free html hit counter #3: Why Contextual Paid Ads Matter | John Battelle's Search Blog

#3: Why Contextual Paid Ads Matter

By - December 15, 2003

Oh, if only we had this three years ago, at thestandard.com

THE MESSAGE
Putting Online Ads in Context
Overture and Google have figured out how to sell the Web. Paid search has already saved Yahoo — and your business might be next.

By John Battelle, June 2003 Issue

The long-awaited “30-second spot for the Web” — a way for ads to finally work online – may well be at hand. Overture (OVER), the company some say saved Yahoo’s (YHOO) bacon, will shortly roll out a service that opens up the entire Web to a new form of advertising. “It’s potentially revolutionary,” says Scott Moore, who oversees Slate and MSNBC.com for Microsoft (MSFT). How revolutionary? Moore says using Overture’s new service, or one like it, could well push his sites to sustained profitability.

The breakthrough, which I’ll call “contextual advertising,” involves commercial links that appear adjacent to relevant content on websites. Say you’re at Caranddriver.com, reading a review of the Acura MDX. In place of banners for everything from cell phones to cars you don’t care about, you would see paid text links advertising the Acura website, the Edmunds auto comparison site, and leasing companies vying for your business. These are the same links you’d see if you typed “Acura MDX” into Overture’s client portals, like MSN or Yahoo.

Google also plays in this new market with an offering called “content-targeted advertising.” The beauty of both is their ease of use for publishers: Overture and Google automatically analyze the publishers’ pages and insert relevant links on the fly. All the publishers have to do is collect a check. It’s close to manna from heaven.
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This natural evolution of the search engine business closes the loop linking search, content, and ad dollars. In the past few years, marketers of all stripes (about 175,000, at last count) have learned to buy paid listings, or sponsored links placed next to “pure” search results. This phenomenon has created billions in annual revenues and a growth rate approaching triple digits. The reason is simple: Paid search is an incredibly efficient way to bring in sales leads — it’s the Yellow Pages, classifieds, and direct mail rolled into a single just-in-time pitch.

Overture resells its paid link services to portals like Yahoo and MSN. The resulting revenues have accounted for the lion’s share of Yahoo’s recent earnings success: a net income of $46.7 million in the first quarter of 2003. Yahoo’s gain may be Overture’s loss; though Overture’s revenues shot up 57 percent in the first quarter, its shares fell 30 percent in April when the company pared back its earnings forecast, largely because it plans to spend more to develop contextual ads, and partners like Yahoo and MSN are now getting a larger share of the revenues.

Google — a private but by all accounts profitable company — makes a mint from selling paid links on its own site, where it keeps all the revenue. But it also sells its paid search results to AOL (AOL), Amazon.com (AMZN), Disney (DIS), and other Web publishers.

The torrid growth of Google and Overture — in the face of the Internet “collapse,” no less — presents an extraordinary problem: “The No. 1 question we get from our advertisers is ‘Can we get more listings?’” notes Susan Wojcicki, director of product management at Google. “That’s one of the main reasons we developed content-targeted ads.” The logic is unmistakable: Search is the best-monetized portion of the Web, but it represents a fraction of all usage. Billions of webpages are waiting for a revenue model, and popups for the X10 camera aren’t going to do it. Major publishers, like Moore at MSN, have already figured this out.

But it’s not with the big guys that I see the real breakthrough. If you’re a publisher with a high-quality site about, say, jazz, you can’t succeed with banner ads. But you just might be able to make it on paid links for albums and trumpet lessons. Google’s offering is limited to sites with large amounts of traffic, like Google Groups, Knight Ridder’s newspaper sites, and Blogger.com. But soon contextual advertising will open up Overture’s and Google’s vast databases of advertisers to the entire universe of Web publishing. Let that soak in: This is a new revenue source for the entire Web, one that not only is unobtrusive but, because it’s based on relevance, might even be useful to readers. Contextual advertising “could be much larger than the paid search market,” claims Bill Demas, senior vice president at Overture. Google’s Wojcicki seconds his assertion. For the sake of independent, high-quality content on the Web, we can only hope they are right.

John Battelle directs the business reporting program at UC Berkeley’s Graduate School of Journalism. He founded the Industry Standard and was a co-founding editor of Wired.

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