Business March 2013

The Incredible Shrinking Ad

As our attention shifts to mobile phones—and their smaller screens—ads are becoming vastly less effective. And companies built on ad revenues, like Google and Facebook, should start to sweat.
Kevin Van Aelst

On July 1, 1941, baseball fans watching the Brooklyn Dodgers game on WNBT witnessed a breakthrough in marketing. For 10 long seconds, before the first pitch, their black-and-white screens showed a fixed image of a clock, superimposed on a map of the United States. A voice-over, from the watchmaker Bulova, intoned: “America runs on Bulova time.”

It was the first official TV advertisement in U.S. history. And it was pretty lousy.

As anyone who watched the Super Bowl knows, TV advertising has evolved from frozen images and voice-overs to stories so entertaining that we occasionally shush each other in order to hear them. But the first ads on TV weren’t even TV ads. They were a mashup of radio and print hallmarks—a slice of audio, a single image—served to an audience that was shifting to television.

The history of affordable news and entertainment in America is, in many respects, a chronicle of advertising’s successful shifts from one medium to the next. After the Civil War, the coincident rise of cities and department-store advertising budgets pushed newspaper circulations skyward. Radio achieved its cultural peak in the 1930s and ’40s, not long after “national advertising came into its own as a corporate entity,” says the American-culture historian Jackson Lears. Television’s deep insinuation into our culture might never have happened without a second 20th-century advertising renaissance, centered on the boxes in our living rooms.

“We’re in the midst of something similar today with our phones,” Lears told me recently. “Advertising must come to terms with a new technology.” Now, in the opening innings of the mobile revolution, about half of American adults own a smartphone. But if television was once known as the “small screen,” smartphones are the smallest, allowing mere inches of marketing space. From an advertiser’s perspective, this has proved problematic. Mobile ads are generally ineffective today, and the ad rates companies are willing to pay are minuscule. Mobile platforms, from phones to tablets, now command one-tenth of our media attention, but only one one-hundredth of total ad spending. That represents a $20 billion gap, and an unmistakable message for tech companies: either the mobile-ad revolution is coming, or our attention has finally escaped to a space where effective advertising cannot follow.

This may seem like good news—many ads, after all, are annoying and intrusive. But it could have unpleasant side effects. The mobile-ad drought, for instance, fundamentally threatens the two biggest businesses built on the back of digital advertising: Google and Facebook. (In a strange twist, it is Apple’s invention, the iPhone, that put them at risk.)

Plenty of apps and companies, including Pandora and Twitter, make much of their revenue from mobile advertising. But ads account for more than 90 percent of revenue at Google and more than 80 percent at Facebook, and as users migrate from desktops and laptops to mobile devices, only a small fraction of these companies’ ad revenues are moving with them. The same problem applies to many of the other companies that have been providing free content and services on the Web as it has developed. For the next 10 years, as mobile penetration screams past 60 percent, 70 percent, 80 percent, this will be the trillion-dollar question: How do you build a thriving business selling ads on a four-inch screen—and what happens if you can’t?

Most mobile ads today are either banner ads—little rectangles clinging to an edge of your screen—or disruptive “interstitials” that pop up and require you to click on them or close them. In other words, they are lousy desktop ads, shoehorned into your smartphone.

This deficit of imagination stems, in part, from a deficit of information. Despite the notion that smartphones incessantly track where we are and what we’re doing, mobile-advertising systems are in fact generally worse than desktop browsers at targeting customers or learning how they respond to ads. “Mobile advertising has been in the dark ages,” says Gokul Rajaram, Facebook’s director of product management for ads. Most mobile programs lack the desktop’s sophisticated user-tracking technology, such as cookies that collect information and help serve relevant ads on Web pages.

Advertising is still an old-fashioned game of “lookie here!”—and on a four-inch screen, there isn’t much to look at.

Further, he says, conversion rates—the percentage of people who take action after seeing an ad—are devilishly difficult to measure. A persuasive mobile promotion for, say, Best Buy, may be more likely to make us visit a brick-and-mortar store, or BestBuy.com on our computers, than to make us enter our credit-card information on a mobile touch pad. As long as phones are primarily research devices rather than digital wallets, mobile ads will appear less valuable to advertisers than they really are.

Presented by

Derek Thompson is an Atlantic senior editor.

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