Bronte Media

Google’s $750m acquisition of AdMob was quite surprising to me and I think very poorly of it. Both the price and the strategic intent of the deal are lousy for Google. Mobile advertising is a crappy environment in both form (small screen) and function (very little commerce/transaction activity in busy micro-intervals of time). And then there is the fact that it’s an ad network, and regular readers will know how I feel about that.

So it is really hard for me to see people I respect use the same flawed logic: That Google is a large company and the price is a drop in the bucket compared to their market cap for the strategic value it offers.

In fact it hurts me to read it. The same logic can be applied to dating advice for a single billionaire: Hopping on a plane to vegas, buying up a kilo of cocaine and paying for 50 hookers on a week long bender may produce a loving and caring wife but it’s pretty unlikely.

Firstly, mobile advertising sucks at the moment because mobile commerce has not developed. The majority of online advertising dollars are tied to online transactions. That’s all of search and a huge majority of display impressions (~70%) and a decent chunk of display dollars.

Everyone is so bullish on mobile advertising but nowhere near as bullish on mobile commerce. They are very much inter-linked. If there is no mobile commerce, there will be no mobile advertising. In the beginning, the majority of mobile ad revenue was ringtone providers. Now they are dying. Granted, the app eco-system is developing at an impressive rate and in-game gifts/enhancements offer a real business model. If they succeed, app developers will buy tons of mobile ad inventory.

People also use mobile phones in small time increments making meaningful activity (researching purchase decisions/discovery) less likely than other types of behavior (lookup of known information).

Finally, in case anyone hasn’t noticed, search has not become as integral to the mobile web as it has to the desktop web. Sites receive about 10% of their traffic from search referrals in a mobile environment compared to 30% in a desktop web (rough numbers).

Then there is the issue of form. Mobile phones fit in a pocket and offer poor creative formats to advertisers and their agencies. This won’t change in the future.

Secondly, AdMob is an ad network. They currently get 40% of the revenue because it is a nascent industry (their net revenue is about $25-30m). That will pretty quickly move to 10-20% cut as the industry scales. We saw it in search advertising (Overture) and display advertising (AdSense). The economics will get worse for the business. There is no doubt Google will add large scale to AdMob but they must have also budgeted for the business economics to deteriorate significantly.

In AdMob’s most recent monthly report for September [PDF] the firm says that it served 10.2 billion ad impressions. Let’s assume the company is at a $10m gross monthly revenue rate. That means the average CPM they are seeing at present is around $1 – more than social networks but a lot less than average display and not in the same league as search.

Specific to AdMob, only half their inventory is in the US as per the report.

So color me skeptical for Google paying 30x net revenue for an ad network operating in a poor advertising medium. The Youtube acquisition was a million times better than this one.