Inside Google

AdMob Inc. isn’t well known among consumers, but privacy groups, the Federal Trade Commission and mobile businesses all know its name.

The 160-person San Mateo company is at the center of what could be the next big online opportunity, as well as a raging debate over privacy in the digital age and an escalating war between Google and Apple.

The company works with marketers, application developers and publishers to place display advertisements on mobile devices. It’s not a huge market today, but most observers expect that consumers will eventually conduct the majority of their online surfing over smart phones, tablets and similar contraptions.

It’s a promising enough opportunity that Google, which has made a concentrated effort to parlay its Internet dominance into the mobile space, agreed to pay $750 million for the 4-year-old company in November. Apple, with its lucrative iPhone franchise to protect, quickly countered with a $275 million purchase of AdMob rival Quattro Wireless.

What’s the appeal?

"The rise in (mobile) usage," said Omar Hamoui, the 32-year-old chief executive of AdMob, who founded the company while in the Wharton MBA program. "In almost any case where a certain medium becomes important, advertising gains relative importance as well."

Think of it this way. As recently as 2002, pundits were skeptically pondering how Google would make money on the Internet. Last year, it earned $6.5 billion, almost entirely by flashing text ads associated with users’ search queries, e-mail content and similar data. It ushered in a new form of advertising that sucked billions away from less targeted, traditional formats like magazines. If the mobile space proves even a fraction as transformative, vast sums are at stake.

Advertising fortune

"Google made a fortune in browsers on PCs," said Jack Gold, principal analyst at J. Gold Associates. "Now everyone is saying, ‘We’ve got bazillions of smart phone devices coming to the market in the next few years. Someone needs to make money on ads and it might as well be us.’ "

Worldwide smart phone sales jumped 30 percent year-over-year last quarter to 53 million units and reached 173.8 million for the year, according to research firm Strategy Analytics. Analysts estimate AdMob’s annual sales top $45 million and are rapidly accelerating. Hamoui declined to discuss these figures or his personal stake in the company, which would imply his cut of the $750 million in Google stock. Three rounds of venture financing led, respectively, by Sequoia Capital, Accel Partners and Draper Fisher Jurvetson raised $46.8 million for the company.

Google’s purchase reflects its desire to protect its existing business, as consumers increasingly reach the Web from smart phones, and tie itself to what may be the next rocket ship. Apple wants to fortify its iPhone stronghold against incursions from Google’s Android handset operating system, and ensure a bigger slice of the market it largely created with the iPhone and doubled down on with the iPad tablet.

Tracking customers

Mobile isn’t just a small-screen version of the Internet, however. There are both advantages and disadvantages for marketers and consumers.

On the plus side, advertisers can know more about these customers, including their location, friends, places they frequent and other information readily served up by individuals who use services like Loopt and Foursquare. The mobile applications combine social networking with a user’s location.

The small screen size, however, is both a blessing and a curse. With only enough room for a single ad at any given moment, they tend to be noticed more easily than a dozen ads spread across a computer screen. But the limited real estate also makes ads more annoying when they’re unwanted.

Advertisers must use the inherent technical advantages of the devices to tailor messages to consumers "based on their interests, the kinds of things they’re doing, the kind of people they’re interacting with," Hamoui said. "You can’t grab a user’s attention because it’s on a huge screen and it’s loud and noisy."

Privacy advocates

It’s these highly personalized capabilities that raise the hackles of privacy advocates, however. They raise a host of questions about "how the data is used and manipulated without the consumer understanding," said John Simpson of Consumer Watchdog. Those concerns are only heightened by the proposed acquisition by Google, which he said could bore deeper into personal information by coupling its rich user databases with AdMob’s.

Consumer Watchdog and the Center for Digital Democracy called on the FTC to block the deal on those and antitrust grounds, arguing it would weaken competition in the already lopsided online advertising space. Google controls nearly 66 percent of the U.S. online search market, according to comScore Inc., and estimates have pegged its share of online ad spending at as high as 40 percent.

In a joint letter to the FTC, the groups argued the purchase would empower Google to boost prices for advertisers, grab a larger share of revenue from mobile software developers and amass "super data profiles" of their users. The FTC has already signaled it is scrutinizing the deal, issuing a rare "second request" for information.

Google spokesman Adam Kovacevich stressed that mobile advertising remains highly fragmented, with more than a dozen networks like AdMob. Despite claims before the acquisition announcement that AdMob was the largest among them, Hamoui now says it’s impossible to identify the leader because none disclose revenue.

Critics misunderstand

He did say that the industry is taking privacy concerns seriously, that antitrust critics misunderstand the online search industry, and that he’s confident regulators will approve the deal once they grasp the nuances of the nascent sector.

"We do display advertising on mobile, which is not an area that Google (or) anyone has dominated," he said. "It’s too new to be dominated."

E-mail James Temple at [email protected].