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Privacy matters, software that blocks ads and cuts out cookies, and the anti-spam culture could reduce the effectiveness and the value of Web advertising. It would also curtail consumer convenience and reduce content quality - there is no free lunch without advertising. Net vs. Gross revenue recognition is a focus of concern. The SEC is looking into the way in which Internet ad firms account for their revenues. If FASB forced those firms that are "grossing up" their revenues to discontinue the practice, revenue multiples would be altered (which could hurt price to sales comparisons), but in most cases the underlying business would not be affected.
Originally, advertisers looked at the Internet as a series of unrelated channels, much like cable television or magazines. They saw promise in Internet advertising due to its ability to reach users with specific demographic characteristics. Advertisements were targeted based on site content. Visitors to a pet site, for example, would receive Purina dog food ads, while visitors to financial news sites would receive E*Trade ads. This demographically targeted advertising followed the cable television and magazine models. Of course, cable and magazines also get subscription revenues ... and the Internet tried. Once upon a time, many subscription attempts were made.
Content targeting as done on television is the least valuable form of targeting for advertisers. Demographic targeting as done in direct mail and some magazines is more valuable. Behavioral targeting now possible in real-time on the Internet is the most valuable form of targeting to advertisers. The sources of the largest, most robust databases will likely be the winners. Companies are now trying to marry online and offline data to better target their messages and media to “the right person, at the right place, at the right time.”
Targeting, targeting, and more targeting is the key.
Classical Targeting Targeting via Site Content
Targeting based on the content of a television show, a magazine, or an Internet site is what we will call elementary demographic targeting. This type of targeting has been done for years by television (based on the likely demographics of viewers of a particular show or channel), radio, magazines, and other forms of media. As such, it was a logical way for the Internet to develop; e.g., sites containing financial news would serve financial advertising.
Neoclassical Targeting
Demographic Targeting via Registration Web sites soon developed an enhanced form of targeting. Rather than assuming what type of user would show up, many sites have taken the next step to actually ask users about their interests through the use of registration questionnaires. The information about the user is stored in the form of “cookies” that are imbedded in the browser and contain electronic codes that allow publishers to identify them. Each time a user comes back to a site on which they have previously registered, the site immediately determines what advertising that user will be most receptive to based on the initial questionnaire. Generally, the incentive of greater access to a site’s offerings is the carrot that is held out to encourage users to give up personal information in the form of a registration. Additionally, sites requiring passwords often ask users for information. The added value here is that users are able to have the site remember his/her password if they go through the registration. Any site that conducts commerce gains information on users.
Each time a user purchases something, at the bare minimum, the site receives credit card, location, and product interest information. The newest trend in gathering demographic information on users is via free Internet service registration. NetZero, Alta Vista, Excite, and other “Free ISPs” plan to gain all of their revenue from advertising (and any commerce that might occur on their sites). In return for receiving free Internet access, users are required to fill out a detailed questionnaire. This questionnaire allows advertisers to tailor their marketing to particularly receptive users. There are many ways of obtaining demographic information on users, but it is all still demographic. Advertisers are only able to use statistics to forecast what type of ad a user with certain characteristics might be receptive to. The key tool for advertisers is behavioral data. Credit card companies are the ultimate gatherers of behavioral targeting information.
New Age Targeting
Online Behavioral Profiling Advertisers have known for some time that behavioral targeting (a.k.a. profiling) is vastly superior to simple demographic targeting. Knowledge of a consumer’s past purchases, interests, likes/dislikes, and behavior in general allows an advertiser to target an ad much more effectively. Department stores have long kept track of consumers’ past purchases. They are thus able to project what other types of products a consumer might be interested in and then send an appropriate coupon or sale offer. Credit card companies are the ultimate gatherers of behavioral targeting information. They maintain vast databases of cardholders’ past transactions, and they sell lists of this data to advertisers. The same type of behavioral model is forming on the Internet. Publishers and ad networks monitor the items that a consumer has expressed interest in or purchased on a site (or network of sites) in the past and target ads based on this information. The Internet can take it one step further than the offline world, however. For example, through a network of sites, an advertiser is able to serve an ad for a Toyota 4Runner to a user who is currently on the New York Times’ Web site. Why is this important? Because that user was on Toyota’s Web site several hours, or days, before and checked out that exact model of vehicle. No such ability exists offline. It’s as if advertisers could see what pages of a catalog a consumer had dog-eared and then sent the consumer an ad for those exact products. A network can track user behavior across its own network, but cannot do so once the consumer leaves to enter another network. For instance, Yahoo! cannot track a user’s behavior once that individual enters the America Online network of sites. For this reason, the scale of the network is critical.
Future Targeting On/Offline Behavioral
The future of Internet ad targeting may lie in combining online and offline behavioral data. Several Web networks have already formed relationships with, or purchased, offline database companies. AdForce has a relationship with Experion, which has an offline database of about 120 million households in North America; likewise, DoubleClick purchased Abacus Direct, a shared catalog database with information on over 90 million U.S. households. 24/7 Media has also formed an alliance to link online and offline data. These relationships will allow online advertisers to focus their ads with even more precision because they are receiving both on- and offline consumer behavior data. For example, if a consumer purchased a set of pots and pans through a catalog, s/he may receive an ad for a set of silverware when next going online. The critical step in merging off- and online behavior is matching an offline identity with an online identity. This requires that a consumer who is in an offline database make an online purchase in such a manner that the offline and online data can be linked. This matching could be accomplished through a name, address, or some other uniquely identifying characteristic. We believe that the size and richness of the database will be incredibly important going forward. Those with large, deep databases will be very attractive to advertisers. To date, none of the companies mentioned above have linked their online and offline data. DoubleClick announced plans to link its data, but soon withdrew these plans amid investigations by the Federal Trade Commission (FTC), the Michigan and New York Attorney Generals, and several class action lawsuits.
The Cookie File
A cookie is simply a text file. The cookie was invented in 1994 by Lou Montulli, a Netscape employee, as a means for Web sites to maintain a user’s preferences. A unique identifier, it consists of numbers and letters. The sole purpose of the cookie is to act as an identifier for a browser. Web sites use cookies for just that purpose to identify users on their sites. Cookies cannot pull information off of a user’s hard drive. The first time a user goes to a site, that site may place a cookie on the user’s hard drive. This cookie is used to identify the user to the site. This allows for site customization (my Yahoo!), storage of a user’s preferences (The New York Times), storage of payment information (Amazon), and targeted advertising. Online advertising agencies also place a cookie on user’s hard drives. These companies are then able to monitor the interaction of a user with their advertisements. Online agencies cannot monitor users across the entire Internet, they can only do this on their network of sites. By compiling data on users’ interactions with advertisements and the content of the sites they visit online, agencies hope to be able to target more appropriate ads to that user and manage their frequency. Users can opt out of cookies by visiting the agency’s Web site. Users can also set their browsers to reject all cookies, or to notify them when a site wants to place a cookie on their computer.
Part 10; Broadband brings Rich Media , Part 11, Rich Media Studies , Part 12; What Could K.O. Internet Advertising? , Part 13; Email ,
Part 14; Advertising or Direct Marketing? , Part 15; What Does the Internet Advertising Market Consist of? , Part 16; Rich Media still has some drawbacks ,
Part 17 Inventory and Concentration , Part 18; Market Share and Concentration Data , Part 19; Global Impact, Part 20; Residential and Business Use ,
Part 21; Pageviews , Part 22; Advertising vs. Direct Marketing , Part 23; Investment Conclusion
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