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Yahoo Pegs Mobile Ads

Today's announcement that Yahoo Inc. (Nasdaq: YHOO) will deliver ads to Vodafone Group plc (NYSE: VOD) mobile subscribers, in return for discounts on mobile services, could be the first in a series of such tie-ins between major carriers and search giants Yahoo and Google (Nasdaq: GOOG). On the other hand, the deal raises as many questions as it answers.

The first, of course, is whether mobile subscribers are actually willing to enter into an ads-for-lower-prices bargain. A recent survey out of The Netherlands suggests that mobile device users have already gotten sophisticated about ignoring ads on "the third screen" -- but that attractive incentives such as discounts, vouchers, free product tests, or the like could induce them to pay attention.

That's the theory behind Virgin Mobile USA Inc. (NYSE: VM)'s offer to give away free minutes to users who view ads and respond to quizzes to prove they've actually paid attention. It's not yet clear whether that model will take off.

Another question raised by the Vodafone-Yahoo program, which is set to launch in the first half of 2007 in the U.K., is exactly what users who agree to accept ads will earn in return.

According to a joint statement, under the new plan, subscribers who accept "carefully targeted display advertisements" will "enjoy savings on certain Vodafone services. This proposition could extend to key Vodafone mobile assets including the Vodafone live! portal, games, television and picture messaging services."

Conspicuously missing from that list is free calls.

“Since we announced our intention to develop revenue from mobile advertising as part of our mobile plus strategy unveiled in May, we have carried out extensive customer trials,” Nick Read, chief executive of Vodafone U.K., said in the statement. “We will now use the experience to determine with Yahoo how best to ensure customers, who choose to receive targeted messages, get better value as well as a richer mobile experience."

The Vodafone announcement comes on the same day that Yahoo CEO Terry Semel, speaking at an industry event in London, claimed that the growth potential for Internet advertising has been widely underestimated because forecasts do not take into account innovative channels such as mobile ads.

"So whether it's mobile or whether it's video or whether it's more and more community [social networking sites]," Semel asserted, "these factors have not gone into those numbers, so we think the actual growth potential of advertising online is really being understated."

Like Semel's company, Vodafone is launching the new mobile-advertising program in the face of discouraging numbers. Vodafone lost $9.7 billion in the first half of this year, after making a profit for the same period last year. Even as spending on online ads has hit record highs, Yahoo has suffered several disappointing quarters and its share price has dropped by 33 percent this year.

At any rate, customers can expect further hook-ups between the search companies and the wireless carriers. Yesterday, Google CEO Eric Schmidt told Reuters that the growth of mobile advertising -- including Google Adwords-like services on mobile devices -- will lead to the price of cell phones dropping to zero. When that might happen, though, is anyone's guess. (See Google's Mobile Challenge.)

Earlier this year Yahoo launched a new "Go Mobile" service, which comes pre-installed on Nokia 6682 phones sold by Cingular Wireless and gives subscribers improved access to Yahoo's mobile search engine and integrates content such as photos, mail, and contacts with Yahoo.

Exchanging ad-viewing for content is, of course, a proven business model: look at broadcast TV. But, says Avi Greengart, principal analyst for mobile devices at Current Analysis , bringing the Google/Yahoo model to mobile devices is hardly the slam dunk that Schmidt and Semel would like to believe.

"Mobilizing Yahoo or Google certainly has challenges to overcome," Greengart remarks in an email. "The screen is tiny, mobile search is not a mainstream activity right now, and managing all the business relationships on the back end (the advertiser, carrier, and search engine) will be no picnic."

— Richard Martin, Senior Editor, Unstrung

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