SPOTLIGHT ON THE FUTURE OF ADVERTISING

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ARTWORK New York TimesCompany R&D Groupwith Mark Hansen & JerThorp, Cascade, 2010-2013Interactive tool created incollaboration with R&D team -- -and presented In various —environments, including a five-screen video wall; a Screenshot -from a visualization of howTimes content is shared acrossthe Twittersphere ~

Sunil Gupta is the headof the marketing unit atHarvard Business School.

For MobileDevices,Think Apps,Not Adsby Sunil Gupta

ike most professionals, I carry a smart-phone. Although I use it frequently fore-mailing with colleagues or texting with

y family, I also use its apps to find in-formation or to entertain myself. And as

I navigate its 3.5-inch screen, I routinely encoun-ter something else: a growing stream of itsy-bitsyadvertisements.

When I click on the app for the online magazineSlate, for instance, I see a banner—smaller than mypinkie—for something called Bingo Rush, with littlestars and the word "free." What is Bingo Rush? I haveno idea. At the bottom of the Huffington Post app is atiny rectangle that says "Scratch and win with Adi-das." What can I win? I'm not sure; the ad can barelyaccommodate five words. On my Sudoku app is anad for BMW—no, wait, it's Audi. (The photo is sosmall that it's hard to tell.) When I give it a tap, theSudoku app disappears, and my screen goes blankwhile my phone struggles to load whatever Audiintends to show me next. Before it appears, I've lostpatience and switched to a different app.

These balky, Lilliputian ads represent the state ofthe art in mobile advertising—and they don't work.Few people click on them. In surveys, four out of fivepeople report disliking them.

Many companies are betting that with sometweaking, mobile ads will become an integral partof their communications strategies. Indeed, one of

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SPOTLIGHT ON THE FUTURE OF ADVERTISING

the most celebrated media graphics produced in thepast year is a slide showing a side-hy-side compari-son of how people consume media (mobile now ac-counts for 10% of time spent with media) and whereadvertisers spend their money (mobile accounts forjust 1%). Over time, some observers argue, thesenumbers will converge. Driven by that logic, mobilead budgets in the U.S. are expected to increase from$2.3 billion in 2012 to almost $11 billion in 2016.

Smart marketers will embrace mobile as a com-munications platform—but the best use of thenew medium won't look anything like the currentgeneration of tiny display ads. Historically, that's afamiliar scenario. Whenever new media emerge—consider television in the 1940s and 1950s and theWorld Wide Web in the 1990s—there's a period offumbling while marketers try to repurpose ads thatworked in the old media. That's why early-l95Os TVcommercials featured narrators reading what wereessentially radio advertisements, and why 1990swebsites were filled with static display ads takendirectly from print campaigns. Neither effort wasefFecdve. New media require new methods of adver-tising, and those evolve over time. The same will betrue of mobile.

The best way for marketers to communicatethrough mobile will be with apps. Apps will trumptraditional ads in part because consumers don't per-ceive them as advertising—they value them for theirfunctionality and thus don't find them intrusive.For marketers, apps will also be attractive becausethey're actually more cost-efficient than traditionalads, and they sometimes create entirely new rev-enue streams.

If you observe how people use their smartphones,and if you look beyond calling, e-mailing, and texting(activities that aren't particularly conducive to adver-tising), you'll see that apps dominate. Users spend,on average, 82% of their mobile minutes with appsand just 18% with web browsers. They downloadabout 40 apps to their phones (out of more than amillion available) and regularly use about 15.

Smartphone apps fall into five categories:• Games and entertainment, which, accord-

ing to one study, account for 42% of time spent onsmartphones;

• Social networks (especially Facebook), whichaccount for another 31% of smartphone time;

• Utilities, including maps, clocks, calendars,cameras, and e-mail;

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FOR MOBILE DEVICES, THINK APPS, NOT ADS HBR.ORG

Although smartphones are ubiq-uitous, "mobile advertising" canbe a hollow phrase. People sim-ply don't like ads on their screens.

Instead of buying tiny banneradvertisements, smart market-ers will create apps that enhanceconsumers' lives.

