Relevancy: Online Advertising Middlemen Get Religion


When online advertising became big business, it became increasingly apparent to advertisers and the most prominent intermediaries in the field that most online ad campaigns were failing because they were irrelevant to their target audience.  Sure, there’s a place for “junk” ads – for big companies who need branding, or for those who can get enough response from a high volume campaign to justify their costs. Since the supply of poorly-targeted ad opportunities exceeds the demand, these “junk” ads soon began to command “junk” rates.

For publishers and advertising middlemen, the effect of this collapse in advertising prices has had a profound impact. Hundreds of business models flew out the window. Companies like Yahoo now had to reinvent themselves. The painful part, for publishers and ad industry people, has been the negative impact that the general collapse in prices has had on prices for more targeted content. Advertisers have flexed their muscles and have successfully persuaded many publishers to accept that their most targeted ad opportunities are little different from low-priced junk.

Software was supposed to save us from this fate. It seems like forever ago that Excite was seen as a “hot” Internet property, but at one time, that was the perception. Crammed with advertising, and for awhile, enjoying healthy revenues, the future for this former #2, and then #5 and #6, portal looked bright. Industry analysts talked breathlessly about Excite’s superior “user targeting” ability based in part on sophisticated user tracking software that would serve users more targeted ads. Excite brass bragged that they squeezed more revenue out of every page than any other portal. Apparently the concept of the “happy medium” never occurred to them. And the loud advertising for love tips, britney pics, and bikini  sales didn’t seem as well targeted as we were led to believe by the hoopla.

Advertising intermediaries also worked on their own sophisticated targeting technologies. This is still a serious business. The traditional ad middlemen still work hard at it, and others still tinker with technical solutions to the economic problem of low ad rates. Applied Semantics, which applies linguistic technology to business problems such as the provision of alternate domain name suggestions, recently developed a product called AdSense that would help place more relevant ads to increase clickthrough rates.

For a couple of months in 1999, it seemed that every advertisement in Business 2.0 was for some kind of paradigm-changing “ad targeting technology.” Then the world changed. Many of the targeting technology companies didn’t get any more VC funding. Business 2.0 itself shrunk rapidly, as so many of its advertisers, who were themselves premised on a future of massive online ad revenues, went south.

Unfortunately for serious, topical publishers, this investment in targeting technology hasn’t helped them to command the rates they deserve. The problem, essentially, is that advertising performance is still poor. Consumers accept a certain degree of advertising in any medium, but online, they’re especially conscious of the form it takes.

And that’s why so many Internet users turn to search engines – whether they are looking for the best sources of information, or a good place to buy a specific product. Consumers are taking control, and taking refuge from information overload, when they do a search.

Capitalizing on this, search engines and portals have been shifting their attention to paid sponsorships of listings that appear “near” search engine results. While many users ignore sponsored search results, a decent percentage consider them an OK compromise, and what’s more, as Overture (the leading provider of sponsored search listings) has always maintained, a lot of people use search engines explicitly to search for products and services.

There is huge potential for search engines to resuscitate the early promise and value of online advertising. In the next couple of years, success and failure for individual advertisers, the major publishers (search engines and portals), the intermediaries (such as Overture), and the medium in general, hinges on two keys:

  • (a) prices; and
  • (b) targeting or relevancy.

The intervention of market forces in pricing online advertising is of course healthy, but in the recent past, the ad market in most online venues became heavily skewed towards the advertiser. Prices plummeted.  This is great news for advertisers, but they may not see it as such unless they can feel confident of getting a decent response from even the low cost advertising.

In the case of search engine keyword advertising, advertisers are again in the driver’s seat. Or so it seems at first. There is a lot of keyword inventory, and minimum prices are low – five cents per click on Google AdWords Select and Overture.

Search engine listings often produce measurably healthy response rates. That high conversion rate stems from the trust consumers have in search engines as unbiased sources of information, and from search engines’ relentless focus on query relevancy.

As advertisers begin to recognize the attraction of these high response rates, a different sort of market dynamic takes over. More advertisers appear in the space, with dollars to spend. This drives keyword prices up, but not across the board. Now, both advertisers and the intermediaries and publishers are doing well.

So who takes it on the chin? Consumers, potentially. Or at least enough of them to potentially ruin this whole business all over again.

Will the supply and demand dynamic wind up destroying the search engine “playing field” like it destroyed the credibility of much of the rest of the advertising-plastered Internet publishing industry? It is in danger of doing so. A classic tragedy of the commons scenario. If too many ad dollars come in chasing after eyeballs, the eyeballs will get offended and either walk or stop paying attention. (“Hard core” marketers will often shout at you that advertising is like oxygen, and that only idiots who know nothing about business would bother to worry about a few naysayers who don’t like to view ads. I guess I just spend too much time talking to my mother, but it seems to me this is something we should be concerned about.)

The best way to avoid a recurrence of previous online advertising tragedies is through a relentless focus on relevancy. Of course this can’t just be left up to individual advertisers. When you’re paying by the click, especially where you’re paying a low price for clicks, it’s search volume that matters the most to you. You’ll keep on advertising on all sorts of keywords until someone tells you to stop.

There are a couple of ways to insist on relevancy in keyword-based search engine advertising and paid inclusion in directories such as Yahoo. One way is to use human editors to review all submissions. This is the tack Overture has taken. It’s a smart thing to do. The relevancy of the results matters in several ways. It leads to higher clickthrough rates, which makes it a more profitable medium. But most importantly, it may lessen the annoyance of users.

Google has now launched a pay-per-click advertising system called AdWords Select. In the design of the system, Google considers clickthrough rates to be relatively synonymous with “user interest,” which is another way of saying relevancy. AdWords Select forces relevancy on advertisers in two ways:

  • (i) by providing them an incentive for doing so that makes it cheaper for the most relevant advertisers to bid on their favorite key phrases; and
  • (ii) by setting an absolute floor on clickthrough rates: 0.5%. If an ad doesn’t pull a 0.5% CTR on a given key phrase, it is no longer shown. Neither mechanism requires human intervention.

Time will tell which of these two methods is superior. Clearly, there are drawbacks to both. It also remains to be seen whether this renewed focus on relevancy will be enough to comfort end users. This is the $64 billion question, because if users stop clicking on sponsored search results as they stopped clicking on banners, the purveyors of pay-per-click search engine advertising don’t get paid.

If advertising sellers and publishers can’t get paid, they go under or switch business models. Ads eventually stop showing. At the very least, ads must become so relevant that genuine user interest is generated.

The tragedy of the commons scenario isn’t all bad. When a pasture gets grazed out, none of the farmers win. None enjoy free access to juicy pasture where formerly a few reaped the benefit. But when a pasture is grazed out, the farmers, and the cows, must leave. The grass eventually grows back. As your father-in-law might say: “the pendulum swings.”

Internet advertising in some form will thrive, as it has in most other areas, because it works, and because the public has been conditioned to accept it.

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