s diminishing CPC – potential, because Google hasn’t given a satisfactory explanation, leaving analysts like me to speculate. But mobile is definitely a factor.

Like Facebook, Google is seeing the share of mobile traffic on its Web search service skyrocket – doubling year-on-year. But, according to numerous digital marketing sources, the CPC paid for Google’s mobile search ads tends to be much lower – up to less than 50 per cent lower – than for its desktop search ads.

Apple’s iAd woes
Apple is yet another big over-the-top brand – the biggest mobile disruptor of recent years – that is struggling on the mobile advertising front. Thankfully for Apple, advertising revenue is not its core business model, but unusually for a company that has very sleekly engineered one successful mobile launch after another since rolling out the iPhone in 2007, it’s ended up with egg on its face with its mobile app advertising offering, iAd.

In February, Apple for the third-time running cut the minimum spend it requires for advertisers to book campaigns on iAd, from a rather forbidding $1 million when the service launched in 2010 to a much more affordable $100,000 now. The reason being that take-up of the service has been disappointingly low.

The reasons for these leading OTT brands falling short on mobile ad revenue differ from case to case.

Conversion rates on mobile search advertising are much lower than on desktop, despite generally higher click-through rates – hence Google’s relatively low mobile revenue. Poor cellular network connectivity, accidental click-throughs and difficult-to-navigate websites all conspire to keep conversion rates down.

Apple was expecting too much of an upfront commitment from advertisers relative to their expected return from iAd. And Facebook, to its credit, has prioritised user experience over monetization, and mobile’s small screen presents a particularly tough user-experience challenge when it comes to cramming in ads.

Lack of advertisers
Underlying these different factors is the perennial problem of advertisers under-spending on mobile. Whilst mobile is taking an ever increasing share of media consumption time, its share of advertising spending remains obstinately low.

This was well illustrated recently by venture capital firm KPCB, which estimated that, compared to print, radio, TV and the Internet, mobile now captures ten per cent of media consumers’ time in the US but only one per cent of ad dollars. That translates into a shortfall of $14bn annually in the US alone!

Although lack of awareness is still a problem, one of the biggest barriers to mobile advertising adoption is all the complexities that go with it. It’s not enough for advertisers to tick the mobile box and extend their advertising to mobile phones. There are many additional steps they must take to ensure their mobile advertising campaigns are successful – such as building mobile-optimized sites and adapting campaigns to better target mobile users’ needs and the unique capabilities of mobile devices.

The mobile optimization challenge
For example, advertisers navigating to the information page of Google’s AdWords platform for mobile are advised to do the above, as well as rethink the keywords they normally target (because mobile users tend to key in shorter words and phrases in the search box on their phone). Although all this is excellent advice to improve campaign performance, it must also put off time-poor and cost-averse business owners, especially among the “long tail” of mom-and-pop businesses that Google has so successfully exploited in its desktop paid search business.

The question of how to mobilize one’s Web presence is a daunting one. It’s hard to know who to turn to, and how and what to mobilize. The bill for building a mobile site can run to hundreds of thousands of dollars. That’s why most businesses online have yet to mobilize. Yet landing from a mobile ad to a desktop site is almost guaranteed to reduce that ad’s chances of conversion.

Google has woken up to the need to help advertisers gear up for mobile, recently launching the GoMo and GetMo initiatives designed to hook up advertisers with mobile-optimization firms catering for all budgets and needs.

Meanwhile, Facebook has to figure out how best to monetize its traffic, both on desktop and mobile. Having ruled out display ads on mobile, it is banking on less intrusive monetization initiatives such as sponsored stories to extract advertising dollars from its mobile inventory.

Twitter’s success story
Maybe it should be taking a leaf out of Twitter’s book. In June Twitter announced that on some days it makes more ad revenue from mobile than desktop.

Twitter’s secret seems to be that its service is naturally suited to mobile. After all, the idea that Tweets should be limited to 140 characters is inspired by SMS and its traditional 160-character limit. And ads on Twitter come in the form of Tweets, so there are no issues with them disrupting crammed mobile screens.

Challenges ahead
OTT players have found it easy to conquer real estate on people’s mobile screens as handsets increasingly become extensions of the internet. But those who depend on advertising for their revenue are finding that extracting ad dollars from mobile screens is not as easy as on the desktop. And that is a big problem going forward, as mobile continues to take an ever bigger slice of digital traffic.

Mobile will no doubt eventually catch up with other advertising media in terms of remuneration. But before that can happen, the businesses and individuals whose ad dollars will fill that gap need to do a lot of preparation work. At the same time, mobile ads need to become cleverer about how they adapt to the limitations of mobile screens. The killer ad format for mobile has probably yet to be found.