Ad Networks – UtilitesDB

Growing in an Unhealthy Climate

Economists, politicians and media types are no longer arguing whether or not the economy is in a recession. Instead most are debating how long it will last.

If recent trends continue, the prognosis is relatively dismal for real estate values, gas prices and the unemployment rate. And as corporations and consumers grow frugal, cutbacks in advertising threaten the vitality of everything from cable operators to newspapers. Internet analysts, wondering about the ripple effect on the industry, offer a variety of opinions. While some think a recession would not have any affect on online advertising and marketing, others feel that it could have a significant impact – negative or positive – on the sector.

Slashed traditional advertising budgets are already apparent. TNS Media Intelligence found that ad spending in the fourth quarter of 2007 declined .1 percent from the fourth quarter of 2006.

But a Direct Marketing Association’s Quarterly Business Review survey in the fourth quarter of 2007 uncovered good news for online marketers: 50 percent said they would increase email marketing, 44 percent would increase database segmentation and 35 percent would increase spending on search engine optimization in 2008. And PQ Media found that spending on alternative media such as social networks, lead generation advertising and consumer-generated media is expected to grow by 20.2 percent in 2008 to $88.24 billion.

These findings reflect a long held belief that there will be a shift of marketing dollars from traditional media to the Web. Some believe this move would protect online companies from feeling the effects of a recession. Standard & Poor’s Internet analyst Andy Liu noted at the company’s 2008 Media Summit that he expects online ad revenues to grow by 20 percent this year – recession or not.

However, not all indicators (or analysts) are so bullish. In March, market researcher eMarketer lowered its estimates for U.S. online advertising market by nearly $2 billion, predicting that it will grow $25.8 billion, as opposed to $27.5 billion, in 2008.

Ability to Measure

Advertisers are shifting online to not only reach their audience, but because Internet advertising costs less and is trackable. Founder of Seer Interactive, Wil Reynolds, predicts a trend where any medium that offers less tracking will lose dollars to areas that offer more accountable results. Effectiveness can be measured by clicks, impressions, registrations and purchases, which are very attractive to bean-counting advertisers.

Brad Waller, vice president of business and affiliate development for AdJungle.com, points out that General Motors, the country’s third largest advertiser, announced it is shifting half of its $3 billion budget into digital and one-to-one marketing within the next three years. He claims this is the beginning of things to come, noting that the market online is growing faster than any other spend.

Founder of FatWallet.com, Tim Storm, says online advertising can be measured but offline initiatives, like direct mail, can’t be tracked. Online campaigns offer ROI down to the penny – so advertisers don’t wonder where their budgets were spent.

Paying for Performance

Even more appealing during belt-tightening days is performance marketing, where advertisers only have to pay when there is an action that is commissionable or measurable. Storm says he thinks there will be a shift of spending toward performance marketing, as opposed to advertising on a CPM basis. He doesn’t think Internet advertising will be affected by the recession as long as advertisers don’t look at the spending as a budgeted line item – which tips the scales in favor of performance marketing.

Online marketing consultant Sam Harrelson agrees that CPM big budget ad buys will suffer in 2008 and performance marketing will continue to increase its reach, effectiveness and popularity.

In fact, the Interactive Advertising Bureau statistics for the first half of 2007 indicate that "CPM deals" were replaced by "performance deals" as the leading pricing model for Internet advertising. In 2006, CPM deals comprised 48 percent of the overall total while performance deals (such as CPA) were at 46 percent. However, in 2007, performance deals made up 50 percent of deals while CPM fell to 45 percent.

There is evidence that performance marketing initiatives such as paid search are becoming more popular. OneUpWeb.com found that 48 percent of all U.S. online advertising spending in 2007 went toward paid search, and predictions are even higher for 2008.

Paid Search

Although paid search is considered more resistant to cuts than other advertising because it’s performance based, some think it is not immune to decreased spending. Advertisers could reason that people are less likely to surf the Internet for potential purchases during an economic downturn.

