Mobile opens up new opportunities for Facebook and Google

Yesterday, I wrote about why analysts are wrong when they consider mobile a threat to Facebook and Google. It’s actually a great opportunity that allows the companies to expand their dominance in Web advertising onto an increasingly important platform.

But mobile also opens up a few more doors for both companies.

Out of home

Businesses in the U.S. spend between $6 billion and $7 billion annually on what’s called out-of-home advertising. This includes things like billboards, transit, airports, and street benches. Some of this is brand advertising and some is direct-response advertising. Although people will have their own definitions of what falls into which bucket, let’s consider the roadside billboard. As you’re driving along the interstate you’ll see ads for restaurants, gas stations, and nearby attractions. Right now, much of the decision to run these ads is driven by size and placement. Billboards compete on being bigger and more obnoxious. Signs are sometimes mounted hundreds of feet in the air so they can be seen from far away. But this advertising can’t take into account a customer’s preference.

Mobile can. With mobile, your phone knows where you are and the direction you’re headed. It knows (or will know) what kind of food you like to eat. Mobile can create a better advertising experience that compares your interests with the capabilities of nearby advertisers and presents you with the best option.

Mobile can also give you a much richer experience than typical out-of-home advertising. If you’re out and you’re thinking about a movie, you can watch the trailer on your phone. I haven’t seen a billboard that does that.

Local 

As Facebook COO Sheryl Sandberg said on the company’s earnings call, local advertising has been the Holy Grail for online advertising. In the offline world, it’s been dominated by newspapers, Yellow Pages, direct mail, and radio. To date, there has been little that’s made a meaningful impact in local advertising online. Players have fallen into two general buckets:

• Plunder and pillage. These are companies like Groupon and Yelp that extract extraordinary rents while delivering little value in return. No local business should ever advertise on Yelp given its current astronomical pricing. For most local businesses, Groupon is also a terrible idea. (But there are some cases where I recommend Groupon.) Part of the reason these companies have to charge so much is that their cost of sales is so high. In Groupon’s case, it has thousands of people calling up small businesses. That’s expensive. The other reason is that because they are standalone public companies, they can’t afford to build the right product for the long term. They have to show revenue now.
• Data-driven, self-serve startups. I see lots of startups tackling the small business market, and many of them make the pitch that they’ll build great self-serve tools and businesses will flock to adopt them. They won’t. Most small business owners don’t have the time to try out every new fad under the sun. Too many startups treat small businesses like they’re big brand marketers with teams that study analytics every day. Most don’t care about reports on the demographics of their business — they’re too busy making cupcakes or snaking drains. Part of the reason for the relative success of Groupon and Yelp is that businesses haven’t been doing ROI analysis! Even if those problems were solved, you’re left with the problem that you need enormous scale in order to support a business. If you’re only charging $30-$40 a month, you need to have a lot of businesses paying you!

That’s where Facebook and Google come in. They don’t have to plunder and pillage small businesses because they have other successful revenue streams. They can afford to design the right experience that works for consumers, businesses, and the company in the long term. They also have massive scale when it comes to consumers and merchants. With Android, Google often knows where the consumer is. The same is true for Facebook, which reaches 600 million people on mobile devices.

One of the problems with local advertising online is that it hasn’t been local enough. Advertising at a DMA (designated market area) level is meaningless for most restaurants and dry cleaners. They need to reach far smaller audiences.

Google and Facebook each has their own strengths. Google has hundreds of millions of Android handsets with consumers who are looking for goods and services. Facebook knows your social graph. Personal recommendations are still incredibly powerful. Facebook also has businesses signed up. According to Sandberg, 12.8 million local businesses have Facebook pages. Create a simple enough ad product and that can turn into a lot of revenue.

Google has largely taken the wrong approach so far with local advertising. It’s tried to reach small businesses by taking the AdWords product that was created for big direct response and brand advertisers and simplifying it for small businesses. The better approach is to figure out the needs of small businesses and build the product for them. (Hint: Small businesses typically are closer in their buying behavior to consumer than they are to big businesses.)

They’re both in a position to help educate local businesses about the right ways to use mobile advertising to reach their customers. To date, a lot of the pitches to local business have been about price. Lower your price for us and we’ll get more people to walk in the door! Smarter businesses focus on value. I’d like to see Google and Facebook use mobile to drive higher quality customers through the door, not just more customers.

Imagine that you run a Tigers bar in San Francisco. Facebook could offer you the ability to reach people who have “liked” the Detroit Tigers and live within a few miles. (I did that search on Facebook and came up with 1,520 people who live in San Francisco and are Tigers fans.) Those customers are much more likely to return than someone who came in from 20 miles away just to get 50% off. Even better, Facebook could use your status updates to help you figure out which customers to target. You just posted about an author event with James Freeman of Blue Bottle coffee? Here are 5,600 Blue Bottle fans in San Francisco. Just click here to buy an ad and promote it to them.

Part of any transition is going to involve some ad dollars simply going away. When Craig Newmark started his classifieds business Craigslist, it didn’t get all of the revenue that newspapers used to make selling overpriced listings in tiny print. A lot of that ad spend just disappeared.

Some out-of-home and local dollars will get Newmarked. If I’m a fan of Friendly’s and I’m driving down the interstate, and your local search tool shows me where the nearest Friendly’s is, you might not get paid for that search.

But that’s OK — there are still billions more dollars that Facebook and Google are in a great position to tap into with the right mobile products.

Disclosure: I own Google stock. I’m temporarily short Facebook. I’m short Groupon and Yelp. I’m a Giants fan despite the fact that I grew up in Michigan. I used the Tigers purely as example to show the kind of reach Facebook has. Go Giants!

[Top image credit: Greg Ward NZ/Shutterstock]