Fast Company

Search for Tomorrow

The next generation of online ads promises the most targeted and trackable messages ever. Meet the future of advertising.

It was an advertiser's worst nightmare. Last summer, the New York Post ran a breathless story about a gruesome murder in which the victim's body was hacked to pieces, the parts stashed in an old suitcase. Opposite the online version of the story ran an advertisement cheerily touting the benefits of . . . luggage.

The offending ad was served up using Google's search-marketing technology called AdWords. For the uninitiated, search-engine marketing lets advertisers bid on keywords or phrases. Top bidders then have their ads appear alongside search results whenever a user types in that phrase. Or in this case, the ads run alongside editorial content containing the keywords. Suitcase in the article. Suitcase ad. We have a match.

It was an excruciating goof, emblematic of the tricky juncture where the search-engine marketing industry finds itself today: The dream is to transform the Internet into a sales tool that finally delivers on the promise to generate eminently qualified, targeted, and trackable customer leads that convert quickly into big sales. Marketers that embraced the first generation of these tools have already achieved phenomenal success by targeting ads to consumers seeking products and services on search engines. Now the toolmakers, predominantly Google and Yahoo, want to serve up ads to the rest of the Web -- delivering relevant messages not just when buyers come to a search engine already hunting for something, but any time, and any place.

There's big money at stake in nailing the solution. In an advertising environment that has steadily weakened over the past three years, search marketing has breathed new life into online advertising by showing how powerful it can be when an advertiser catches a shopper's attention at that perfect moment when she is ready to buy.

Advertisers rewarded the nascent industry by doubling its revenues in 2003 to the tune of $1.9 billion (a figure that is expected to jump again in 2004 to $2.8 billion dollars, says Forrester Research), or nearly one-third of all online advertising spending. And those hefty totals ring up in small increments: Expedia, for example, is the top bidder on Yahoo's service for "Miami vacation," paying 83 cents a lead.

Three techniques are emerging that could push online ad revenues even higher: contextual ads, behavioral ads, and local ads. But none of them are slam dunks. In pushing the envelope to make related text ads as ubiquitous as the 30-second TV spot, the search engines and the marketers that use them tap dance along a very fine line between what is helpful and what is obnoxious, what is exciting and what is simply in very poor taste.

Keeping Things in Context

"We advertise on TV and radio," says Steve Hartmann, the director of online marketing for eHarmony, an online dating service. "But we discovered that a lot of people only vaguely remember our name. Maybe they'd just catch the word 'harmony' and that we were a dating service. When they typed that in at a search site, that's when they'd find us." Hartmann discovered that close to 70% of eHarmony's new customers from online advertising channels arrive through search-based ads.

Seeking to go to the next level, Hartmann bought contextual ads from both Google and Overture (owned by Yahoo). He did so because the ability to place eHarmony ads where serious-minded singles spend time on the Web -- say reading an article on CNN's Web site about a scientific discovery on the brain chemistry of love -- sounded ideal. Google and Overture dominate search marketing and offer contextual ads through partners such as AOL, MSN, CNN.com, and the Web sites of The New York Times and The Washington Post.

But contextual ads don't seem to target consumers as effectively as pure search ads. "We're definitely not seeing the traffic from newspaper sites that we see with search engines," Hartmann says.

There are many reasons for this lower success rate. Many publishers are leery of these ads for fear of blurring the lines between editorial and advertising, so their reach is limited. The bugs in the system also remain, ergo the very targeted but terribly unfortunate luggage ad. These incidents expose the flaw in the logic that purchasing a given keyword can guarantee relevancy to the material next to the ad.

Overture has responded by instituting an editorial review process. "We needed human influence to deal with those words that are ambiguous in meaning," says David Karnstedt, senior vice president and general manager of direct business at Overture. Google, meanwhile, believes its technology can fix any editorial problems.

Perhaps more problematic to contextual marketing's prospects is the very nature of the Internet experience. When someone types the name of a product or service into a search engine, chances are he wants to find it and buy it. When that same person surfs a news or content site, he may just be catching up on the day's events. "They're not in shopping mode, they're in browsing mode," says Danny Sullivan, an analyst who runs SearchEngineWatch.com. And there's not any fine-tuning that can be done to fix that.

Fresh Ads for Good Behavior

Because of the inherent flaws in contextual marketing online, the stakes are even higher for the online advertising industry's next big play: behavioral marketing. This technique promises to serve up ads based on a Web surfer's habits and mind-set. "You're targeting the person, not the content," says Forrester analyst Charlene Li. It's far more ambitious -- and more advertiser-friendly -- than contextual marketing. "You could never target intent before, in any medium," says Li, capturing what's exciting about the new method. "You just put your message out there around content that seemed likely to attract the right people and hoped it worked."

