We just released our U.S. mobile advertising forecast, and the fact that this market represents a promising opportunity hardly needs repeating. Nevertheless, the U.S. mobile market has remained largely out of reach for many years.

The often-cited statistics about how many more mobile phones there are versus computers suggest we are on the verge of a market transformation akin to the early days of the Internet’s growth. While forecasters and pundits have touted the potential of mobile advertising for years, the U.S. market has failed to materialize. We believe this is about change.

Specifically, we believe the U.S. mobile ad market will grow from US$33.2 million to US$1.4 billion in 2012, a CAGR of 112 percent.

Definitions are important here since it seems no two forecasts measure mobile the same way. We break mobile into three distinct ad segments: ad-sponsored directory assistance, mobile Internet (search, browse, etc.) and multi-modal applications. We will have much more to say about these components in future posts.

The two largest contributors of revenues will see a substantial increase in usage:

• Ad-sponsored directory assistance will grow from 270 million calls in 2007 to 2.1 billion calls in 2012, a CAGR of 50 percent.
• The number of mobile Internet users will grow from 37.9 million in 2007 to 91.7 million in 2012, a CAGR of 19 percent. 

The question is: Why now? We believe the market is converging around several important themes that will drive mobile ad adoption:

1. Top-line search growth is slowing. Portals and search companies must move their monetization products into markets where they can utilize existing ad products (e.g., paid search links) to promote top-line revenue growth.
2. Google, the largest search engine in terms of share and revenues, has considerable ad overhang, meaning advertisers want to spend more money than current traffic levels can support. Some estimates put the ad overhang at Google between US$1 billion and US$2 billion. In this context, mobile traffic translates to an increase in revenue events and top-line growth.
3. The mobile and search markets are linked, and we believe market share in one could affect the other. Therefore, Microsoft will push hard into mobile, and Google will attempt to retain its dominant search position. Meanwhile, U.S. carriers understand the market position Internet search dominance affords and will not allow their products to be relegated to a secondary standing. In Europe, for example, as Google’s search share has increased so too has its mobile market share. Operator-specific search in Europe in the meantime has declined.
4. U.S. carrier dominance and the proliferation of voice query products (like ad-sponsored DA) mean we will see an increase in dial-around services that attempt to circumvent the carrier deck using voice in and data out. Kelsey clients are familiar with this trend since we predicted Google’s market entry — led by 877-520-FIND, the predecessor to 800-GOOG411 — and Microsoft’s acquisition of Tellme more than a year ago.
5. GPS handset devices are shipping en masse this year, and 50 percent replacement is expected within five years, allowing improved mobile applications.
6. Apple’s iPhone represents a transformative device, and many manufacturers will enter the market with similar form factors driving down prices.
7. Finally, Yellow Pages companies such as AT&T are executing on a multi-channel ad business. Mobile represents a critical link in this multi-channel strategy where these companies will try to dominate ad share.