By Peter Nowak

Google Inc.'s move to introduce ads to YouTube videos means the internet search giant is one step closer to introducing its own advertising-supported mobile phone, analysts say.

Google's move to incorporate ads in its YouTube video website could be replicated on mobile phones, analysts say.
(Paul Sakuma/Associated Press)

Google Wednesday announced it was attaching semi-transparent "overlay" advertisements to the bottom of selected YouTube videos, which are designed to be relevant to the user's interests yet unobtrusive when viewed. The ads take up a small portion of the videoscreen and disappear after a few seconds if not clicked on.

Analysts say the company has been experimenting with a similar model on mobiles, whereby the customer would get a discounted or even free monthly phone service that would be paid for by advertisers. The missing piece of the model, however, has been the challenge of putting those ads on the phone without them getting in the user's way.

The move with YouTube, which Google bought in 2006 for $1.6 billion US, is proof that it can be done, analysts say. Phone screens could be used to subtly display ads that are viewed while dialing.

"It showcases the fact that you can do ads that are unobtrusive in at least one format with video. It very well could be that you could use a derivative of this to handle cellphones," says California-based technology consultant Rob Enderle. "It does look like Google is getting closer to bringing out that property."

Much of Google's success on the internet has stemmed from its targeted ad strategy, which matches advertisements to search queries. The ads are context sensitive so they are often relevant to what is being searched, which means the person searching is in effect going to the ad rather than the other way around.

"The ad isn't coming and finding me by data mining, rather it's linked to content that I'm finding," said Lawrence Surtees, IDC Canada vice-president and principal analyst of communication research. "[A phone] would have to present itself a little bit differently, but clearly Google is interested in exploring any aspect of online advertising."

Company not commenting on phone possibility

A company spokeswoman would not comment on the possibility of a Google phone, but chief executive officer Eric Schmidt has repeatedly stressed the importance of expanding its bread and butter — ad-supported search services — to the wireless world.

"What's interesting about the ads in the mobile phone is that they are twice as profitable or more than the non-mobile ads because they're more personal," he told a conference in May.

'It does look like Google is getting closer to bringing out that property.'— Technology consultant Rob Enderle

Although Google currently offers some services, including maps and e-mail, on existing mobile phones, its further wireless expansion has faced resistance from traditional operators, who are reluctant to give up the growing ad revenue being generated on handsets.

Lowell McAdam, chief executive of the second-largest U.S. mobile operator Verizon Wireless, recently told the Wall Street Journal that Google wants "a disproportionate share" of that revenue.

That friction has led Google to consider becoming an operator itself by pledging to buy wireless spectrum — the airwaves mobile phones run on — in a U.S. auction to be held next year. The company said it would bid at least the minimum $4.6 billion US if the Federal Communications Commission imposed a number of open-access rules on any auction winners.

The rules would have forced the winners to make their mobile phones work on any network, prevented them from blocking certain kinds of software that can be loaded onto handsets and required them to rent the airwaves at a reasonable rate to interested third parties.

The FCC last month agreed to the first two requests but declined on the third, arguing that there is nothing currently preventing airwave owners from voluntarily striking rental deals with third parties. Despite the setback, Schmidt told a dinner audience at the Progress and Freedom Foundation's Aspen Summit this week that Google would "probably" still bid on spectrum.

"It's highly likely that when we get to that point we will see the regulatory framework that is conducive to the bid [we wanted] to make," he said.

A number of options

Once Google owns wireless spectrum, it will have a number of options.

The company could build its own wireless network and become an operator like AT&T Inc. or Rogers Communications Inc. Or, in what analysts say is a more likely scenario, the company could rent out its airwaves to smaller players who would use a Google branded phone as a weapon to compete against bigger providers.

The Wall Street Journal reported earlier this month that Google has developed prototype cellphones that could reach the market within a year. A Google phone, much like Apple Inc.'s hotly-desired iPhone, could soon be a reality, the newspaper said.

The search giant could also easily make a splash in Canada, analysts say, where a similar spectrum auction will take place early next year.

Google is prevented by foreign ownership restrictions from controlling a wireless company in Canada, but it could partner with smaller players such as Winnipeg-based MTS Allstream Inc. and Montreal-based Vidéotron Ltée to take on national incumbents Rogers, Telus Corp. and Bell Canada Inc.

"If they do go ahead, it definitely begs the question of why wouldn't they be interested in putting a foot on the ground in Canada?" Surtees said.

"Google might be a natural, well-heeled party for one or more interested smaller players here."