Mobile Ads and you.

By SHIRA OVIDE And GREG BENSINGER

Advertisements on mobile gadgets have a bad rap. But slowly, the rulebook for what works in mobile advertising is being sketched out. Shira Ovide has details on The News Hub. (Photo: Getty Images)

In 2010, Apple Inc. AAPL -2.09% co-founder Steve Jobs proclaimed, "Mobile advertising really sucks." Now, however, the rule book for what works in mobile advertising is slowly being written.

Some of the ingredients to success include ads that play on the unique properties of mobile gadgets, including location, or ads disguised as a game, coupon or information that consumers want, say ad executives and industry observers.

What doesn't work? The same old Web ads plopped into a smartphone.

Mobile advertising has been touted as the next big thing since Apple's iPhone debuted in 2007. Yet the promise remained unfulfilled because marketing companies have to navigate consumers' desires for privacy with the enticements mobile devices offer, such as fresh information about users' location and spending habits.

Accidental clicks on mobile ads, difficulties buying ads in big quantities, and fuzzy metrics also have kept a lid on mobile ad spending, marketers said.

This year, research firm eMarketer Inc. projects less than 2% of all U.S. marketing spending, or just $2.6 billion, to go toward mobile advertising. Meanwhile, consumers using smartphones and tablets now generate more than 10% of Internet traffic, according to data provider StatCounter Inc.

"The mobile ad market is just not fully formed yet," said KC Estenson, who oversees the online and mobile business for Time Warner Inc.'s TWX -0.10% CNN.

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As users move to mobile faster than marketers, mobile ad prices are being pushed down. While rates vary widely, on average it costs $2.85 to reach 1,000 iPhone users with a mobile ad, according to mobile-browser firm Opera Software ASA OPERA.OS +1.38% . By comparison, an ad in a national newspaper can cost as much as $50 or $100 for 1,000 viewers, a standard ad-rate metric.

Here's a look at what types of mobile ads are resonating, and which pitches are getting the thumbs down from consumers or marketers.

Search Ads
Just as with the online-ad industry, mobile marketers are plowing the biggest chunk of spending into search ads, where it is easy to prove a person visited a website or bought a product in response to an ad.

About half of all U.S. mobile ad spending goes toward search ads, more than the roughly 47% of total digital spending going into Web search, according to eMarketer. Google takes a 95% share of all mobile-search revenue in the U.S., estimates eMarketer.

In some categories such as hotels, restaurants and auto insurance, "you're seeing bids for ads that are higher on mobile than on desktop," said Jason Spero, who runs Google's mobile-ad business. He adds that "as an industry, we have some work to get" such rates across the board.

Comcast Corp. CMCSA -0.11% has paid for mobile-search ads that allowed users to tap a button on a smartphone to initiate a phone call to the cable company.

The Philadelphia company this year said mobile users accounted for more than 10% of its online sales. The rate at which people clicked on its mobile-search ads was almost four times greater than on desktop ads, Comcast said.

Useful or Fun
Skittish about bombarding mobile users with seemingly random ads, marketers including Kraft Foods Inc. KFT +0.38% and Macy's Inc. M +0.29% are experimenting with messages they want consumers to believe are fun, pay rewards or help them find useful information.

Scott Nordby, president of Innovative Real Estate Group in Colorado, said he pays online-real estate company Zillow Inc. about $340 a month to ensure his thumbnail photo and contact information show up on 10,000 Zillow-powered home listings in a single Denver Zip code. With a few taps on the smartphone screen, a would-be home buyer can call or email Mr. Nordby and his team.

Mr. Nordby said he receives about 150 to 180 inquiries a month—or more than half his total referrals—from would-be home buyers who found him on Zillow. Roughly one in 10 referrals from Zillow come through calls from would-be buyers' smartphones. He adds he's "thrilled" with the results.

Zillow Chief Executive Spencer Rascoff said people who use Zillow on mobile devices are three times more likely to contact agents like Mr. Nordby than people who surf Zillow on a traditional computer.

Big Is Beautiful
As smartphone screens get larger, companies have found some success with ads such as "takeovers" that briefly fill all or most of a device's screen.

San Francisco app company Fotopedia sells such ads on its iPhone and iPad apps, which let people flip through high-quality photographs of Paris, national parks or wild animals.

Marketers including National Geographic and travel websites Jetsetter and Expedia Inc. EXPE -0.65% pay roughly $1 to $1.50 for each user who clicks an ad, which fill a full screen. Like fashion ads in a luxury magazine, the Fotopedia ads appear every 10 "pages" or so of the app.

As many as 18% of people who see an ad click on it, said Christophe Daligault, Fotopedia's senior vice president of global operations. On the Web, it isn't unusual for just 1% of people shown an ad to interact with it, marketers said.

Still, big ads should be used sparingly, some marketers said. Craig Bierley, director of General Motors Co.'s GM -1.86% Buick advertising, said the auto maker tends to limit takeover ads to major product introductions because otherwise "people might find it annoying."

Unfamiliar Places
One approach mobile marketers are trying—with mixed results—is inserting ads in new places to overcome "ad blindness" by consumers used to tuning out marketing pitches in the usual spots, such on the edges on websites.

Start-ups such as Facebook Inc. and Twitter Inc. also are slipping ad messages into the flow of virtual conversations on their digital services.

Amazon.com Inc. AMZN -0.88% is pushing into new territory with ads on its newest Kindle tablets and e-readers. In the U.S., the company's new $199 Kindle Fire HD device displays ads filling its 7-inch screen whenever a user lets it "go to sleep." In the wake of consumer complaints following the introduction of the new Kindles this month, Amazon offered a $15 option to turn the ads off permanently.

Some Kindle Fire HD buyers said they didn't mind the ads. But Steve Campbell, a 56-year-old resident of Naples, Fla., said, "This thing is just constantly pumping ads at me," and is "tempted" to pay the $15 to opt out of the ads.

An Amazon spokesman declined to comment.

'Spray and Pray'
Banner ads—the boxes or rectangular ads on many mobile websites or apps—are known as the "spray and pray" approach. Marketers, consumers and companies all said these ads are cheap, crude and annoy mobile users. Still, banner ads account for nearly $2 of every $10 spent on U.S. mobile ads, according to eMarketer.

Mr. Rascoff said Zillow stopped showing generic banner ads about a year ago following consumer complaints the ads were irrelevant or hogged space on 4-inch mobile screens. "There's good money to be made, but at what cost?" he said.

Marketers and ad-dependent companies said banner ads are an inevitable first step in a new ad medium, just as the first wave of the Internet was dominated by now notorious pop-up and "dancing cowboy" ads.