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My eyes lit up when I saw this figure: Mobile advertising could hit the $5 billion mark in revenues by 2012. That’s quite an upstroke from the just-over $100 million earned from mobile advertising in 2007. It got me thinking about the hows and the whys of the situation. What’s going to cause this exponential increase in mobile ad revenues? Which technologies will be the most utilized in this expansion? There was definitely part of me saying, “How can I get a piece of that revenue pie?”

What we’ve seen so far of mobile advertising is limited. Most current models are based around paying customers to view ads. Advertisers haven’t yet figured out exactly how to utilize SMS without it being considered spam. And the mobile web is relatively new and without a sound advertising mechanism.

Still, these are the primary vehicles for delivering advertising in the mobile environment. So how are they going to evolve over the next few years in order to grow into that $5 billion revenue giant?

Paid advertising

The current model
This is the model we’re seeing right now, but which many think won’t have much of a lasting effect. The idea is that carriers broker deals with advertisers who will serve ads to subscribers. In return for viewing these ads, the carriers reimburse the subscriber with airtime.

The foremost of these programs is Sugar Mama, which gives Virgin Mobile subscribers one free minute for every two Sugar Mama activities they perform. They also have the option of going online to view and rate ads, which gives them a minutes of airtime for every minute spent rating ads. It sounds like a nice model, but can it last?

“The jury is still out on this model,” says Greg Sterling, principal, Sterling Market Intelligence and Senior Analyst, Local Mobile Search. “There are mixed signals from consumers on their receptiveness and on the efficacy of this for advertisers.”

The latter reason, the efficacy of this for advertisers, certainly raises a level of concern. Even though the model might be attractive to some, we’re simply not familiar with being paid to view ads. As such, services might not be used to the advertisers’ wishes, and we could see them pull out of this kind of business in time. What good does it do them if people view and rate their ads, but don’t convert into customers?

The mixed signals from consumers indicates that even though they do receive compensation for their time viewing ads, they still consider them enough of a nuisance to continue holding them in contempt. Hey, advertising sucks, especially in the interruption model. These ads, though they do benefit the consumer in a way, are still interruption pieces, and figure to continue being viewed as such.

“There might be some lasting value in market segments were consumers are price sensitive (e.g., youth and lower-income groups),” says Sterling. This might be why it’s working for Virgin Mobile, whose users probably appreciate the free minutes more than, say, an AT&T customer would. As Sterling notes, “[paid advertising] is unlikely to have much traction or staying power among more affluent users.” However, there is still the issue of converting the viewers of the ads into customers.

Google’s proposed model

Still, there exists another strategy for mobile advertising that subsidizes the cost of a mobile phone or the monthly service costs. This is currently being discussed by Google, and was a topic of conversation with CEO Eric Schmidt:

“Your mobile phone should be free,” Schmidt told Reuters. “It just makes sense that subsidies should increase” as advertising rises on mobile phones.

Danny Sullivan, editor-in-cheif of Search Engine Land, agrees. “I think the idea that Eric Schmidt suggested, that you might just get a free phone in return for ads, makes sense.” However, there are complications that go along with this, which might render the idea flawed. As Sullivan explains, “I think phones are going to be more desktop like, where you use a browser that is not in the carriers control. So the ads you see will come from the sites you visit, and the price you pay for seeing them is, well, seeing them.”

Given the increasing number of smartphones being offered by major carriers, this certainly is going to present a problem in the Google model. Advertisers might not be as apt to participate in an ad program that subsidizes phones when they can just continue with the form of Internet advertising we’re seeing now, just on a mobile platform.

However, with Google’s participation in the 700 MHz spectrum auction, they might be looking to become a mobile carrier themselves. While this wouldn’t come to fruition for a number of years, if it happens at all, it could help save their vision of mobile advertising.

“I can totally imagine Google moving to having a virtual carrier service where you get a free phone and plan or if they get some of the new spectrum, running a service that way,” says Sullivan.

Mobile web advertising

It might be hard to believe if you look around and see everyone armed with a BlackBerry, but only 13 percent of U.S. mobile phone users surf the web from their phones. A number of factors play into this, among them that people don’t want to pay $30 or $40 per month for mobile Internet when they already pay nearly that much for broadband service at home.

In any event, the mobile web has nowhere to go but up. And as more and more people surf the web from their phones, the greater opportunity there will be to optimize web space for advertising. The only question is: Will this resemble our current desktop Internet advertising models?

