Following up on a new report from Bernstein Research, I’m back with a closer examination of the research (which focuses on the U.S. market) and an exclusive podcast with Jeffrey Lindsay, senior analyst and lead author. My special thanks to Jeffrey for fitting this interview in between trips. A value-add in this particular podcast: Another perspective on the controversial question: What is the potential impact of a tie-up between Vodafone and Yahoo?

Overall, the report is a good read. It covers all the bases, from mobile ad revenue predictions to estimates for mobile search revenues, and it recounts the results of a road test (Google vs. Yahoo) to determine (literally) which provider is getting more bang for the buck when it comes to paid search.

Indeed, mobile search performance is at the top of my radar as Peggy Albright (founder of Albright Research, and MSG associate) and I have just wrapped up a white paper comparing mobile voice services available on the iPhone. More importantly, we have moved into the final phase of our Mobile Search Performance Report (MSPR), an industry-first quarterly report documenting the mobile search experience across a range of geographies, operators, and search engine providers, providing insight into the key performance metrics, such as click-distance and mobile advertising relevancy.

While I may have my issues with some of the Bernstein report findings, there’s no arguing the fact that Google controls a sizeable share of the U.S. mobile search market,  despite the fact the search giant consistently delivers a poorer user experience (an observation based on MSPR findings as well as those reported by Mobile Commerce during a recent Mobile Search Master Class).

Based on brand reach research (number of visitors to a search property divided by the estimated total of visitors ever to access the search category  in a month) and comScore estimates (as reported in September 2008), Bernstein Research reckons Google had 62 percent of the U.S. market in January 2009. Yahoo came in second with 30 percent, and Microsoft’s Windows Live finished third with 11 percent.

Listen to the podcast here. [19:21]

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Against this backdrop, Bernstein estimates that mobile search revenues in the U.S. will grow from $20 million in 2008 to $910 million by end-2012. (Much lower than the numbers I’ve seen, so the truth must lie somewhere in the middle.) In contrast, mobile advertising revenues are set to skyrocket. Bernstein figures revenues will grow from $160 million in 2008 to $2.3 billion by end-2012. It further projects that global revenues will grow from $700 million in 2008 to $7.2 billion by end-2012.

But the real news is Google’s algorithm for success. Google’s strategy of “pulling through” users from its PC platform to mobile appears to be paying off big-time. Google is not only benefiting from user habit (users tend to visit the same brands and destinations they know from the PC Internet, with Google leading the pack); it’s able to keep all the cash from paid search advertising. As the report points out: “Google has not made to our knowledge any agreement to split revenues with the carriers. Google is possibly also gambling upon intensifying carrier competition and a favorable political climate to drive through de facto ‘wireless net neutrality’ and avoid splitting its revenues with the carriers altogether.” (Think it through. It’s an outspoken observation – and possible outcome – that should have alarm bells ringing in carrier boardrooms…)

At the other end of the spectrum, Yahoo and Microsoft focus on paid default placement (a strategy of negotiating to have their search engine app pre-loaded on the mobile deck so it is available as the default). Unlike Google, the search engines split their paid search advertising revenues with their mobile operator partners. (Yahoo with AT&T and T-Mobile and Microsoft with Verizon.) It’s a strategy to which I give high marks because it potentially encourages a more robust and healthier business ecosystem. However, Bernstein doesn’t seem to share my long-term view. It focuses on the here and now, concluding that Google’s strategy of winner-takes-all “will result in significantly higher margins” than Yahoo and Microsoft.

But a closer look (and an excellent podcast with Jeffrey) reveals good reasons to watch Yahoo over the next months. Vast improvements to mobile search and an exciting set of mobile apps are a boost to Yahoo’s popularity and potential for growth. (More on my take after I hear back on my request for an in-depth briefing to connect the dots in the raft of recent announcements, so watch this space.) Bernstein thinks Yahoo has “already overtaken Google.” The challenge now is to “translate this gain into superior financial performance with advertisers.”

