The New Advertising Business

Editors' Note: The following is
the text of the current SuitWatch newsletter, by LJ
senior editor Doc Searls. Subscribe to SuitWatch
here.My journalistic career arc bridges a long interim during
which I helped build one of the leading advertising agencies in
Silicon Valley. I risk violating
my reputation as a
scourge of marketing when I admit I had a fun time in the ad biz,
but it's true--I did. Hodskins, Simone & Searls was a great
little agency, and we did a darn good job, considering the fact
that doing creative work for technology clients is generally an
oxymoronic undertaking.Unless they happen to be Apple or funded by too much VC
money, technology companies generally don't go for artsy
advertising that "creates impressions" and "builds a brand". They
want to move goods. They want their advertising to explain the
features and benefits of those goods and put their messages in
front of the right potential customers for the lowest possible
cost. If your agency can do that and be creative, fine. But the
first priority is to drive sales.The whole time I was in that business, I noticed how many
problems derived from a single ironic fact: our customers and our
consumers were different populations. This also was true for the
media in which we placed our advertising. The people who paid for
the advertising were not the same as the people who received it.
Because readers, viewers and listeners paid nothing for the
advertising they consumed, their direct influence on the
advertising they consumed was about the same. Between advertisers
and consumers, advertising was not a way for the twain to
meet--that's what sales and promotion was for.In fact, back in those days I also noticed that in corporate
battles between marketing and sales, marketing generally lost. If
there was a VP of Sales & Marketing, it almost always was
somebody from sales. That's because sales touched customers, and
marketing did not. Instead, it was marketing's job to be
"strategic". Advertising was always a strategy. To the tacticians
in sales and the technologists in engineering, advertising
"strategy" tended to be a bit abstract and annoying, because it
seemed to happen in this vacuum where the company and the customers
rarely met.Anyway, I found myself thinking back on the old days when I
visited Google on Tuesday and got some hang time with Richard
Holden, who runs the
Adwords program
there. I had wanted to talk with somebody involved in Google's
advertising effort, because it seemed to me that effort was
threatening to alter the whole advertising business. That would be
quite a switch from what happened in the dot-com era, when
traditional advertising thought was given countless billions of
dollars to spend on capturing eyeballs and other annoying ideas
that stayed current as long as they continued to float on too much
money.What we might have here, I also thought, is a good example of
how Linux lowers the threshold of market disruption for companies
that take advantage of Linux's extreme technical economies.When you look at a Google results page (try "fly fishing"),
you'll notice two kinds of advertising: sponsored links above the
listed results and a stack of boxed items on the right that look
like classified ads. Richard Holden explains how it works behind
the scenes:The premise behind the ads on the right side,
Adwords, is an auction model. People bid on placement based on
keywords. They set the maximum cost per click (CPC) they're willing
to pay. In effect, they set their true reservation price: the
maximum they're willing to pay. They pay no more than slightly
above the next lowest competitor, so there's no winner's curse
where you outbid everybody by an extreme margin. This creates a
competitive marketplace where advertisers bid on leads generated
for them by search results.
We take a relevancy factor into account. We rank the ad,
based on the click-through rate. So a lower-bid ad with a higher
click-through rate will be ranked, placed, higher in the list of
results.In other words, users' click-through history is what makes a
given finding more valuable. Richard continues, "The advertiser
likes it because they get a benefit (they don't pay as much to be
shown as high), the consumer likes it because they're seeing high
quality ads, and we like it because both parties like it and
there's a virtual cycle of reinforcement.""Will they sell AdWord positions?" I wondered.Richard answered, "We don't promise position, because we're
focused on utility to the user. That quality is critical to
us."It's interesting to see how Google's advertising offerings
have evolved. They started with a traditional CPM
(cost-per-thousand) model, then shifted to a CPC (cost-per-click)
model a little over a year ago. Then they started syndicating their
advertising. Earthlink, AOL and AskJeeves are three customers. It's
interesting that AskJeeves is a search engine competitor and an
advertising partner.Last month Google added Content Targeting, which puts text
ads in banner spaces, replacing graphical annoyances with
text-based relevancies. One good thing about this model is it gives
sites a monetization model where there was none before. Richard
explains, "A lot of independent content on the Web kind of died
simply because there wasn't a monetization model behind it. We're
able to help people to monetize, from a publishing model, content
that wasn't monetizable before."Content Targeting is what produces text ads in the banners of
BlogSpot sites. I have one friend, who recently decided not to
upgrade to the ad-free Pro version of Blogger (which Google owns,
by the way), because she liked the advertising in her banner. That
means Google has achieved, at least in her case, something of a
holy grail: advertising people actually want rather than
endure.Today, Google has more than 100,000 advertisers and claims to
be the "largest pay per performance search marketing program".
Google doesn't publish its financial results.
Overture, however, does.
Overture is a public company and a competitor of Google's in the
on-line advertising business. Overture's revenue was $200 million
last quarter. Their cost of goods sold was $2 million, for a gross
profit margin of 99%. They're doubling in size every year. They now
own two competing search engines: Altavista and
FAST. They run their
own site on Solaris, so think how much more they could clear if
they ran on Linux. (Some context: the Google folks told me they run
on a virtually countless number of mostly second-tier, nonbranded,
old-generation hardware. Pentium IIIs, to be precise.)So what's happening here? Simply put, companies like Google
and Overture are blowing away everything the old advertising
business holds dear. Beautiful images. Attention-grabbing graphics.
Awards. Strategy. Even old conventions like
branding--a term Procter & Gamble borrowed
from the cattle industry, back when they created mass media
advertising in the dawn of commercial radio more than 70 years ago.
They're blowing it away by connecting users and advertisers and
helping both offer something valuable to each other.Obviously, you can't export Google's type of on-line
advertising to print, television and radio. But you can export the
value system, and that's exactly what's bound to happen, among both
advertisers and users. When it does--as it inevitably will--we'll
watch the end of advertising as we knew it.Kind of like we see happening with operating systems.Doc Searls is Senior Editor
of Linux Journal.

email: doc@ssc.com