This post has been burning inside us for a long time. We should have written it a year ago, but other things intervened.

In a previous post, we touched on how mobile advertising is changing, with new business models coming out constantly. Here we want to take a quick look at what has gone wrong so far, a post-mortem for Mobile Advertising 1.0.

For the past few years, mobile advertising was growing at a tear. AdMob sold to Google for close to $800 million, and Quatro went to Apple not long after, for a large amount as well. This fueled a huge wave of venture investing in the mobile ad space. And for many years that led to tremendous growth rates for the space. All that appears to be unwinding now.

What went wrong? We think the answer is pretty straightforward. The big advertising dollars come from the big brands – Coke, Pepsi, Auto makers, etc. But they have for the most part just dipped their toe in mobile advertising. That seems to be changing now, but the explosive growth we saw in mobile ads over the past few years, came about largely without their spending.

We spoke to one analytics firm a year or so ago. They monitored mobile web traffic on roughly 15% of all iOS devices out there. They told us that 90% of mobile ads were being served up within apps. We are talking about display ads, excluding search results or feeds that appear in mobile Facebook or Twitter streams. Other analytics firms reported similar findings. Of that 90% of “in-app” advertising, it turns out that over 90% of the ads were promoting other apps.

Think about that for a moment. You have an app. You make money by having a mobile ad network sell ads that appear within your app, but the almost all of those ads are for other apps. If you are over the age of 33 this probably sounds very familiar to you, as this is exactly what happened during the last Internet Bubble in the 1990’s. VCs funded all kinds of new sites, those sites monetized through apps sold on the basis of eyeballs. And eventually, revenue among sites was driven as much by barter as by cash sales. I will display your ads on my site in exchange for you displaying my ads on your site, and somehow we will call that revenue. The mechanics are different this time around, but the affect is the same, with lots of circular flows of ads and dollars.

A year ago, we spoke to a friend at a mobile ad network in China. He lamented the fact that there were over 70 mobile ad networks there. I consoled him, but still thought to myself “Wow, another China asset bubble in the making.” Soon after I returned, I found out that there were over 400 ad networks operating in the US and Europe. So who really had the asset bubble?

As we argue in our earlier piece, this does not mean that mobile advertising is dead. Instead, we think it is like a phoenix. Someday, something much more powerful will arise, but for the moment everything tastes like ashes.