As Jeffrey put it in the podcast:  “To Yahoo’s credit; Yahoo has improved enormously in mobile search recently. And clearly, its applications are resonating more with users. Now that may ultimately translate down the line into a more favorable share, so possibly, going with Yahoo might end up being a good strategy provided Yahoo can keep its momentum going and keep improving. Probably at this minute, it seems that the worst choice for the carriers would be to go with Microsoft, which is where Verizon has gone.”

Among the highlights:

GOOGLE WINS?: Sure seems that way. As Jeffrey puts it: “Even though competitors have preferential placement through deals, and even though competitors may have apps that consumers say they prefer, Google’s still winning.” Why? Brand reach is a big part of it. “What we’re seeing with Google is: That without compelling people in any way – you don’t have to sign up a contract to use Google, you don’t have to pay Google anything, you just use it if you prefer it -  people, in 60 percent of the cases, will just elect to use Google.”

VODAFONE & YAHOO: “After analysis and results, and we’re doing some more user surveys at the minute which we think will probably confirm [our view]: Vodafone might actually be wasting their money.” Drilling down a bit more Jeffrey says “Vodafone might not be wasting money in the sense that they’re doing a deal with Yahoo, it just that they probably could have done better with Google had they selected Google under very similar terms.” (A tall order indeed if we consider Google doesn’t split paid search revenue. (I later asked Jeffrey to look at it from the operator perspective. Does it pay to give it all to Google? Listen in and let me know what you think.)

ANDROID: It’s a fail as far as Jeffrey is concerned. The bad news: The apparent collapse of the Android Alliance and the surprisingly low brand reach of Google among G-1 users have dealt a tough blow to Android. The good news: It doesn’t seem to matter. “Android strategy doesn’t seem to have been a success, but it hasn’t hampered Google’s outcome.” The pull-though strategy – picking up users who repeat their PC behavior on their mobile phones – has paid off.  We should keep in mind Jeffrey is talking about the trend in the U.S.  No doubt users in emerging markets that have leapfrogged the PC altogether are likely to be a little harder for Google to simply “pull through.” What’s more, MCN tells me user preference in Japan and much of Asia favors content and commerce over search results.

OPENNESS & OPERATORS: “I think it boils down to the control mindset with the operators. The operators need to feel control, and it depends whether you would accept a lesser degree of control and a lot more money, or you want a higher degree of control and get nothing.”

My take: It depends on where you are in the value chain. For investors, it’s enough to know Google’s paid search pays dividends. But the mobile search road test Bernstein uses to determine the effectiveness of paid search strategies employed by Google and Yahoo also highlights an important factor that could play in Yahoo’s favor as more people do more with their mobile phones.

By way of background, Bernstein road tests Google’s approach (giving prominent placement to ads) and – based on the Google Ad Traffic Estimator – estimates what the advertiser had to pay Google for the top-notch spot. Yahoo, on the other hand, has organized its apps into a carousel that gets high marks on user experience, but makes it tougher to show ads.

Read between the lines, and this criticism may actually hold the essence of Yahoo’s longer term competitive advantage. Its paid search strategy correctly tends to emphasize the quality of the user experience over the quantity of paid search ads that could be delivered. As the report points out: Yahoo favors delivering a good user experience over “overt monetization via display ads.”

But is that really a shortcoming? Doesn’t delivering a better user experience ultimately solve the monetization issue? A better user experience means more users, more searches and more opportunities for brands and mobile advertisers.

And let’s examine the premise that the end-game is about displaying ads at the top of the results list. Many companies – including those that support Every Single One Of Us – are beginning to question the fit between PC advertising methods and our intensely personal mobile devices (and the metrics we use to measure their success/failure).

User experience or prominent placement? Which makes for a more sustainable business model over time? The jury is out on this one – so please share your ideas and insights.

Disclaimer: MSG has been chosen to undertake the Mobile Advertising U.K. research project on behalf of Every Single One Of Us; MSG is an Every Single One Of Us Collaborator. MCN has been an MSG supporter.

Tags: Every Single One Of Us, Google, iPhone, MCN, Microsoft, Mobile Advertising, Mobile Search, Paid Search Advertising, Voice Search, Yahoo

This entry was posted on Monday, March 9th, 2009 at 9:48 pm and is filed under Mobile Advertising, Mobile Research, Mobile Search, Podcasts. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.