Mobile Ads: Not So Fast

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Startup Squeeze

Problem is, many of the big players, such as Nokia and Microsoft, have already placed their bets, so the funding and takeover spree may turn scarce for scores of other small mobile ad startups. "The technology in most of the startups isn't very different," says Baker. "I don't think there's a lot of extra value" in more purchases for Nokia. Most of the startups enable advertisers to contact users via SMS and multimedia messages. Many promise to insert ads into mobile music, video services, and mobile games.

That said, there are potential acquirers out there. Google (GOOG) still doesn't have the technology to serve SMS and multimedia ads onto mobile phones. "We'll continue to invest," says Dilip Venkatachari, a product management director at Google. So may traditional ad agencies and media companies that haven't yet developed a mobile play. But Nokia's Baker says many of these companies are choosing to develop the capabilities internally rather than through acquisitions.

Any unaffiliated startups will face an uphill battle competing with handset makers and the Internet giants that have already jumped into the mobile advertising market. Yahoo! (YHOO), which boasts 500 million users of its online services, is now showing mobile display ads in 16 countries, working with huge carriers such as Vodafone. "For us, this is a very strategic area for the company, where we invest a lot of people and dollars," says Gary Roshak, Yahoo's vice-president for mobile advertisers and publishers.

With the market not growing as quickly as expected, "it causes a problem for the many startups because they'll need to make their cash last longer," says Baker. As such, industry insiders predict that many of them may be snapped on the cheap in a year or two.

A Google Boost?

Many of the startups reject this glum outlook, pointing to new opportunities such as Verizon Wireless' plan to open its network to more devices and services as a potential kickstart for the mobile ad business. It took CellySpace.com about 1½ years to get U.S. wireless carriers to allow its subscribers to receive text messages bearing coupons and ringtones created with the Web site's do-it-yourself software for small businesses. If wireless networks become more open, such approvals may take less time, says Rich Eicher, president of Skycore, the company that launched CellySpace on Dec. 4.

Another possible boost may be the emergence of touch-screen devices like the iPhone, which make it easier to click on an ad, as well as phones based on Google's Android (BusinessWeek.com, 09/06/07), a new wireless software platform designed to enable easier and cheaper development of mobile applications. "Clearly, more openness is going to open up more opportunities," says Paul Palmieri, CEO of Millennial Media, which delivers mobile ads for Ford (F) and Procter & Gamble (PG).

It's too early, though, to say whether networks and phones will become open enough to facilitate a mobile ad boom any time soon. "Right now, what we are really in is the foundation stage, trying to determine how to move into mobile advertising," says Phil Holden, a director of online services at Microsoft.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.