Will Bigger Ads Lead to Bigger Profits for Google?

Google is thinking big to solve a big problem. For the last three years, the company has seen its average cost-per-click on its ads decline rapidly as users shift to mobile devices.

This week, Google announced it would add full-screen interstitial ads to its AdMob mobile ad network for all app developers. The ads could be static banners or YouTube style pre-roll video ads (with the skip button included). The announcement comes just about a month after Apple rolled out full-screen ads on iAd -- its mobile ad platform.

Meanwhile, Google faces pressure from Facebook and its new ad platform, which features better targeting on mobile than Google's AdMob. While Google looks for its own way to improve targeting, it's hoping these higher priced ads will help ease the pressure in mobile.

Haven't I seen these before?

One of Google's new full-screen ads is interactive. Source: Google AdWords Blog

Full-screen display ads have been around for years, but have been restricted to games. Games make the most sense for these full-screen ads, which are essentially commercial breaks. There are natural breaks in most games, where these ads can play without disrupting gameplay or taking up screen real-estate while playing.

The interstitial ads are extremely popular among game developers. Over 50% of mobile game makers use interstitial ads, according to a survey by VentureBeat. What's more, the survey found that users found interstitial and video ads significantly less annoying than banner ads. Banner ads also ranked as the least effective monetization strategy for game developers.

So, if interstitial ads work for game developers, why wouldn't they work for all apps? There are natural breaks in other apps as well, and Google wants to help app publishers monetize those breaks. A news app, for example, may throw an interstitial ad before or after a user finishes reading an article.

Apple is taking advantage of the opportunity as well, and has done better with successful app developers than Google. Game makers with app counts in the double digits use iAd more than they use AdMob.

That may have been due to Apple's high minimum ad spend, and premium brand advertisements. Apple eventually dropped the minimum ad spend, and it opened up the platform to all brands in April. Apple's new interstitial and video ads coupled with its openness is putting pressure on Google.

The bigger threat
iAd is still a small threat to Google in the grand scheme of things. Facebook actually represents a bigger threat, especially on mobile. On Monday, Facebook announced a new demand-side-platform for ad buyers, which leverages Facebook's near omnipresence on smartphones and tablets.

Facebook took 18 months to rebuild Atlas. It's finally here. Source: screenshot from atlassolutions.com

Facebook's app is installed on over 70% of smartphones in the U.S. Google has a strong presence on smartphones as well, but most of its apps come pre-installed and don't always require an account log-in. When a Facebook user logs into his account on a mobile device, Facebook is able to link that device to his Facebook account. (All apps do this.) Then it can use that information to help advertisers target and track specific demographics and ad campaigns across devices.

Google currently relies on cookies -- tiny pieces of tracking code. The problem is, app developers don't have cookies in their apps. Thus, the targeting relies on the apps' own demographic information, and not much else. Google is currently working on an alternative for cookies, but has yet to announce any details.

Facebook could siphon off brands from Google's DoubleClick demand side platform, stealing away ad dollars at the same time. What's more, Facebook could work with Google's AdMob to serve ads, but it doesn't have to. It has its own network, and there are plenty of other companies with ad inventories to fill. Google is hoping that its new ad units keep it in the loop while it develops its own advanced targeting method.

Closing the gap
Mobile ad spending is expected to grow 83% in 2014, increasing to nearly $18 billion. The key to capturing that revenue isn't necessarily more effective, less annoying, and higher priced ads. Although Google's efforts to provide those units will probably help increase its CPC on mobile. The real key is providing brands with key measurement and tracking tools. That way marketers can better understand what works and what doesn't work on mobile. That's what Facebook is doing, and it's what Google needs to do to really drive mobile CPC closer to desktop.

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The article Will Bigger Ads Lead to Bigger Profits for Google? originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). 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.

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