In March, comScore, the Internet ratings firm, reported that Google’s paid clicks fell .3 percent between January 2007 and January 2008, even as the number of searches rose 40 percent in the same period. As recently as April, Google’s ad clicks were rising at a 60 percent clip.

The industry panicked that Google, considered a bellwether for the overall sector, was being affected by the cyclical economic forces of the overall market.

It’s possible that Google is tightening the reins on clicks to combat click fraud and generate better clicks in general. And Hitwise found that the percentage of traffic going from Google to retail shopping sites is actually increasing. Since the bulk of paid search advertising is shopping related, the Hitwise data draws a different conclusion than the comScore data.

But cost per click has its challenges – there continues to be big inflation numbers. As more folks jump in, the costs get higher.

It’s possible that there won’t be less activity in paid search but there might be less money spent on bids. Seer Interactive’s Reynolds offers an example: the same number of marketers could bid on a term like "mortgage" but spend less money doing it. So if in the past a marketer paid $1,000 for 10 leads that convert, today that $1,000 dollars would only buy five leads.

Reynolds doesn’t believe this will cause marketers to abandon paid search, but thinks it could cause them to lower their bid to spend $750 for those five bids – reasoning that "smart marketers always will spend up until they max out their ROI." Interestingly enough, Reynolds says the saved $250 isn’t likely to go to buy radio or display ads. From what he has seen, people looking to rein in their paid search move into SEO as their next step.

Reynolds has seen shopping and e-commerce people moving from paid to SEO – and believes the affiliate space might have a good fallout as well because the closer a marketing channel is tied to results, the easier it will be for managers to get funding for it.

Survival of the Fittest

Google has boomed over the past few years because of search engine marketing – so it is possible that search engines will fare well during an economic downturn if paid search continues to be popular. Yahoo, Google, MSN and AOL have worked to become one-stop shops for advertisers by building up ad networks with targeting and tracking capabilities. David Hallerman, eMarketer senior analyst, notes that when "the portal is both destination and network, perhaps advertisers can get all they need without straying – at least that’s what the Big Four hope for."

Many niche sites have flourished while they get better at improving targeting to meet the needs of their clients. Reynolds says that vertical sites, if they can show ROI for marketers (even with less traffic) will start to get dollars if markets like Google become to expensive to play in.

Specific verticals that offer people a way out of a bad situation such as employment sites, job training sites, and mortgage refinance loans and debt consolidation sites like LowerMyBills, could become more in demand. Also well positioned are sites that offer people efficiencies in a weak economy such as comparison shopping engines and coupon sites.

FatWallet’s Storm believes that coupon sites could fare well this year – he points out that some of FatWallet’s best years were during the last downturn of 2001 and 2002. When the economy is in a slump, people gravitate towards being more cost conscious. For example, Storm has read reports that the craft industry does well because people make their own quilts – it is both entertainment and fulfills a need.

So far this year, Storm has not noticed any spending shifts – booms or drop offs – for FatWallet. Electronics and technology continue to be FatWallet’s strong categories as do other categories like Health & Beauty and eBay.

Insurance is another sector well positioned to weather an economic storm. Jon Kelly, president of SureHits, an ad network for insurance and loans, thinks it could increase because consumers are adopting the Internet as a primary means of buying insurance. Even technology laggards, who in the past surfed the Internet to find the best quote but picked up the phone to complete the transaction, are purchasing through e-commerce.

Another reason for Kelly’s bullish prognosis: "When the economy turns rough, people start looking for the best deals on insurance and they turn to the Web to do it." Kelly explains that auto and home insurance look particularly strong over the next few years because consumer demand for them does not drop in a recession – car insurance is mandated by law and home insurance is mandated by mortgage companies.

Kelly predicts that there will be increased Internet spending by insurance companies as the battleground for customers moves online. He thinks the areas where they will increase spending are paid search and affiliate and ad networks with a strong vertical focus like IndustryBrains, Quigo and SureHits Ad Network.

