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May 25, 2006, Wall Street Journal - By AMOL SHARMA and ROBERT A. GUTH
In a sign that the nascent market for advertising on cellphones is gaining momentum, Microsoft Corp.'s MSN unit is in talks to acquire a small private company that provides ads for the wireless Web sites of several major content providers, say people familiar with the situation.
Acquiring Third Screen Media, whose clients include USA Today and The Weather Channel, would give MSN immediate access to technology that serves up ads on cellphones, as well as a network of relationships with leading advertisers.
The deal, if it goes through, is part of a broader strategy at Microsoft to grab footholds in promising advertising areas before other big players, namely Google Inc. To that end, Microsoft this month bought Massive Inc., a New York-based company that provides advertising in videogames.
Executives at Microsoft and Third Screen declined to comment on whether the two companies are in talks. What Microsoft is willing to pay for Third Screen is still uncertain. Observers estimate the Boston-based mobile marketing firm has revenue of less than $10 million a year, though the company is growing rapidly.
The talks between Microsoft and Third Screen Media could still break down without the two reaching a deal, people familiar with the matter say. And there could be other potential suitors for Third Screen, including large advertising agencies looking for a way into the wireless market, they say. Last year, advertising giant Omnicom Group Inc. acquired the mobile marketing company Ipsh.
Microsoft's interest in Third Screen is the latest indication of the increasing focus on cellphone advertising among content publishers, major brands and advertisers. Mobile ad spending, which was just $45 million in 2005, is expected to swell to $1.3 billion by 2009, according to the technology consultancy Ovum.
Advertisers are expected to flood into the market for a simple reason: Almost every consumer owns a cellphone. In the U.S. alone, there are more than 200 million cellphone subscribers. Most people don't lug around their TVs or PCs all day -- but cellphones are a constant companion for many consumers, making them an almost continuous channel for marketing. What's more, advertisers can potentially find out a lot about their wireless audience, tailoring messages based on demographics, usage information, and even a consumer's physical location.
For content providers, advertising will be a crucial source of revenue in the mobile world. There are also opportunities for wireless carriers, who are struggling to persuade consumers to sign up for service tiers that include multimedia content ranging from ringtone downloads to video. An ad-supported model would allow the carriers to offer cheaper, or even free, access to that content. Several U.S. wireless operators are testing Third Screen as an ad delivery platform, people familiar with the situation say.
So far, companies have engaged in marketing on cellphones mostly through text-message campaigns, where consumers are pinged with special offers or asked to participate in contests that generate buzz about a product. Discovery Channel, for example did a promotion in March for the show "I Shouldn't Be Alive." The marketing campaign, powered by Ipsh, allowed viewers to text message a short code to participate in a trivia game and enter a sweepstakes to win an adventure trip.
More advanced ads, such as banners in mobile Web sites and video commercials, are still emerging. That is because while more than a third of cellphone subscribers send text-messages, only 1% are using their phones to watch TV and 10% to browse the Internet, according to M:Metrics, which tracks wireless-industry data through consumer surveys.
Some big brands, however, have already entered the market. A visit to The Weather Channel's mobile Web site brings up a banner ad for Burger King. Users can click on a link to find a restaurant based on their zip code. Third Screen powers The Weather Channel's ads.
Third Screen CEO and founder Tom Burgess said the average ad campaign his company ran in 2005 brought in $35,000. This year, several campaigns are at the "several hundred thousands" level and two or three are over $1 million. The company displays about 70 million ads per month across all its publisher's mobile Web sites. Mr. Burgess said mobile ad spending is no longer in "trial mode" with media companies setting aside small amounts of cash. "By next year, brands will have dedicated mobile budgets," Mr. Burgess says.
Microsoft General Manager Joe Doran said that the market for mobile-phone advertisements is now "tiny" but it's an opportunity that has "tremendous potential."
Google has grabbed a huge chunk of advertising flowing online by specializing in tying advertising to Internet search results. Microsoft has tried for three years to chase Google down in that business but remains an also-ran. Increasingly Microsoft is trying to pitch itself as the owner of a broader set of offerings that include not only advertising tied to search results but also videogames (hence the acquisition of videogame advertising start-up Massive) and now mobile phones.
For several years, Microsoft has used Third Screen Media to deliver ads over cellphones tied to its Hotmail email service. When mobile users access their Hotmail accounts via their phones, Microsoft serves text and small graphical advertisements.
Expanding the mobile-ad business is "part of our long term strategic play," Mr. Doran said. Mr. Doran declined to comment on whether Microsoft is holding talks to buy Third Screen Media. Still, "I do believe that there is a clear advantage in being a first mover," in areas like mobile advertising, Mr. Doran said.
Regardless of whether the deal happens, Microsoft's long-term goal is to tie mobile advertising into an automated service that would let advertisers place ads in mobile phones, videogames, Web-search results and perhaps other areas, Mr. Doran said. That system, called adCenter, is under development and can currently only connect advertisers with Web search.
Some consumers find traditional telemarketers annoying; the new wave of mobile marketers runs the risk of provoking additional consumer ire. Wary of a potential backlash, advertisers, carriers, and publishers have thus far been reluctant to put ads in front of cellphone users. "There's been a hyper-concern that you will offend consumers," says Paul Reddick, vice president of business development and product innovation for Sprint Nextel Corp., the nation's third largest wireless carrier.
Yet the field of players is rapidly increasing. Ad Mob, which was launched four months ago by Wharton MBA student Omar Hamoui out of his apartment, is taking a different approach from Third Screen. The company has developed an automated Web-based system that allows advertisers to put text on mobile Web pages that users can click. The advertiser enters in the text, such as "Click here to download ringtones," and selects the Web sites where it should be displayed. The advertiser pays per click of the ads.
Video ads may be the next frontier. There has been little activity in the area so far, because so few consumers actually watch cellphone video, and until recently, most phones weren't video-capable. Some companies, such as Greystripe Inc., are developing in-application video advertising, where cellphone users who download a game, for example, have to watch a short ad before playing.
Another coming service some wireless carriers are exploring is location-based advertising. So a user could see ads, for example, for the coffee shop or pizza parlor nearest to them.
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