As noted earlier, Sullivan thinks that this is the model that will prevail as we see more smartphones on the market. However, this would take the carrier basically out of the equation. That’s not going to fly in today’s mobile landscape. Carriers are looking for every possible way to further monetize their networks, and aren’t going to be so keen on mobile web sites taking care of their own advertising, as normal websites do nowadays.

One way the carriers can step into the mobile advertising realm is to introduce an interruption-based advertising model. As noted earlier, though, people tend to not enjoy interruptions all that much.

“Consumers are already either hostile or ambivalent about mobile ads and that sort of experience would drive consumers away from those sites or services that are using it,” says Sterling.

However, while interrupting a user’s web experience could cause contempt, one area where carriers might get away with this kind of advertising is within mobile videos, such as Verizon’s VCast service. “The ‘interruption’ model might work in a mobile video/tv context since there’s something of a precedent there,” says Sterling.

If you’re watching an episode of a TV show on your mobile phone, you could certainly start to see commercials embedded, as if you were watching it on your home TV. This wouldn’t go over well at first, for certain. We love digital content, and for the most part, we don’t have to deal with eight some-odd minutes of commercials when we watch shows digitally. However, since there is precedent in the model, people might just let it roll off their backs in time, just as they do when they watch TV at home.

The only drawback: No flipping channels during commercials. This is only going to make advertising in-show more attractive to advertisers and carriers.

SMS advertising

Advertisers salivate at the idea of SMS advertising. Why? Because they can create more targeted campaigns. Though carriers can’t give out your CPNI (customer proprietary network information), they can sell information such as who you call, how long your talk to them, and what you buy through the carrier. Verizon introduced such a program in October, though it wasn’t received very kindly by the Internet media.

“Anything that isn’t permission based or based on anonymous, aggregated user information will likely meet with objections and potential regulation,” says Sterling.

Yet SMS can so easily be used for ad campaigns. It’s a cheap form of communication, and nearly everyone who owns a cell phone at least has a text messaging feature included, whether they use it or not.

“SMS is ripe for more mobile advertising but it has to be done right — opt-in or otherwise relevant,” says Sterling. “If not, it’s spam. But it is the highest usage category right now after voice and marketers are waking up to that.”

Carriers and advertisers, then, are going to have to look for alternatives if they’re going to run successful SMS campaigns. It’s quite a balance to 1) not be considered spam and 2) not be considered infringing on people’s privacy. However, Sterlings sees the alternatives. “There’s lots of potential mobile ad targeting that doesn’t require personal information: search, geo-targeting, contextual targeting and certain kinds of demographic and behavioral targeting. And users want ‘relevant’ ads, so a balance can quite easily be reached.”

In other words, prepare to start seeing a lot more SMS-based ad campaigns, though it might take a while to get right.

“I think the bigger issue is that your phone knows where you are and where you have been,” says Sullivan. “Ads can be targeted that way, but that also means a profile of your movements is built. Kind of scary.”

Don’t forget search-based advertising

Of course, these aren’t going to be the only vehicles that drive mobile advertising to the $5 billion mark. So what else might we see from mobile advertisers down the road?

“Search will be important over the long run,” says Sterling. However, while search-based advertising should be an ideal for mobile advertisers, there are still inherent issues with search itself that could prohibit advertising in that medium. As Russell Shaw of Mobile Messaging says in his mobile messaging predictions: “Mobile search will still suck.” But in the long run, it might be the most viable outlet for both carriers and advertisers in the mobile realm.

Sterling also notes a number of other methods of monetizing the mobile web, including “ad-supported directory assistance (e.g., 800-Free-411), text-based advertising (including contests, coupons) and WAP (search, display).” He also adds that, “Yahoo!’s new mobile platform also has some interesting options for advertisers in the form of widgetized landing pages and sponsored applications.” We’ll see more of this with the launch of Yahoo! Go 3.0.

There may also be drawbacks to mobile advertising. “It’s not clear right now, however, whether mobile will be a branding medium,” says Sterling. “It may be able to reinforce brand messages promoted in other media and it may ultimately be most effective as an integrated piece of a larger, multi-faceted campaign.”

While the specifics remain a mystery, we know one thing for certain: Mobile advertising is only going to become more prevalent. Whether its with existing models or ones that will be developed over the next few years, the ads you see on your mobile phone are going to increase. Yes, it might be annoying. But there’s little we can do about it at this point.

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