Effective apps will do at leastone ofthe following:

Add convenience Banking apps, for

example, let people pay their bills online.

Offer unique value. Commuters can use

an app to order groceries while waiting for

their trains.

Apps on Facebook

and other sites let users send gifts to

friends.

Offer incentives. Apps that give away

mobile minutes, for instance, can entice

customers.

Entertain. Companies can capitalize on

the popularity of mobile gaming by devis-

ing games focused on their brands.

These strategies will help marketers

reach customers and build long-term

engagement with them.

• Discovery, including apps for Yelp, TripAdvisor,and Flixster;

• Brands, such as Nike and Red Bull.The challenge for brand marketers is clear: If

smartphone users spend most of their time withapps but regularly use only about 15, and if few ofthose 15 are for branded products, the marketingreal estate on users' mobile screens is constrainedindeed. How can marketers reach and engage theseconsumers?

Instead of buying tiny banner advertisements,marketers should create apps that add value to con-sumers' lives and enhance long-term engagementwith their brands. To do so, they need to understand

how and why users choose apps. My research revealsfive strategies that can help them succeed.

1. Add convenience. Most airiines have mobileapps that allow customers to check in and to moni-tor their flights' status. Most banks have mobile appsthat let people track their bank balances and pay bills.ESPN's app lets sports fans check scores. Of course,people can also do these things on desktop comput-ers or from a mobile browser, but the smartphoneapps function more quickly and smoothly, so mostcustomers prefer them. And every time a consumeruses one of these apps—or even glimpses it on thescreen while swiping to find something else—it in-creases her exposure to the brand.

Convenience apps can give marketers a great re-turn on investment, but they face three constraints.First, although they can strengthen relationshipswith existing customers, they aren't very efl'ectiveat acquiring new customers. Second, establishedbrands with large customer bases have an inherentadvantage in using these apps to drive retentionand engagement; such apps aren't a viable alterna-tive for every company. Third, as more and morecompanies build convenience into their apps, theywill find it harder to differentiate themselves onthat basis.

2. Offer unique value. Some apps take advan-tage of mobile capabilities to do things traditionaldesktop computers can't. In South Korea, where theUK-based retailer Tesco has a grocery delivery busi-ness called Home Plus, the chain plastered the wallsof subway stations with life-size, high-resolutionphotos of products on store shelves, complete withQR codes that can be scanned with a smartphone.This allows consumers to shop and arrange for de-livery while waiting for their trains. Within threemonths ofthe system's rollout, the number of regis-tered users of Home Plus had increased by 76%, andrevenues had increased by 130%. After a decade ofbadly trailing its competitor E-Mart, Home Plus is

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SPOTLIGHT ON THE FUTURE OF ADVERTISING

Why Mobile Ads Don't WorkDisplay ads functionwell in print and ondesktop computers.But there's a growingconsensus that theyjustdon't work on mobiledevices. Here are threereasons why:

People Don't Like Them

Surveys show that people find

mobile ads more intrusive

than desktop ads, because

mobile is a more private

venue. In fact, fully one in

five say that mobile ads are

"unacceptable."

There's No Right Side

PC users are conditioned to

find ads in the right margin

of the screen—they appear

that way on Facebook and

in Google search results, for

example. But mobile screens

are too small to have a usable

right margin, so ads pop up in

unexpected places.

The "Fat Finger" Effect

Advertisers closely track how

many users tap on an ad. But

many of those taps are inad-

vertent, because the ads are

tiny—so it's difficult to judge

an ad's effectiveness.

now closing the gap in overall market share, includ-ing offline sales. Since it was launched, in April 2011,the app has been downloaded more than a milliontimes, and the company is now expanding its virtualstores to bus stops.

Nike, similarly, has capitalized on mobile's dis-tinctive abilities. In 2006 it unveiled Nike+, an app(originally for iPods, now available for most smart-phones) that works with a special chip in runners'shoes to monitor speed, distance, and caloriesburned. Although the app itself is free, people must

Consumers don'tperceive apps as intrusiveadvertising—they valuethem for their functionality.

buy either a sensor-equipped Nike sneaker or a shoe-mounted sensor in order to use it. Nike credits theapp with having driven growth of 30% in its runningdivision as of 2012, and it has expanded Nike+ to in-clude apps and accessories that track other activities,from playing basketball to sleeping.

