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Ad networks and behavioral targeting; who benefits the most? June 19, 2007

Posted by jeremyliew in ad networks, advertising, business models, Consumer internet, Internet, user generated content.

Today’s WSJ has an excellent article on behavioral targeting. It details Pepsi’s launch of Aquafina Alive,their new low cal vitamin enhanced water. The campaign was backed by an online campaign through Tacoda and targeted to people who had previously visited “healthy lifestyles” websites.

The result? Pepsi recorded a threefold increase in the number of people clicking on its Aquafina Alive ads compared with previous campaigns. “We’ve never been able to get to this level of granularity,” says John Vail, director of the interactive marketing group at Pepsi-Cola North America.

Brand advertisers like Pepsi (you’re not buying the water online after all!) having this sort of success is a strong indicator of the growing importance of ad networks.

Last week the FTC announced that they would investigate Microsoft‘s acquisition of aQuantive and Yahoo‘s acquisition of Right Media, adding them to their ongoing investigation of Google‘s acquisition of Doubleclick. Although the American Association of Advertising Agencies and the Association of National Advertisers asked for antitrust review, I think that they have little to fear and much to benefit.

First, let me give some context on ad sales. As I guy who has “carried a bag” myself, I believe that sales cycles are directly proportional to the complexity of the sales message, and RPMs inversely proportional.

A simple sales message results in a short sales cycle and high RPMs. Take automotive advertising; imagine you’re selling online advertising to Toyota.

Autoblog has the next easiest sales proposition. Autoblog has amassed an audience of auto enthusiasts. While they may not all be in-market car buyers, they have a natural affinity to cars, and selling ads against this vertically targeted audience is a relatively simple proposition with relatively high RPMs.

The Washington Post sells its demographic. It argues that its readership skews higher income and hence is more likely to buy a Lexus. Its a pitch that has worked in print and on TV for years, and works online as well, although not quite as well. Sales cycles will be reasonable, and RPMs lower than for Autoblog.

Many large sites or networks sell reach. The pitch goes something like “Lots of people visit us, and some of them might want to buy a car, right?” Its a tougher sale, and even when successful, it generally results in CPC campaigns that mitigate the advertiser’s risk, often resulting in low effective RPMs.

So what does this mean for the networks and the “fattening long tail”? As I’ve posted about in the past, I’m a fan of “synthetic channels“, or vertically targeted ad networks, that can take advantage of the first two of these categories of sales.

But many sites generate pageviews that are unable to take advantage of these sales pitches. They are untargeted, and as such, are likely to be soldat a deep discount as “run of site” or “remnant” inventory, if they are sold at all.

This is where ad networks who apply behavioral targeting can really have a big impact. eMarketer predicts that behavioral targeting will increase by 7x over the next four years.

Behavioral targeting growth

A large network can anonymously track a user as they move around the internet, recognizing them to be the same person when they show up at different sites across the network. They then use this data to target ads more effectively on “lower value” sites, thereby increasing the value of the ad inventory. So for example, a user who had previously visited Autoblog gets a Lexus ad when they show up on a MySpace page, even though the Myspace page has nothing to do with cars. This has become standard procedure at many of the big networks.

As we saw from the Aquafina example, behavioral targeting works for advertisers.

The key question is how does the incremental value (the increased CPM between the Lexus ad and a “run of network” ad) get split between the three constituents in the relationship; Autoblog, MySpace and the network. This is partly the outcome of supply and demand. Because of the massive surplus of “broad reach” inventory online, the bulk of the value goes to the network and Autoblog.

The network gains disproportionate value from having Autoblog in its network because it can now make a lot of its “broad reach” inventory more valuable. However, in a world with multiple networks, a site that ads “behavioral information” to a network can take that data advantage with it to any other network.

So sites with the opportunity for endemic advertisers have an advantage, not just as standalone sites, but also as members of ad networks.

Its not the advertisers that need to worry about consolidation of ad networks, but sites with content that can be used for behavioral targeting.

I’d love to hear what readers think on this issue.


1. Ad networks and behavioral targeting; who benefits the most?  »Technology News | Venture Capital, Startups, Silicon Valley, Web 2.0 Tech - June 19, 2007

[…] Source:Lightspeed Venture Partners Blog Today’s WSJ has an excellent article on behavioral targeting. It details Pepsi’s launch of Aquafina Alive,their new low cal vitamin enhanced water. The campaign was backed by an online campaign through Tacoda and targeted to people who had previously visited “healthy lifestyles” websites. The result? Pepsi recorded a threefold increase in the number of people clicking […] Share and Enjoy: These icons link to social bookmarking sites where readers can share and discover new web pages. […]

2. pjentrepreneur - June 20, 2007


Several ISPs (including those that want to deliver citywide WiFi) are purchasing ad servers and software that tracks user behavior without necessarily knowing the identity of the person. The idea is to support free WiFi access through ads. Example: you go to a city which has free Wifi run by operator X. Based on the sites you visit through X’s network, you are shown ads at the bottom (very discreet, they say). The WiFi operator gets a cut from the revenues. Now, you think this works only in large cities which have a lot of people using the free network. However, one company says they can aggregate users across the country. So someone visiting auto-related web pages in a small town will get the same ads as someone doing the same thing in Philadelphia. The hope is that even small towns can support free ad-supported Wifi networks.

3. Erron - June 21, 2007

I think that one of the major things that is still relatively untapped is the difference between definining consumers by what they do online versus who they are and what is known about them. Personally, I belive that the highest revenue potential for online advertising is to be found in even better targeting ads to users based on precisely who they are rather than something fundamentally no better than a breadcrumb (where they are searching for, what they did last, etc.) Most online advertisers define and target people by what they did last rather than who they are and I think miss great revenue opportunities.

In my curent and past positions (CEO of YellowBot.com and head of bizdev for Citysearch.com) I have been responsible for licensing business listing data (basically contact information and enhanced information such as hours, brands, services, products sold, URL, etc.) for local businesses. During these positions, I have either talked with or worked with three companies (Localeze, InfoUSA and Acxiom) that collect both business listing and consumer data. Think about it this way: everbyody over age 13 has a database file somewhere which is constantly being updated and merged/purgerd with your education, address, salary, phone number so that direct mail people can contact you. Then, the data companies append all of the special demographic information (pets, boats, do you rent or own, religion, age, marital status, religon, specialized licensese, etc.) to the point where anybody can go out and buy specialized data about consumers whenever they want to sell you something.

I think that online advertising is like a strainer; the more precise you are targeting ads the finer particles you get out–and better opportunties for directional marketing. My experience is that badly targeted ads, not ads per se, are what really tick people off and cause lower eCPM. Culturally and politically, there may be some pushback on properly demographically targeting advertisers by individuals rather than SERPs, but I think it is worth pursuing.

4. links for 2007-06-21 - June 21, 2007

[…] Ad networks and behavioral targeting; who benefits the most? Who’ll get the most out of it: the niche site that enables the ad network to build the surfer’s profile, or untargeted large sites where most of (behaviour-based) ads are served? (tags: advertising marketing behaviour behaviouraltargeting adnetworks businessmodel) […]

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