By Georgina Prodhan
BARCELONA (Reuters) - For Facebook it must look like a no-brainer -- exploit its huge consumer loyalty and half a billion mobile phone users as a way of opening up the mobile market to blue chip advertisers.
Trouble is, there are reasons for the limited success so far of mobile advertising and none of them have completely gone away. Even if Facebook succeeds, others eyeing this potentially massive market may still struggle to cash in.
Earlier this week, Facebook announced new ways for businesses to advertise to its users, including on mobile for the first time, by having marketing messages appear in its members' news feeds -- partly an effort to establish regular revenue streams as it gears up for an initial public offering.
The move could help give advertisers access to the mobile phone market, long seen as underexploited, but is unlikely to open up the market more generally.
Despite pent-up demand from advertisers -- and a vast discrepancy between the amount of time consumers spend on their mobile devices and the advertising dollars spent there -- there are still big barriers to mobile phone ads.
Mobile has proved almost impenetrable to advertisers except through Google Inc searches for a host of reasons, including the small screen, a lack of good mobile websites and resistance to the invasion of a space seen as more private than a computer.
Much experimentation is underway at telecom operators, ad agencies and software firms to find ways to deliver tailored ads to people based on their location and capitalize on a boom in smartphone sales, without driving away customers.
In Britain, for example, the three biggest mobile operators including Vodafone Plc are creating a joint venture that they say will allow advertisers to create a one-stop shop for advertisers to book campaigns that reach a national audience, as well create coupons and loyalty schemes for stores.
Together, they have 70 million subscribers -- more than the entire UK population as many Britons have more than one device -- but such numbers are dwarfed by Facebook's 425 million who regularly access the site from a mobile phone.
Facebook could succeed where others have failed because the messages will appear as a news item where a user has "liked" a brand or bought a product via Facebook, meaning they should feel more like a personal recommendation than an ad.
"You cannot have a brand coming along and just flaunting itself," says Marco Veremis, president of digital marketing firm Upstream, which has run mobile campaigns for brands including Coca-Cola Co, Nestle SA and Royal Dutch Shell Plc.
"I would say they are going about it very carefully."
Of the time spent consuming media, more than a quarter is on a mobile device, surpassing television at 22 percent, according to a study released this week at the Mobile World Congress in Barcelona by InMobi, the world's biggest independent mobile advertising network.
Yet mobile accounts for only around 2 percent of the near half a trillion dollars spent globally on advertising each year, while television attracts about 40 percent.
Even powerful companies like Apple Inc are struggling to make an impact.
Advertising agencies and mobile operators are hopeful that the rapid spread of smartphones and tablets, with their Internet capabilities, bigger screens and greater processing power, will create new opportunities for mobile advertising.
Ad agencies can be more inventive than ever before, for example creating layers of video or interactive screens that open up when a user clicks on a banner ad, offering a more interesting experience and new ways of measuring engagement.
Mobile ad technology firm Celtra recently created a campaign for Starbucks Corp in which users could click on an ad to be taken to a screen where they could design their own cup, with the best ones featured in an online gallery.
"Because it's such a personal device, we'll see higher levels of engagement, and that should encourage higher levels of responsiveness," says David Gosen, European managing director of the telecoms unit of research firm Nielsen.
But the personal nature of the phone is a two-edged sword.
According to a survey released by Upstream last week, the vast majority of adults in the United States and Britain find banner adverts on mobile devices irritating, and fewer than one in six who surf the Web on a mobile have ever clicked on one.
For those who do get it right, the rewards can be enormous.
Google, which leads the market for online paid search advertising, said in October its annual run rate for mobile revenue had more than doubled to $2.5 billion in a year.
Search results are not generally perceived by consumers as advertising, while the fact that many users choose to share their location on a mobile device to use services like Google Maps helps to deliver more targeted results.
Twitter also expanded its mobile advertising offering this week, and may succeed for the same reason, because its sponsored tweets are seen by many as news.
Facebook is now planning to use its knowledge of its members, gathered through their voluntary sharing of status reports, personal details and likes, to build an offering to rival Google's.
"Facebook is becoming the biggest collection of preferences in the universe," says Karl-Heinz Land, head of social internet commerce at business intelligence firm MicroStrategy, which analyses Facebook data for corporate clients.
"Social, mobile, local -- these are the three forces which are creating the perfect wave. Facebook now makes it very easy."
Privacy concerns, however, are a key risk for any company seeking to commercially exploit its users' data, especially one that has such highly personal information as Facebook does.
Google is already facing a backlash against its new policy of pooling all the data it collects from its search, gmail, YouTube and Google+ social network -- which has been seen as a move to help it compete better against Facebook.
Facebook users may not necessarily understand when they are volunteering to have their purchase of an item broadcast on their news feed, and could be embarrassed at the consequences.
Users may also perceive advertising that is too personalized as creepier on such a personal device as a phone in their pocket that knows where they are than on a desktop.
"People don't like to have too targeted advertising because it can feel a little spooky," says Paul Lee, head of technology, media and telecoms research at consultancy Deloitte, saying campaigns sometimes deliberately blend in less relevant ads.
Some mobile operators, who have enormous amounts of data about their customers but have largely failed to or decided not to exploit that information, argue they are best placed to work with advertisers and are also the best guardians of customer information.
"Our economic model simply doesn't require us to monetize the hell out of every piece of data we ever get. Our approach is that if I make the service better for my customer, and he gets more out of it, then it's a legitimate conversation," says Ronan Dunne, head of Telefonica SA's O2 UK.
Some operators are already offering services where customers explicitly opt in for advertising messages in exchange for free minutes or other benefits.
Mobile media company Blyk has teamed up with operators Orange, T-Mobile and Aircel to deliver between one and four marketing messages per day to customers who have chosen to take part in return for minutes or discounts.
It quadrupled its mainly young audience to 4 million last year and has helped its operator partners reduce the proportion of subscribers switching away to other services.
In Turkey, about 8 million Turkcell customers have downloaded commercial jingles that play while a caller is waiting in exchange for free minutes. One-third of Turkcell's mobile internet revenue now comes from mobile marketing.
But in general, the revenues that mobile operators have made from marketing have been negligible, while Web giants have exploited their networks to push their own services and earn ad revenue in the process.
So far, Facebook seems to be getting the right balance between privacy and money-making, although the path is fraught with danger, especially as the company opens up to private investors impatient for profits, says Upstream's Veremis.
"They recognize that over mobile you've got to advertise less and your advertising shouldn't look like advertising," he says. "But there is absolutely no way to sidestep the fact that if you ask users they'd definitely prefer that this never happened."
(Additional reporting by Leila Abboud and Kate Holton; Editing by David Holmes)