SMARTER STRATEGIES

Content-Hungry Smartphone Users Balk at Ads

R. Colin Johnson | Date: 03-14-11 | Comments

When cable television took off, it discovered that with very few exceptions, it could charge a premium for shows without ads, but could not charge additional subscription fees for shows containing ads. Mobile smartphone advertisers yearn to break that two-tier mold, but may have to bow to user expectations.

Mobile ad services were banking on a fast uptick in revenue that has not materialized, spawning novel new business plans that offer two tiers of services: ad-free mobile subscriptions backed by advertising-based Web services.

With half the world population carrying cell phones and the other half slated to join the mobile electronics revolution over the rest of the decade, business plans are proliferating to put ads on all those screens. Ads are planned for mobile Web surfers, mobile television viewers, short message service (SMS) users and even mobile gamers. And that does not even count the burgeoning new genre of location-based services that trade local information about events and venues in return for using your location in targeted ad campaigns.

Carriers hope to cash in on these increasing ad revenue streams to boost their bottom lines without increasing the basic rates that their subscribers are paying for their phone services. Even in the face of possible consumer-advertising overload�a trend that could turn users sour on a carrier�targeted ads are still viewed as the savior of services with plenty of users, like Twitter and Facebook, but who are not (yet) profitable.

Mobile users of the Spotify music service must pay a subscription fee, but in return get ad-free mobile service. (Source: Spotify)

Skype, for instance, is planning on adding display ads featuring international brands to its Windows client in advance of its anticipated $1 billion initial public offering (IPO) later this year. Even though the Skype IPO will likely generate as much as $1 billion�the biggest IPO since Google generated $1.7 billion in its 2004 IPO�of its 145 million connected users only 8.8 million are paying subscription fees. Skype's most recent accounting claims it generated $860 million in revenues in 2010, but ended up with a net loss of about $7 million.

Skype's new advertising effort aims to put it in the black, but for mobile users of Skype's services using iPhone, BlackBerry and Android, the apps will remain ad-free. Skype is courting subscribers to its wireless voice-over-IP (VoIP) service, and other service vendors with mobile sectors are also getting in on this two-tier model�free with ads on the Web, or ad-free with a subscription when going mobile.

For instance, the Spotify AB music service now offers two tiers�advertising-supported services for those connected by WiFi or landline and paid subscriptions for mobile users. The two-tiered model seems to be working, since Spotify recently announced that it had converted its one-millionth user to a paid subscriber. The service has more than 10 million registered users in the U.K., Finland, France, Netherlands, Sweden, Norway and Spain. Ordinarily, users listen to its database of over 10 million music tracks while on the Web for free, but pay a subscription to access the same service from their mobile device.