' Masthead Venture Partners

Market Overview: Internet Advertising and Behavioral Targeting

The world of marketing is in transition. Today, marketers must address global competition, media fragmentation, declining consumer loyalty, new technologies, and ROI pressure. In order to meet these new challenges, they desperately need new tools that leverage the interactive potential of the Internet to offer synergistic, integrated marketing. They need to go from mass marketing to targeted marketing.

There is a large opportunity for a company to introduce a new approach for delivering on the original promises of Internet one-to-one marketing. According to Gartner there is a fast-expanding market among media suppliers estimated to reach $500 million by 2007 for a new audience profiling and targeting solution.

Despite the growth of performance-based advertising in general and paid search advertising in particular, there are real limitations with the current offers. First, the number of opportunities to reach a consumer with a paid search message is limited. There are only about 10 billion searches annually in the U.S. compared with about 350 billion total page views on the Internet. The number of searches is growing at only 7-9% per year. The result is that marketers are willing to buy many more paid search advertising opportunities than Google, Overture, Ask Jeeves, Find What and the other search marketing vendors can deliver.

This imbalance has led to the growth of several kinds of advertising networks, including contextual networks such as Google's Adsense, ad performance optimizing networks such as Advertising.com, and DrivePM, and Adware (often called spyware) from vendors such as Claria and WhenU. All of these have significant disadvantages relative to another type of ad network, one which is based on Behavioral Targeting, such as diminished effectiveness or tainted "rogue status" which limits brand advertisers ability to engage with them.

Behavioral Targeting is more effective than contextual networks or ad optimization networks because the targeting is based on the consumer's use of the Web over time, not just the page they happen to be reading at the moment. Behavioral Targeting translates into more relevant ads for consumers, more effective and efficient ad campaigns for marketers, and less waste and better revenue yield for publishers. Clickthrough rates increase, and a consumer's web experience is enhanced.

Current Advertising Networks

Google Adsense and other contextual networks.The most visible and successful performance ad network is Google's AdSense. It uses Google's index of the Web to associate advertising with key words on the page the consumer is visiting at the moment. In this contextual ad network, publishers sign up for AdSense by copying some HTML off Google's site and pasting it on their pages. Google will serve text ads on the publisher's page whenever Google has an advertiser that has purchased a keyword that appears on the publisher's page. This technique creates an incremental revenue stream for major publishers with copious amounts of traffic and a modest income for smaller sites.

The problem with contextual targeting, however, is that only about 20% of Web content has commercially relevant content. Associating a text link with a site that reviews consumer electronics is likely to generate a "clickthrough" to an electronics retailer, but consumers spend much of their time online looking at news, sports, and weather, none of which have many key words that are going to be of much value to that same electronics retailer. In fact, attempts to use contextual targeting with news have had the unfortunate result of promotions for Samsonite being placed next to stories about suitcase bombs and offers for life jackets being placed adjacent to stories about capsized ferries.

Contextual targeting works well in certain types of consumer content. A consumer researching the purchase of a new car, or computer is likely to find a lot of relevant advertising. But contextual networks can only target that advertising when the consumer is on the page with that content. If, ten minutes later, he or she is browsing the local sports scores, he or she will see nothing related to an earlier search. The leader in contextual targeting is Google, but there are a number of start-ups competing in this contextual space, including, Quigo, Context Web, and Kanoodle.

Advertising optimization networks. Advertising.com, Fastclick, Tribal Fusion, and Aquantive/DrivePM are examples of another type of pay for performance network. They offer advertising optimization networks. Often these networks will buy a less valuable run of site inventory from Web publishers for one price and then make their margins by running pay for performance ads in those slots at higher effective prices. They have been able to do this profitably for the last few years because publishers had excess inventory they were willing to sell cheaply and because they were able to test the performance of various ads and only run the ones the generated enough click through for them to make a profit. This business model has come under pressure recently because more advertisers are using the Web, and therefore publishers are less willing to sell their limited inventory at a discount, and because most ad servers in use by the publishers now have the same optimization capability as the networks.

Adware/Spyware. The last category of pay for performance ad network is adware, often called spyware. Companies like Claria, WhenU, and Direct Revenue, have a downloadable software client that runs in the background on a user's machine, observes behaviors, and then pops up a relevant ad. These companies grew rapidly during the early 2000's because targeting advertising based on a consumer's behavior online works. They have also created a significant consumer backlash because they are often unknowingly installed on a consumer's machine without their explicit permission, usually attached to a free download like a screensaver or a file sharing system. Once on the machine, the applications slow performance, interfere with other programs, cause system crashes, and bury themselves so deep that it is very difficult to remove them. They serve pop up ads that take over the screen and interfere with what the consumer is trying to do. These companies have been sued by publishers for corrupting the copyrighted pages the publisher is serving to the consumer and have caused such a consumer backlash that there is now anti-spyware legislation on the books in several states and working its way through Congress. Due to these recent difficulties, the revenue growth of these companies has diminished as they have been forced to abandon old ways and become "legitimate."

