The phrase “mobile advertising” is so equally fraught with controversy and brimming with revenue potential that the mere mention of it sends the mobile industry into a debate about the viability of current content business models and the future of the industry's relationships with its customers.

That's exactly what happened last month when AT&T Chairman and CEO Edward Whitacre said in the Wall Street Journal that the mega-carrier plans to aggressively use its Cingular Wireless service and devices as a mobile advertising platform. In the weeks since, AT&T and other mobile carriers have been bombarded with questions about mobile advertising; Google has filed for a mobile advertising patent; numerous companies have sought to explain how they can fit into the mobile ad market; and an ongoing consolidation of mobile marketing, advertising and content firms has continued to heat up — one of the most recent deals being IMG's acquisition of Nunet announced just last week.

Integrating more ads — whether in the form of banner ads on mobile content portals, small rotating ads on content decks or commercials inserted into the content itself — is thought to have tremendous revenue potential for carriers and their content partners, as well as obvious benefits for advertisers, which are always looking for new ways to deliver targeted marketing messages to consumers. The most optimistic perspectives on mobile advertising include a promise of drastically lower-priced or even free mobile content services for these consumers.

Yet, Whitacre did not mention the particulars of what AT&T will do, instead leaving it to people like Karl Spangenberg to try to explain.

Spangenberg, AT&T's vice president of IP advertising, exudes a, “Where do I start?” sort of attitude when talking about what AT&T may or may not do regarding mobile advertising. The distinction between Whitacre's general directive and Spangenberg's less portentous particulars is important because mobile advertising for now remains a concept that has progressed past the embryo stage, but not much further.

When asked if AT&T is testing mobile advertising offerings, Spangenberg said, “The short answer is we're not in a trial right now. Now that we have merged with BellSouth, we will start comparing notes with BellSouth and Cingular about how this can be done. What it should look like, how it should be delivered — all of this needs to be thought through.”

Generally speaking, there are a few different ways to incorporate advertising into mobile content. Some content portals already include banner advertising, and some carriers have used short message service (SMS)-based advertising in the past. But as mobile content offerings have increased in popularity, the carrier content deck on a mobile phone represents the ultimate mobile ad space. “The carriers want their content decks to be the destinations, and they are doing everything they can to make that happen,” said John Beale, vice president of marketing at mobile content enabler Volantis. “If I'm an advertiser, that's where I want to be.”

Those ads can be served by advertising content conversion vendors — like Ad Mob, Millennial Media or Third Screen Media — which transfer existing ads into mobile device-ready formats and also help advertisers to develop mobile-specific ads. All of these companies have reported a sharp increase in recent months in the number of ads they are serving to carrier content decks.

Settlement for mobile advertising, however, remains an evolving science. “Most settlement has been manual, but we haven't seen a lot of situations yet where there is more than one advertiser with a banner ad on a portal,” said Fran Heeran, chief technology officer of mobile commerce firm Valista. “Once you get into multiple advertisers on a deck, this will get more complicated.”

However, carrier content decks, while a major destination for mobile advertising, don't represent the limits of the concept. It's understood by carriers, advertisers and everyone else involved that, with the rise of mobile TV and other video programming, the industry will begin to see specialized advertising or sponsor messages inserted into or attached to video content in some way.

“We'll certainly see more advertising in the context of the content application itself,” Beale said. “Then, you've got an interesting situation with the ad being part of the content and how the revenue from that ad should be shared between the content owner and the service provider. That's why carriers like the idea of ads on their decks.”

Mobile advertising developers are still figuring out what kinds of ads grab user attention. “What TV people learned with video on the Web was that putting a regular 30-second TV ad on the Web wouldn't work as well,” Spangenberg said, “so you might have to try different sizes and formats to get it right.”

Meanwhile, the increase in potential ad spaces and form factors within mobile content services and devices also creates the potential for the kind of cross-pollination that advertisers love and carriers likely will race to enable. The mobile device is set to join the Web-connected PC and the living room TV as the next marketing frontier. “The big thing to appreciate is that we now have three screens,” Spangenberg said. “We have very frequent and very many touch points to the same person. That allows a great potential for horizontal integration, and that's really the pay-off pitch.”

AT&T isn't the only carrier that realizes the power of the mobile platform as an advertising medium, and it certainly isn't the first. Asian and European mobile carriers were, not surprisingly, the first ones to extensively use SMS-based advertising and have aggressively experimented with other methods, as 3G networking and content have come to further define the mobile user experience. Orange, in the U.K., already offers a mobile gaming service free to users and supported completely by advertising. In Norway, the Norwegian Broadcasting Corp. and Ericsson are conducting a trial of interactive mobile advertising that allows users access to personal content and messages, plus a degree of interactivity with mobile TV programs and their sponsors.

Ultimately, mobile advertising proponents argue that if devices and content platforms are made more open and flexible to advertising opportunities, consumers may benefit from free or discounted services. Then, service providers and content owners won't be under as much pressure to make sure their individual content offerings quickly attain large subscriber thresholds. “Many content companies believe this will diminish their need for quick revenue from the application itself,” Beale said. “And certainly the application cost will come down for the user — why wouldn't it?”

Heeran added that ad-supported mobile services could be just what a subscriber base, initially jaded by premium-priced mobile content, needs to see. “That might be the main reason why it needs to be underwritten,” he said.

“That's a reasonable expectation — that there be lower subscriber costs or no fee,” Spangenberg said. “An advertiser might support your opportunity to download ‘The Office’ for free. We'll have to see what value the market puts on us being able to provide that.”

Still, one of the biggest variables remaining in mobile advertising equation has yet to be determined. There's very little evidence thus far about how sensitive mobile users will be to increasing advertising on their phones and in their applications. It's widely thought that consumers will be more amenable — and respond more actively — to advertising messages that are targeted specifically for them, and the personal nature of the mobile device seems to be tailored to prove that concept.

But carriers may pursue mobile advertising tentatively until they see how users react. “Absolutely the key sensitivity point as we try to launch this new revenue stream will be how our customers respond,” Spangenberg said. “There is a great opportunity here, but our primary concern remains the relationship we have with our customers.”

MOBILE ADVERTISING BY THE NUMBERS

$871 million Amount spent on mobile advertising during 2006

$11.3 billion Amount expected to be spent on mobile advertising by 2011

$3.1 billion Amount expected to be spent on mobile Internet display ads and search advertising by 2011

$4.4 billion Amount expected to be spent on mobile advertising over mobile TV services by 2011

$70 billion Roughly the amount of money spent on traditional TV advertising in 2006