AdJungle’s Waller has seen record growth on its classifieds site, EPage – with 30 percent growth in revenue with January 2008 over January 2007 and an increase in the average revenue per user. He has seen growth in areas that want to get rid of excess inventory and says that in a tight market, people buy more items used than new. Listings for home-based businesses that offer ways to earn extra income are popular – like "how to make money from your laptop."

EPage makes money from advertisers paying for more exposure, as opposed to getting a cut of the purchase price. Advertisers pay to have their ad ranked higher on the page – when advertisers have success; they are willing to pay more.

Conventional wisdom would suggest that real estate would be hard hit in a recession. But Michael Stark, the founder and president of PostYourProperty.com, says that just because the housing market is tanking doesn’t mean there will be a negative effect on the online real estate vertical.

His real estate sites focus on the for-sale-by-owner (FSBO) market, which accounts for approximately 15 percent of U.S. real estate and says that traffic to his sites continues to grow despite the recession because of the focus on enabling the "do it yourself " FSBO movement. In fact, the crumbling prices, slow sales and a credit crunch in 2008 will make the FSBO option attractive to an increasing number of buyers and sellers.

Foreclosures are good for Stark’s sites because more postings mean more inventory, which means more advertising for his sites. Advertisers on Stark’s sites include people trying to sell their house, brokers, agents and lenders looking for new business.

Waller says that lead generation companies like Epic Advertising (formerly Azoogle), XY7, CPA Empire and Leadpiles could do well because people are buying and selling leads for real estate.

Performance marketers should feel confident that their industry is well positioned to weather a recession although things could get a bit tougher. Affiliates might get scrutinized more heavily – marketers don’t want to pay affiliate commissions if they find evidence that a paid search campaign created the sale. "Many marketers are estimating the ‘influence’ of their affiliates and zeroing out commission when other marketing campaigns are involved," Lee Gientke writes on ReveNews.com.

Some industry watchers say that marketing will move more in-house as knowledge of how to do search or affiliate marketing continues to spread out into wider communities instead of just specialized networks or agencies.

Leagues of Their Own

Since the days of the gladiators, sports fans have had an irrational bond with their favorite athletes and teams. Feats of athleticism evoke eruptions of euphoria or a tidal wave of tears as a game’s final play unfolds.These strong emotions create an indelible brand loyalty that remains long after the season ends.

Marketers are learning to exploit these relationships in new ways by expanding the scintillating sights and sounds of sports beyond television highlights to broad online distribution. By enabling fans to personalize their interactions with multimedia content and by bringing the game to their favorite arena – be it a social website or a personalized Web page – sports leagues are creating new online marketing opportunities that are increasing revenue. Typically, online merchandising of memorabilia and apparel is not handled by sports leagues’ online properties and is therefore not addressed in this article.

Sports leagues and their broadcast partners have historically been conservative in granting permission to use video and audio from games online. This idea was based on the belief that making highlights or live broadcasts available dilutes the value of live games and would reduce advertising revenue and attendance. For example, in the late 1990s, local radio affiliates streamed broadcasts of baseball games online for free. But within two years, Major League Baseball ended the process, allowing audio webcasts to be streamed only through the MLB.com website through paid subscription services.

Baseball continues its policy of charging to listen togames online today. Dinn Mann executive vice president of content for major league baseball, says the league listened to fans and for the 2008 season reduced the price of a season audio subscription by $5 to the former price of $14.95. “We tipped our cap to fans who complained,” he says.

Requiring customers to pay for live audio provides an alternative revenue stream, according to Mann. “Having a subscriber base and not relying entirely on advertising is of strategic importance,” says Mann. Subscriptions,which require submitting an email and physical address, provide an avenue for MLB to pursue online and offline direct marketing.

Major League Baseball also charges for video streaming of live games and restricts viewing to any games that are “out of market” from where the customer lives. This protects the lucrative contracts with cable companies and local TV stations that are the bread and butter of their revenue. Baseball game viewing- despite the lengthy 162 game schedule – remains largely a pay-per-view world, Mann says, because “some things are still worth paying for.”