The Next Wave: Tacoda's Behavioral Targeting Ad Network
Behavioral Targeting is an online ad-targeting system that uses a consumer's behavior on a Web site to determine his or her interests, and then serves ads to that person, wherever they go on that site, relevant to their interests. The problem has been that consumers often leave the site and travel elsewhere on the Web. But now, Tacoda Systems has solved that problem and opened a way for an expansion in Internet Advertising. Tacoda's new behavioral-targeting ad network can continue to serve consumers ads that they are interested in seeing even as they surf to new sites.

Tacoda's recently launched Audience Network extends the power of behavioral targeting to an entire network of participating publishers. Publishers participate in the network as a provider of the audience (advertising opportunity) or as a provider of the profile data that makes it possible to target a person with a relevant ad. A visitor to the Dallas Morning News web site who places an ad to sell a car, and then visits the auto section, could be placed in a segment called "in market car buyers." If he or she later visited another site on the network such as CBS Sportsline, he or she could see offers from an auto dealer network in the Dallas area to test drive a new car and win a prize.

Tacoda's behavioral targeting ad network is more effective than contextual networks or ad optimization networks because the targeting is based on the consumer's use of the Web over time, not just the page they happen to be reading at the moment. Tacoda's behavioral targeting makes it possible to reach a specific target segment regardless of where users are surfing on the Web.

In order to accomplish this targeting, Tacoda tracks and segments consumers on publisher partner sites. Then, it sells and delivers high-value targeted ads to "segmented" consumers as they surf remnant pages. This difference translates into more relevant ads for consumers, more effective and efficient ad campaigns for marketers, and less waste and better revenue yield for publishers. Unlike spyware, Tacoda's Audience Network does not disintermediate the publisher, nor does not collect any personally identifiable information (PII). It is an experienced, trusted provider, and strives to be completely transparent.

Tacoda's behavioral targeting protects the consumer's privacy by never collecting personally identifiable information. It protects the quality of the consumer's Web experience by never interrupting their browsing experience with pop up or other forms of intrusive advertising. Tacoda's behavioral targeting ad network improves the consumers experience because network participants like CBS Sportsline just replace an existing ad with one that is more relevant to that consumer. Behavioral Targeting also protects the consumer's privacy and each publisher's interest in their audience data by never sharing the profile data between publishers.

Behavioral Targeting has a number of key advantages for advertisers and publishers over other ad networks. For advertisers, it is more cost effective. Because it works better for advertisers, it will deliver more revenue to publishers, but even more importantly, it does not disintermediate the publisher. Publishers are concerned that portals and search engines diminish the value of their content and brand. Tacoda's Audience Network is not an audience aggregator, nor is it a data owner. Behavioral Targeting enables publishers to realize the full value of their investment in their content and their audience. Unlike other advertising networks, Tacoda's is completely transparent. Publishers have real-time access to a comprehensive set of reports that shows exactly which audience segments were delivered to which advertisers, what the response was and how the revenue share was calculated. Finally, Tacoda's Audience Network creates a new revenue stream for publishers that enable them to provide more valuable content to consumers for free with less advertising. As for consumers, Behavioral Targeting makes web surfing a more productive and enjoyable experience.

The available opportunity for Tacoda's Behavioral Targeting ad network addresses the approximately 250B monthly commercial pageviews (of the total 350B on the Internet today) where advertisements are delivered on an untargeted run-of-site inventory basis. Because this set of pages is currently priced well below those of a targeted nature (on a CPM basis), the potential for value-creation with Tacoda's enabling technology is huge.

About Masthead Venture Partners
Headquartered in Cambridge, Mass, Masthead Venture Partners is a venture capital firm dedicated to providing early stage information technology, internet infrastructure and services, communications, and IT-intensive life sciences companies with the capital and hands-on operational support they need to develop into industry leaders. The firm has the advanced technical expertise, proven operating experience and deep industry knowledge and relationships to help entrepreneurs build companies with category defining potential. For more information please visit www.mvpartners.com.

Back to top

© 2003 Masthead Venture Partners. All rights reserved.