Telcos in Advertising Value Chain - Threat or Opportunity?

We're delighted to be working with Alan Patrick of niche consultancy Broadsight on our Ad-Funded Services programme, which we're running with the GSM Association. (Alan will also be 'analyst in residence' in the Digital Home stream at the Telco 2.0 event in March). Alan has been exploring developments in online advertising for many years based on his experience of working with companies like BBC, British Telecom (OpenWorld and Ignite), AOL Time Warner, ntl and UPC and consulting at McKinsey.

Below he gives us 'Some thoughts on the impact of Online Advertising on the Telco 2.0 Landscape'. He says:

As we know, over the last few years, the penetration of broadband internet has risen rapidly across much of the world (see here for stats). China and India have recently started to catch up, with China predicted to overtake the US about now.

There is a link between Internet pentration, e-Commerce, and Online Advertising which I have described here. As broadband connections have risen, online shopping and e-Commerce have rapidly followed, due to the ease of use. The rise of online advertising has also risen with the rise of online shopping and e-Commerce, up from a very low percentage of all global advertising in 2002 to c 6% by 2006.

This "rush to online advertising" has also had a knock-on impact on online mobile advertising - SMS advertising has been around for quite a while and has grown respectably, but the rise of 3G services has led to a plethora of partnerships (Yahoo / Vodafone for example) in 2006 between Telcos and Search Engines to gain search engine advertising revenues from mobile portals.

However, the sheer scale of online advertising is also potentially a risk for Telcos of all stripes, for two main reasons:

Firstly, a number of new services that Telcos are looking to launch (IPTV, various Mobile multimedia services for example) are finding that competing solutions are using advertising revenue to subsidise the services, thus impacting many of the subscription based business cases that they were often predicated on.

Secondly, a number of non Telco players are adding Telco services as a free (or at least heavily subsidised) adjunct to increase stickiness to their existing businesses (eg Skype / eBay, Yahoo and Google Mobile services, and Apple (no longer an IT company)

The risk for Telcos is clear - outside players will give away for free the services that Telcos need to make money from, as that is their main revenue - and the scale of subsidy now possible from online advertising makes the problem material - and it will only get worse.

So what is a Telco to do?

We will be adressing the overall issues around online advertising in more detail in our upcoming report which we're producing in partnership with the GSM Association, 'Ad-Funded Services and Role of Telco in Advertising Value chain', and which is being jointly written by STL and us Broadsight (available to order now). However, one very interesting area to examine, which we thought would be very fruitful to blog about and get people's comments on, is the issue of online metrics.

The online advertising media has dramatically changed the need for metrics to measure and understand advertising ROI.

Pre internet it was all so very simple - media was sold to mass audience blocs that were fairly predictable, and Ad pricing was faily simple as well - audience reached, prime (or otherwise) position on the piece of media and standardised targeting data allowed marketers to get fairly predictable results, and relatively unsophiticated feedback methods were good enough.

The early internet took off on the same lines with banner ads, classifieds and those annoying popups kicking it all off. The Cost per Thousand reached (CPM) pricing was a simple yet "good enough" metric. As online experience increased, Cost Per Click (CPC) pricing became the new approach, with advertisers only paying when the customer clicked on the Ad. Click Through Rates (CTR) were initially very high (c 10%) but dropped as customers became more inured to them.

Where it all changed was when search engines, especially Google, started to match the Ad served to what the customer was searching for, with increasingly discrete targeting - the first real low cost, mass production "pull" advertising systems. Differential pricing and then auctions, detailed analysis of the user's digital footprint all emerged in rapid profusion, until the measures started to move to Cost Per Action (CPA) pricing approaches, such as Cost per Sale made (CPS), and now Cost per Revenue obtained (CPR). Microsoft has now started to trial a next generation system that makes use of user identity demographic data to increase accuracy even more. Add to that the impact of Web 2.0 technologies such as RSS that make established online metrics such as pageviews increasingly inaccurate. See notes here, here and here or even here for commentary on these issues.

Mobile went a slightly different route, via text based sms and (much less so) mms adverts, and as 3G increased penetration there was an increasing focus on internet style search based ads. In 2005 / 6 there has been a large rise in trialling advertising approaches for mobile multimedia, including Mobile TV - but the result is much the same - the increased targeting requires far more discrete metrics

This may be an excellent opportunity for Telcos to create some further value from online advertising.

To run these sort of metrics and services effectively requires large amounts of discrete data, some of which these players do not have at present. Telcos however, because they hold billable user identities (ie detailed demographics) and have been provisioning the end services and measuring their usage, so have a wealth of some of this detailed data. Mobile Telcos can add moving location and on-the-move service usage data.

The first step is to understand its value. The next question is what to do with it. How best to maximise the potential benefit - sell, partner, procure - or something else? We'll be exploring these issues in our new online survey (live later tonight) and at the Ad-Funded Services Workshop at the Telco 2.0 event in March.