This year is the first time that baseball fans can watch archived broadcasts of full games for free, something that MLB is”experimenting with,” according to Mann. The archived games do not feature advertising, but MLB is “exploring the right relationship,”Mann says.

Growing the Audience

Sports leagues are now taking a page from online marketers’ playbooks by encouraging consumers to personalize their experience in interacting with content. Instead of going the affiliate marketing route, the digital sports media companies are focused on partnering with social networking sites and other media companies that have established audiences of fans. The strategy is to encourage consumers to link to and save content on the sites where they visit on a daily basis, enabling fans to mash-up multimedia content to create something new from existing content. Marketers who join the roster of their online partners will gain a share of the spoils in growing their audience and reaching a new generation of fans.

At the start of the 2008 season, MLB.com announced a partnership allowing Yahoo.com to stream games and highlights.Yahoo will also sell ads against both pay and free content, although thus far the video has been distributed largely without ads. Through this agreement, MLB.com gets access to Yahoo’s large audience and the two companies share revenue from any transactions facilitated through Yahoo.

Professional and collegiate sports leagues have learned that embracing younger audiences on their home turf is the quickest path to rapidly growing an audience. The NCAA, in partnership with CBSSports.com, opened the video streams of its college basketball championship tournament to a wide variety of publishing partners with great success. This enables fans to see the content where they want it delivered.

Just a few years ago, video streams of March Madness games were protected from the majority of the population as if they were enriched uranium. The subscription service generated just $250,000 in revenue annually. But over time online distribution was proven not to be hazardous to the health of television advertising revenue. Subscription fees were replaced with free streams, and then the NCAA/CBSsports.com embraced social networking (See sidebar).

Free live game webcasts have paid huge returns, according to Jason Kint, senior vice president and general manager of CBSSports.com, which manages the online video distribution of the NCAA tourney. CBS Sports created an embeddable media player that contained multiple advertising locations, in-stream ads, and fixed positions sold to sponsors.

Online “consumption is additive and not cannibalistic”of the TV audience of live college basketball, Kint says.The streams were primarily delivered to people who didn’t have access to TV, including office workers. The media player’s “Boss Button,” which instantly hides daytime viewing at the office, was clicked more than 2.5 million times, according to Kint.

People will continue to watch games on TV if they can,he says, as the final championship game was the most watched game on TV and had the smallest proportional share of online viewers. Industry watchers speculate this type of arrangement may lead to new relationships between those who promote other events, such as concerts or entertainment awards shows and affiliates who can deliver a targeted audience.

Content owners looking to maximize their audience for ad-supported content should also spread it far and wide, Kint says. “Don’t expect users to come to a URL – bring the content to them.”

Like its collegiate counterpart, pro basketball also recognizes that working with existing online communities enhances rather than endangers its own digital efforts. For the past two years the NBA has “embraced the idea of distributing content beyond NBA.com” and is partnering with video sharing and social networking sites, according to NBA’s Vice President of Interactive Services, SteveGrimes.

Grimes says working with video sites such as YouTube, Joost and Hulu and social networking sites such as Facebook, Beebo and MySpace has increased fan engagement. The NBA makes highlight videos available to publishers such as Hulu and Joost to strengthen its brand awareness among younger audiences who are consuming a greater majority of their video online.

The NBA is encouraging fans to create their own highlight reels by mashing up content available only on NBA.com and embedding it on their social networking sites. “Fans that love the NBA will come to NBA.com, but those who like it will visit other sites,” Grimes says.Widgets that enable sharing of content are delivering interactivity to sports media. NBA’s widget page (www.nba.com/widgets/) contains embeddable code for showing highlights, up-to-date-scores and photos. The NBA has sponsorship deals with companies including Lenovo and TMobile for some of its widgets to gain revenue from content that sits on other sites, Grimes says. The league has also launched a fan application on Beebo to reach its audience.

“(Sports) sites are starting to realize the power of how content can be aggregated across the Web (using widgets),” says Tad Greenleaf, the media team lead, for Omniture Consulting. Greenleaf, whose company has measured fan engagement for the websites of all of the professional leagues, says that while some leagues have hesitated on widgets and distributing content to other sites, they will do so as long as they can maintain some control.

