After years of balking at the idea of opening up their networks to advertising, the four biggest mobile operators in the United States are edging closer to incorporating banner ads, text message marketing and short video commercials into their business models in an effort to reduce the cost of offering new multimedia services to subscribers.
Experts at the industry'shere this week said the question is not if and when mobile advertising will happen but rather how it will be implemented.
"Advertising is the only way that carriers can afford to add more content to their services," said Tom Burgess, chief executive of Third Screen Media, a company that manages mobile advertising for content providers and carriers. "They can't grow their content catalogs if they don't support advertising, because they won't be able to keep increasing subscription fees."
Sprint Nextel will be the first of the four major U.S. carriers to move in this direction. Paul Reddick, vice president of business development and product innovation for Sprint Nextel, .
Several Verizon Wireless executives have acknowledged that the company has been testing a program to open up cell phone services to advertising. Cingular Wireless is also considering inserting advertising into content it offers through its menu of services. But wireless-services executives at CTIA were reluctant to give details.
"We are looking at mobile advertising closely," said Rob Hyatt, executive director for entertainment and premium content at Cingular. "I'm not prepared to say anything publicly here. But if you look at the cable TV market, a subscription and advertising business model worked very well to deliver lots of high-quality content."
Mobile virtual network operators, or MVNOs, are also introducing ad-supported content into their business models. Amp'd Mobile on Wednesday said it has struck a deal with Procter & Gamble to offer targeted ads with its video service.
A cautious approach
Today, most wireless Internet services in the United States don't include advertising. What little mobile advertising there is can be , which are accessed through a mobile browser rather than through the carrier's cell phone menu, or deck, that subscribers use to locate service options. Opening the carrier decks to advertising will likely increase the available ad inventory content owners can sell by about 30 percent, Burgess said.
The major carriers have been reluctant to introduce advertising into their networks because they fear a backlash from consumers.
"We are being careful about jumping into advertising," Lowell McAdam, chief operating officer of Verizon Wireless, said during a panel at the CTIA show. "People view their cell phones as their personal space, more so than their PC. If they get an ad they don't want to view, that as a violation."
But as operators look toward offering more data services on their networks, they are quickly realizing that there is a lot of money to be made in advertising--a new revenue stream that could offset the heavy losses they are experiencing in their voice businesses. Operators also see advertising as a way to support new creative content.
According to market researcher Informa Telecoms & Media, advertisers will spend more than $11 billion by 2011 on mobile marketing. Operators could stand to take up to 50 percent of this advertising revenue as they negotiate deals with content owners.
While just about every media service, from newspapers to Web-based services to cable TV, generates a portion of its revenue from advertising, it's unusual for the operators delivering the media to be given a cut of the advertising revenue. But carriers have full control over their networks, picking and choosing which brands and content they carry on their decks.
They've also spent billions of dollars upgrading their networks to get them ready for rich graphic, audio and video content. And they've subsidized the cost of third-generation, or so that users can get access to the services. So as a result, operators feel entitled to a piece of the action.
The situation has created tension between the carriers and content owners. But operators can provide a wealth of demographic customer information, including billing ZIP code, age range and gender. They can also provide valuable behavioral information, indicating the types of content subscribers have purchased or mobile Web sites they've visited.
As a result, they are seen as valuable partners whose subscriber information enables advertisers to develop tightly targeted and relevant ad campaigns.
For example, advertisers could use location information to send SMS (Short Message Service) text messages to cell phone subscribers traveling to a new city. The messages could tout nearby restaurants or could include coupons to be used at certain locations.
The most effective forms of advertising could be linked to, a technology that would help determine which topics users find interesting. A subscriber searching for a Coldplay ring tone, for example, may not mind an advertisement promoting the group's new album.
"I actually think mobile advertising could be good for consumers, especially if it's search-based advertising," said Charles Golvin, an analyst at Forrester Research. "If it's linked to search, consumers will get information that is relevant to them."
But Golvin warned that advertisements can't be too intrusive.
"My sense is that people won't be too enthusiastic with any advertising that interrupts what they're doing or doesn't provide them with useful information," he said.
The ads also must be relevant. "Just because I'm walking by a Starbucks doesn't mean I want to have a coffee," he added.
Operators say preserving a good customer experience is paramount. They also agree that any advertising they allow on their networks will have to be useful to consumers. Verizon executives said they'd also give customers the option of not accepting advertising at all.
"We won't be ramming ads down people's throats," said Richard Lynch, chief technology officer at Verizon. "I don't believe every customer will see the ads the same way. Some may choose not to see them at all, and for that option, they will pay accordingly."
Golvin said there is some evidence to suggest that consumers are willing to accept advertising if they can get some content for free.
But consumers shouldn't expect advertising to make all their mobile games, TV or music free.
"Mobile advertising will be a supplement rather than a subsidy," Sprint's Reddick said. "When we did research, we found that why customers adopt or (choose not to) adopt content has less to do with it being too expensive. Instead, people said they didn't subscribe because it wasn't relevant."