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.
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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.

The most fundamental challenge is that advertising is still an old-fashioned game of “lookie here!”—and on a four-inch screen, there isn’t much to look at. Across platforms, ad rates on a per-person basis correlate with display size. TV ads are the most expensive. Then come full-page ads in printed newspapers and magazines. Then banner ads on your desktop. And finally, way, way down at the bottom of the list, are the little rectangles on your smartphone. Ad rates per mobile viewer are, on average, five times lower than those per desktop viewer and, by one estimate, some 10 times lower than those per print-magazine reader.

Jason Spero, Google’s head of mobile advertising, approaches the mobile-ad puzzle more like a behavioral economist than a marketing executive or an accountant. He thinks about moods, intents, and incentives, and how they change when people step outside their house and navigate the world with a phone.

“We’re not too concerned about cost per click now,” he told me, although a recent analyst report estimated that Google makes an average of just 51 cents when you click a search ad from your phone, less than half of what it makes when you do the same from your laptop. “We’re worried about getting the experience right. One in three mobile queries for us has a local intent. People are trying to solve a problem called lunch. Or they’re shopping and want to look something up. Or they want a locksmith right away.”

Those are three totally different contexts, Spero pointed out, and Google wants to respond to them with distinct types of ads. For example, “click to call” buttons, which allow users to dial the advertiser from their phone in seconds, work for travel agencies and insurance companies, where the first interaction might naturally involve a phone call. But what about for local businesses like dry cleaners? “People don’t call dry cleaners, they just walk in, so that ad should be a map.”

Hyperlinked phone numbers and pins on maps barely scratch the surface of mobile capabilities. But with the advent of location-based services, we are starting to see the germ of a bigger, if perhaps creepier, idea—ads that talk to you and know you personally. Imagine you introduce a friend to your favorite coffee shop. You both point your phones toward a bar code displayed at the counter. You receive a loyalist’s deal on your phone—10 percent off anything—while your friend gets a onetime coupon on coffee, because the ad knows that it’s morning. This is the promise of place-based advertising, and companies like Scanbuy are working to introduce it everywhere.

“One of the biggest problems with mobile advertising is that it’s not interactive, it’s just a passive ad,” said Scanbuy CEO Mike Wehrs. “We can make it a full interactive engagement: ‘Thank you for scanning. Do you want to watch a video? Are you interested in sellers nearby? Would you like to order it online?’ ”

“I think mobile advertising is going to be more lucrative than Web,” said Marc Andreessen, the tech entrepreneur and investor, during an interview in New York City in December. He described a smartphone that knows you, your money, your habits, your wants: “The targeting is going to be amazing [and] more valuable.” He paused, and added, “These formats don’t exist yet. They have to be invented.”

You should hope that Andreessen is right. Even more than newspaper, radio, or TV, all of which are supported by subscribers or subsidies in addition to ads, the emerging generation of news and entertainment—begun on the Web, and now migrating fast to our smartphones—relies on advertising. The fact that most of our iPhone distractions are free makes us forget that businesspeople built them. For most, survival means serving up ads that work.

There is a case for tempered optimism. Six years ago, the iPhone debuted. By 2015, a projected 2 billion people worldwide will own smartphones. If the 100-year history of advertising tells us anything, it’s that advertisers shift to new technologies more slowly than audiences, but eventually, they get there. In 1941, a Brooklyn baseball fan might have wondered whether radio ads would ever work on television. He couldn’t have known the answer. We do now.

Derek Thompson is an Atlantic senior editor.
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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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