Mobile advertising is booming. According to research company eMarketer, the market for mobile advertising doubled in 2013 to $17.9 billion, representing a 105% increase, year over year. More important, the same source expects this market to grow another 75% in 2014, to more than $34 billion. By 2018, this market is expected to reach $94.91 billion, roughly five times its current size.
As advertisers shift marketing budgets from traditional channels such as newspapers and TV stations to mobile apps with high traffic, companies that offer attractive mobile advertising solutions are set to benefit enormously. Internet giants Facebook (NASDAQ:FB) and Google (NASDAQ:GOOGL), which accounted for more than two-thirds of mobile ad spending last year, are among the top winners. But even smaller companies, such as Pandora (NYSE:P) and Twitter, could experience massive improvements on the top line. How will these companies benefit?
Google's the king of mobile advertising
Google is expected to earn $14.7 billion in net ad revenue this year, including display and search ads on smartphones and tablets. The search giant controls roughly half of the mobile advertising industry, thanks to its Android project, currently the world's most popular mobile platform.
Google protects its mobile dominance by controlling Android's open-source software. The basic version of Android is available for free. However, this version does not include Google's mobile services such as Gmail and Google Play. To get the key apps, mobile device manufacturers need to obtain a Google Mobile Services, or GMS, license, which are charged on a per-device basis.
Google charges a minimal fee for its GMS license, allowing most manufacturers to afford installing Google's key apps on their devices. The real business here is not licensing, but advertising. Most customers will get their new Android devices with pre-installed versions of Google applications inside. These applications show Google ads, generating meaningful revenue.
Facebook is building an arsenal of stand-alone mobile apps
Despite being originally developed for the web, Facebook has transformed into a mobile company in the past few quarters. In its most recent quarter, the company generated 53% of its total ad revenue from mobile.
Unlike Google, Facebook does not own a mobile ecosystem. Instead, Facebook's mobile strategy focuses on building and buying an arsenal of stand-alone mobile apps, including in-house developed Facebook Messenger, Instagram, acquired for $1 billion in 2012, and WhatsApp, which was recently acquired for $19 billion.
By buying Parse, a start-up that provides a complete mobile development platform, Facebook showed that it is not only interested in owning popular apps, it also wants to play a crucial role within the community of mobile app developers. Eventually, Facebook could release its own mobile operating system.
Robust opportunity for Pandora
Pandora's mobile ad revenue hit a record $116.8 million in the most recent quarter. The company, which provides both free and paid subscriptions to its music streaming and recommendation service, could be looking to sell ads through computer-automated systems. Roughly 70% of Pandora's listening happens on mobile devices.
Looking for the best exposure
As the mobile advertising industry continues to grow, several new players are expected to appear on the scene. Mobile start-ups will continue competing with Internet giants for a piece of this promising market. In this fierce space, winners usually differentiate themselves by either building an entire mobile ecosystem, the way Apple and Google have done, by focusing on a particular segment, or simply by building an arsenal of stand-alone mobile apps.
Final Foolish takeaway
Once a tiny market, mobile advertising is expected to reach $94 billion in total revenue by 2018. Facebook and Google will control much of mobile ad spending. However, there's also space for smaller competitors that focus on a particular niche, such as Pandora. Finally, when looking for the best exposure to mobile advertising, it's important to keep in mind that mobile winners usually differentiate themselves by building ecosystems, narrowing their focus, or creating a diversified portfolio of mobile apps.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Pandora Media. The Motley Fool owns shares of Facebook, Google, and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.