Neither the Home Plus app nor Nike+ feels likea traditional marketing communication—and that'sexactly the point. Mobile users don't want ads; theywant apps that deliver unique benefits.

3. Provide social value. Facebook added its bil-lionth user in October 2012; its app is one of the mostused in the mobile world. Yet Facebook, like othersocial media companies, has struggled to monetizeits user base through advertising. Marketers ques-tion the effectiveness of ads on social media sites, be-

cause ads interrupt the user experience of connect-ing with friends. Activities that enhance connectionsamong friends are a different matter.

Social gifting is a case in point. As Reid Hoffman,a cofounder of Linkedin and a partner at the ven-ture capital firm Greylock Partners, has observed, itdraws on three hot trends: gift cards, social network-ing, and mobile shopping. Consider two examples:Since its November 2011 launch, more than 300,000people have used the Swedish start-up Wrapp togive their Facebook friends promotional gift cardsavailable from nearly 100 major retailers. (In all,more than 2.2 million cards have been sent.) And inSeptember 2012, three months after acquiring themobile social gifting company Karma, Facebook an-nounced the rollout of features that let users sendtheir friends gift cards for Starbucks coffee. MagnoliaBakery cupcakes, and other goods.

4. Offer incentives. The basic concept is famil-iar; many firms use short-term promotions and otherincentives to entice customers to buy their productsor to "like" them on Facebook. To win a spot amongthe handful of apps on a consumer's mobile phone,however, marketers need to come up with especiallycreative incentives.

Coca-Cola did so with a recent promotion inBrazil. In March 2012 the company began installingspecial devices in venues such as beachfront kiosks-bright red machines that look like soft drink dispens-ers and bear the Coke symbol and the phrase "Refilde Felicidade" ("RefiU Happiness"). After download-ing a mobile app, consumers—typically teenagers-can hold their phones up to one of these machines,which will "dispense" 20 megabytes of free datacredits while an image of a Coke bottle being filledup appears on the screen.

5. Entertain. Recall that smartphone usersspend more than 40% of their app time playinggames, and that the figure for tablet users is even

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FOR MOBILE DEVICES, THINK APPS, NOT ADS HBR.ORG

higher. This represents a huge opportunity for savvymarketers.

Red Bull is one company that has capitalized onthe opportunity. Instead of creating an app focusedon its brand, it devised several mobile gaming apps,including Red Bull Kart Fighter, Red Bull X-Fighters,and Red Bull Air Force. For an energy drink company,building games requires a new and very different setof capabilities, and it is more complicated than sim-ply buying banner ads. But the effort is paying off:In all, the games have been downloaded about twomillion times to date, and whenever a customer hits

"Play," he's engaging with Red Bull.The fact that creating apps demands completely

new skills will probably turn out to be a plus formany companies. As Angry Birds and similar appsbecame overnight sensations, thousands of com-puter programmers entered the industry as free-lance app designers. (More than 275,000 developershave registered to build apps for the iTunes storealone.) Despite the hype, many are struggling; as theNew York Times recently reported, "only a small mi-

nority of developers actually make a living by creat-ing their own apps." As a result, developers' fees areoften far lower than those of ad agencies. So apps arenot only the most effective way to reach mobile con-sumers; they're also more cost-eíñcient than manytraditional ad campaigns.

DESPITE THE UBIQUITY of smartphones and the hoursmany of us now spend each day with our heads bentover a small screen, sophisticated marketers willrealize that "mobile advertising" is often a hollowphrase. People simply don't like ads on their mobiledevices. Even location-based ads that entice custom-ers through context-specific discounts are merelyserving a short-term objective, not engaging custom-ers for the long run. Marketers will get better resultsby communicating with consumers in a format thatenhances their lives and offers long-term value. Inthe coming years, creative minds may find new vehi-cles for achieving these aims. But for the time being,apps are the best way to win the hearts Eind minds ofmobile consumers. Ü HBR Reprint RI3O3D

"Since you asked, no, the moat hasn't been eifective at all."

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