Advertising provides miniscule revenues to most telcos today. But many see ads as a key way to prove their networks are more than just a "dumb pipe". With accumulated data about their customers and existing billing relationships, telcos hope to attract advertisers with one key advantage: relevance to the target audience.
ISP ADVERTISING
So far, online advertising has largely been the preserve of web giants such as Google, AOL, Yahoo and Microsoft. While their traffic skips across internet service providers' (ISPs) networks, owners of underlying telecoms infrastructure have so far had limited success with ventures into the media. Virgin Media and its cable TV network is an obvious exception but providers of standard copper-wire broadband have few outlets - beyond their own limited "portals" - upon which to display ads.
That's where Phorm comes in. This dotcom has signed up the UK's three largest ISPs - BT, Carphone Warehouse and Virgin - to its "Open Internet Exchange". The exchange hope to broker ad sales targeted at the ISPs' customers, but displayed on websites such as newspapers (including FT.com) and online communities (such as iVillage). Like all good dotcoms, Phorm's had stratospheric share price growth - the shares have raced up to 3,505p - and dramatic falls - the shares fell back to 1,525 on privacy fears and reported losses of £32m.
Phorm hopes that ISPs will be able to provide more detailed data about their customers' online habits than ordinary tracking cookies. If they've already visited a site selling a certain product, that makes them a better prospect for advertisers of that product than someone merely reading, say, a review of it - a typical place to display contextual advertising at the moment.
Media owners set the price they want for their selected ad space, while advertisers say how much they'd be prepared to pay for exposure to a consumer who meets pre-selected criteria. Only profitable campaigns - ie. when the former is less than the latter - are run, and the excess once the media owner has been paid is split "fairly" between Phorm and the ISPs.
"Most [online advertising] response rates are extremely low," says Phorm chief executive Kent Ertugrul. "Now you'll see ads based on your interests wherever you go."
BT intends to have WebWise - the consumer-facing part of Phorm's platform - available to all its 4m (and rising) broadband customers by the end of 2008. They say focus groups suggest consumers want to see more relevant ads, and are also keen for WebWise's fraud prevention capabilities (available only to those agreeing to see the targeted ads). Campaign group Privacy International has vetted Phorm's tracking technology, which doesn't link names to browsing data.
Whether consumers really want the same advertisers following them from site to site remains to be seen. Martin Mabbutt at Nomura also warns that telcos' previous attempts to claw back users from Google et al - such as photo or amateur-video sharing sites - have foundered because they lack sufficient scale.
MOBILE ADVERTISING
Advertising on mobile phones is a relatively new phenomenon, but one in which Vodafone has taken an early lead. Having started trials over two years ago in the UK, Spain and Germany, it now runs full services in nine markets. It's working with the big hitters of online advertising to grow the market, partnering with Yahoo to deliver ads in its mobile internet portal, Vodafone Live, and with Google when searching in the wider web.
Vodafone's annualised revenues of £2bn from mobile data, with an estimated 400m people worldwide using the mobile internet, imply a target worth aiming for. Analysts' estimates of the mobile advertising market vary between $11bn and $16bn (£6bn to £8bn) by 2011, with most marketers already looking to increase their investment in the medium.
"The market is still in its nascent stages," says Richard Saggers, Vodafone's head of mobile advertising. He is acutely sensitive to concerns about making ads too intrusive or interrupting the "mobile experience". But when content is relevant to the recipient, with an offer or other action, he says mobile advertising has huge appeal to both sides of the communication.
Early trials found that mobile advertising can have a greater impact than other media on several key measures: brand awareness, quality of customer and response rates. Compared to regular online ads, which are clicked on by 0.1 to 0.2 per cent of viewers at best, Vodafone's click-through averages of 2 to 3 per cent on mobile is impressive. Blyk, a UK-based mobile service provider offering 16-to-24-year-olds free calls and texts if they watch or act on ads sent to their handsets, claims an impressive average response rate of 29 per cent across nearly 500 campaigns since October's launch. Sceptics, however, claim these rates reflect the novelty of the medium, and are unsustainable.
Nonetheless, all the major automotive brands are advertising in one or more of Vodafone's advertising territories, with one case study showing a 20 percentage point uplift in brand awareness on the mobile channel compared to other media. Peugeot found mobile attracted younger and more affluent people to test drives than other channels.
"We're seeing positive results and brands are coming back to rebook campaigns," says Mr Saggers at Vodafone. "We can create an experience beyond the click, beyond the banner. It's completely different to something advertisers can do on TV."
Some of the most innovative examples of mobile marketing are going on outside developed Western markets. In the Czech Republic, students can text each other for free if they use a branded application on their phone.
INVESTMENT OPPORTUNITIES
The telecoms industry dwarfs that of advertising, so while the opportunity is large in absolute terms, there's only so much difference ads can make to companies the size of Vodafone or BT. "It's difficult at this time to draw a firm conclusion," says Mr Saggers, on when advertising will become meaningful contribution to Vodafone's finances. "Vodafone is creating a leadership position with its global footprint. In some markets such as Egypt, Vodafone is first to market with anything of this kind of service. There's a real opportunity to augment [existing services] and deliver new revenue streams."
Investors looking to capitalise on this trend in the short term could see greater returns from technology providers. Phorm is still a concept stock, driven by newsflow. More ISP customers in the UK would likely bring another boost; US telcos are likely to watch and learn from the UK market before adopting themselves, but a deal with the likes of AT&T or Comcast would open up a much larger opportunity for Phorm and its partners.
The best way to gain direct exposure to mobile advertising are technology makers Velti and 2ergo, who are small enough to grow fast on the back of operators' early-stage ad ventures. For a broader play, ad conglomerates WPP, Publicis and Aegis have all acquired or taken stakes in mobile-advertising companies. "Mobile advertising is becoming a seriously hot area," says Michael Armitage, analyst at Charles Stanley Securities.
While advertising is often hit hard in a recession, telco advertising's small base means growth is likely to remain dramatic, especially as brands look for greater and more measurable returns on their marketing investment.
