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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.