The New Advertising Business

by Doc Searls

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.


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