Why U.S. Carriers Are Struggling In the Mobile Ads Business

Last Wednesday, Telefónica, the Spanish telecom, beat its competitors to the punch: it teamed with the private equity firm Blackstone to buy the technology behind MobClix, a defunct mobile ad exchange. On the surface, it's a natural move. For mobile advertisers hungry for user data, the richest sources are the mobile carriers themselves. And, for the carriers, mobile ads are a convenient new well for revenues as smartphone ownership in the U.S. and Europe approaches a peak. Telefónica's counterparts across the Atlantic have certainly thought so. At a conference two years ago, Bill Diggins, the head of Precision Market Insight, a division of Verizon Wireless, teased his venture's potential with an aphorism familiar to the advertising world: "Data is the new oil." As oilmen, though, the U.S. carriers have disappointed. The top three have each begun operations that tap their vast pools of user data for advertisers, but they have not advanced nearly as far as Telefónica. Each is held back by wary customers and regulators, as well as more technologically adept and agile competitors, like Google, Facebook and Pandora. "Right now," said Rajeev Chand, the managing director and head of research for Rutberg and Company, "telecom operators are struggling to figure out business models for the post-telecom world." A hushed pivotAT&T has moved into this new world more visibly than others. A year ago, the country's fourth largest ad spender was also marching swiftly in the mobile ad business. That is, until it unexpectedly shut its doors. In 2011, AT&T launched AdWorks, a business arm that opened its mobile data inventory for advertisers. It ran a major campaign with Levi's and Foursquare, leveraging its mobile data to drive in-store traffic and boasting 10 billion monthly mobile impressions. Last May, AdWorks added Blueprint, a platform that gives anonymized data, and treasured consumer segments, on over 70 million of its subscribers for targeted ad campaigns across TV, online and mobile. The platform was split in three, one for each screen, and could not track individuals or groups across the devices. But Maria Mandel Dunsch, the head of marketing and media for AdWorks, told Ad Age at the time that they were "laying the groundwork" to do so. But five months later, AdWorks quietly closed its mobile and online division, laying off the sales staff and senior leadership. At the time, the company said it was turning its attention solely to TV and argued its online and mobile networks represented "only a small percentage" of their business. The cost argument makes sense. According to eMarketer, the entire mobile ad business in 2014 will hit $31 billion -- less than AT&T's consolidated revenues for the 2013 fourth-quarter alone. But people familiar with the AdWorks operations said the logistics of building a mobile platform from scratch were more daunting -- and the returns on its data inventory less lucrative -- than AT&T expected. With the birth of AdWorks, AT&T appeared ahead of the curve. Now with the bold move from Telefónica, a sizable telecom with global ambitions and a partnership with Sprint, AT&T's competitor, AT&T looks like it has dropped out of the game. Specter of data-mining At the onset of AdWorks, AT&T discussed operating an exchange like Telefónica, according to one person familiar with AT&T. But the conversations did not venture far. "I don't think buying an ad exchange or getting into that business was ever really on the table, given their concerns about privacy," the person said. Those concerns have hung tightly over the carriers in their advertising maneuvers. Verizon debuted Precision Market Insights in sports stadiums last fall, giving marketing sponsors access to its users inside for data-location and tracking. The company has had to stress the "opt-out" feature of its tracking following negative press coverage. Worried regulators are a hurdle, too. "There's hesitation because no one wants to be called out to some Senate hearing," Mr. Chand said of the carrier's initiatives. Carriers can identify cell phone owners with far more granular detail -- within fifty feet of the exact location -- than the big mobile ad players, Google and Facebook, can, said Akshay Sharma, research director of Carrier Network Infrastructure at Gartner Research. But so far, the risks of privacy backlash have outweighed the benefits for carriers of unleashing the full potential of its first-party data. "They have an advantage that they just haven't leveraged," Mr. Sharma argued. "Carriers don't want it to look like they're data-mining you." Sprint, the third-place operator, has taken a different tactic than its larger rivals. In 2012, it created its mobile ad service Pinsight Media, a subsidiary that uses Sprint's distribution channel primarily to run mobile-app advertising campaigns. The company has powered initiative for PayPal and Supercell, the mobile gaming company. Evan Conway, VP-monetization and strategy, stressed that Pinsight is incredibly cautious with its first-party data. It deploys it in a closed-loop, buying on around six mobile exchanges using information from Sprint subscriber data, but does not give it to advertisers or third-party vendors. (Last year, Pinsight signed a deal with Telefónica. Mr. Conway expects them to add the Spanish telecom's exchange to their list shortly.) Yet without the allure of its direct data, its efforts have flown under the radar in advertising circles. "No developers or publishers that I know are talking about Sprint and Telefónica," said Mr. Chand. The same could be said for the others. "All the operators initiatives are met with skepticism," Mr. Chand continued, "if brands and marketers are even aware of them." A closing window While Sprint has inked several partnerships, AT&T opted for a more isolated tactic with its data marketing. With AdWorks, AT&T partnered with Turn, a demand-side platform, using it as an external vendor. But AT&T built its digital advertising platform internally. It was a "soup-to-nuts" approach, Mr. Conway said. Industry observers claimed that Telefónica's smartest move was to do the reverse: buying the ad technology intact from Mobiclix, a company that AT&T was at one point rumored to buy. Telefónica is expected to kick-start its exchange, called Axonix, in May, with the demographic data and location of its 330 million subscribers. Its director is Simon Birkenheard, a former executive at Google. "We are absolutely seeing ourselves as equivalent to Google, Facebook and Twitter," he claimed last week. In all likelihood, the U.S. carriers have not thrown in the towel. And the arrival of Axonix may prompt them to introduce new measures more swiftly. "Having at least one carrier with a global reach and a reputation of a Telefónica will compel others to consider something similar," Mr. Sharma, the analyst, said. Adria Tomaszewski, a Verizon spokesperson, said Precision Market Insights has ended its initial trials and is prepping for the next phase, but would not offer further details. One source said the company is currently examining potential agency partners. Mari Melguizo, an AT&T spokesperson, said AdWorks is currently focusing on digital advertising on its own web properties and has no plans to revive its digital platforms. "We are exploring other ways to help businesses connect with consumers, but have nothing to announce at this time," she wrote in an email. The two big carriers have been busy fielding damages on other fronts, including the pesky attacks from T-Mobile, which is increasingly peeling away customers. In its wi-fi business, AT&T has suddenly faced new competition from Silicon Valley: in July, Google undercut its prices and robbed the telecom of its exclusive contract with Starbucks. One person familiar with AdWorks said competition from Google was not considered when it closed its digital arms. But the rapid expansion of the search giant in mobile advertising -- and increasingly cross-screen marketing -- is narrowing the gap for the carriers to jump into the industry. "These are great ideas, whose time have almost passed," warned Mr. Chand. "But the window has not closed."

Why U.S. Carriers Are Struggling In the Mobile Ads Business

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