To deliver on that opportunity is a daunting technological task. It requires analyzing the surfing habits of millions of users in order to define segments based on what users are reading, how often they read it, and what products they search for. One of the first entrants in the market is Kanoodle, a small New York-based search-marketing firm. It has joined with online advertising network 24/7 Real Media to launch BehaviorTarget, a behavioral search service. "We've created a taxonomy of 486 topics that we'll roll out slowly as we reach critical mass with each audience segment," explains David Hill, president of media solutions at 24/7 Real Media. "If you visit sports sites several times a month and fashion sites several times a month, you might fall within our 'active women' behavioral segment." Unless you're a guy who likes sports and fashion, or works in one of those industries.

Though a potential gold mine for advertisers, data collection on this scale -- and at this level of detail -- is, for many consumers, a little scary. It raises a host of privacy issues as well as questions about who retains the rights to or ownership of particular kinds of information. Lance Podell, president of Kanoodle, is quick to defend his company's concern for privacy. "I'm tracking a cookie, not you, and you will be able to opt out at any time. That cookie doesn't know your address or your Social Security number, it just knows your behavior. IP addresses aren't being collected," he says.

Lycos is one of the first companies to sign up for BehaviorTarget. Says Steve Gross, Lycos's vice president of marketing, "We need different and creative ways of making money off of our user base. We have a unique user base in the tens of millions, but our ability to understand that base was limited." Consider a group of users who have been defined as car enthusiasts because they visit automotive sites such as Edmunds.com and NASCAR.com. Gross is eager to sell ads aimed at that group and deliver marketing messages to them even when they're visiting a technology blog. "Television advertisers would love to understand composition this well, to identify audiences and what they want, beyond just age and sex, which is how they sell ads now," says Hill.

So although it may seem simplistic to get lumped into a bucket because of a few Web-surfing habits, it is better information, as Gross notes, than most advertisers have to work with. Yet even its boosters acknowledge that behavioral marketing is a work in progress. "There are things we're still working out," admits Hill. "For example, somebody goes to a series of auto sites, but how many times must they visit before they become part of that segment? Our plan is to use our software to watch their behavior over the course of time, then do branding studies to hopefully get the mix and the formula right." If that works, and if the privacy guardians don't howl too loudly, this may be the method with the best chance of taking off.

Think Local, Act Local

If the search engines have learned anything from their original keyword-advertising system, it's that when people type a product name into the search window, they want to buy that product now. Chances are, though, that users see ads from online retailers who can ship it within the week, not the minute. How can you feed immediate needs, such as where's the closest party-goods supply store that's open late? Hit 'em where they live.

In March 2004, Google launched a beta site called Local.google.com that lets users search by zip code or local address. Thirty percent of all advertising is purchased in local markets, and the Yellow Pages ad market is estimated at $14 billion per year -- a stash that Google would love to break into. So far, the company has focused on importing Yellow Pages data into its local engine and getting the location algorithms right, without serving up additional ads alongside search results. The big question will be whether the advertisers arrive when local goes live.

Seth Berkowitz, vice president of business development at the car-buying information site Edmunds.com, says no thanks. In theory, he's a likely customer, since he sells customer leads to local auto dealers. But he's focusing on buying location-specific keywords through traditional search-marketing products. "I love it when people type in 'Los Angeles Honda Dealers' because 20% of those people execute on those ads," he says.

"To make local search work," says Jupiter research analyst Gary Stein, "you have to get all the plumbers and dentists on there, then you have to get people to shift over to thinking about using Google to find plumbers." Don't expect local search to be a significant moneymaker for anyone until national retailers hop on board to let you know where the closest Home Depot is and whether they have that sander in stock you're itching to buy.

It's obviously too early to pass judgment on any of these emerging online marketing techniques, although each has significant flaws. Remember that GoTo.com, the precursor to Overture, was laughed at in its early days for selling simple keywords on a search engine. No matter which, if any, succeed, what's clear is that these models for segmenting, targeting, and reaching customers are forever changing the way companies think about advertising as a sales tool. When you can select your target customer by geography, actual (not projected) buying patterns, and browsing behaviors -- and track the return on investment of each ad by following a customer from the time she is targeted to the time she makes the purchase -- it's hard to go back to fuzzy math and schmoozy ad salespeople. The technocrats will have the last laugh, even if it's at the marketers' expense.

Alison Overholt is a Fast Company staff writer.

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