By contrast, MLB has not released any widgets as yet because “we haven’t reached the point that the content needs to reside on their (fans) pages,” says MLB.com’s Mann. “… We have taken a long term view and not just rushing to the tool of the day.”

Measuring Success

Most of the sports leagues are more concerned about building traffic and fan engagement than selling tickets or jerseys through their partnerships with publishers, according to Ominture’s Greenleaf. His company built a social networking website for the Indianapolis Colts (www.mycolts.net) that greatly increased traffic to the NFL’s Colts site by enabling fans to comment, share content and create their own blogs. The leagues want to measure views of videos to see how they can be used to retain consumers, Greenleaf says. “How much can a piece of content drive people into the site, or are they hitting and leaving?” He says sites want to see if the relationships have “velocity” and are encouraging users to “dive deep” into the sites.

Greenleaf says another strategic play is for leagues to buy keywords about teams, players or about timely topics in the news because the leagues “don’t want them going to other places on the Web.”

“The key thing is that you need to control [the environment] if you are the owner of the content,” says Robert Tuchman, the President of TSE Sports and Entertainment, which develops corporate marketing programs around sports. Tuchman says those who market sports leagues have yet to capitalize on the legion of diehard fans that follow their sport. “They have to get behind their existing market or other organizations will control their inventory.”

Tuchman says while social networking around video highlights is the hot topic today, it should be part of a larger strategy that integrates all media. “Social networking is just one aspect. You need to sell combined media packages” that include TV, print and outdoor, according to Tuchman.

Scoring With Mobile

The days of learning how your team fared by reading the morning paper are long gone. Now fans want to know about scores, injuries and trades immediately, and the league sites are marketing to this perceived need. Through mobile-device enabled websites (WAP) and SMS and text-messaging services, sports leagues including the NHL, NBA and MLB are generating revenue from on-the-go consumers.

For the 2008 season, MLB.com added video alerts to its text alerts subscription service. The alerts highlight great catches or home runs from a fan’s favorite team that will be sent to handsets within three minutes after a play happens. The NBA’s “mobile to go” service offers team and player text alerts as well as a service customized for fantasy league fans.

Quattro Wireless launched the mobile version of the NFL Draft site for the annual draft, which took place in April. The site, which included photo galleries,articles, draft prospect pages, player analysis, and the full draft order, was updated in real-time as the college players were selected by NFL teams.

“The NFL is trying to continue to give their fans more coverage wherever their fans may be,” Lars Albright, vice president of business development for Quattrosays. “The NFL found that the draft is turning into something of an event … It’s becoming a marketable event.”

Sports leagues and news services originally charged subscriptions for notifications to mobile phones and handhelds, but they are starting to shift to ad-supported services, says Eric Eller, senior vice president of products and marketing for Millennial Media. Eller, whose company operates two mobile advertising networks (CPM and CPC) that aggregates demand, says one of the big trends is in-game mobile marketing.

For example, during a game, fans in attendance can be shown messages on their mobile phones that are linked to messages being shown on the big screens that sit high atop the stadiums, Eller says. Mobile phones “will play an important part of sports marketing around events,” he says.

Sports leagues have learned that by making highlights more widely available and engaging on their favorite online destinations, they can grow both their television audience and put more fans in the seats.

AOL’s Advertising Aspirations

What a long, strange trip it’s been for AOL.

The more than 20 year old company that was once at the forefront of Internet community building and defined the online experience for many early Internet adopters, is now experiencing a bit of an identity crisis.

AOL has moved far beyond its famous “You’ve got mail”catch phrase/punch line/movie title. So, then how does AOL define itself ? Is AOL an Internet provider, a media and entertainment company, an ad network, an email provider or a Web portal?

While it’s all of those things in one fashion or another,the company is working toward positioning itself as just one thing – a next generation ad network.

“AOL has reinvented itself so many times. It is hard tokeep track,” says Adam Schlachter, senior partner at media and communications consultancy Mediaedge:cia.

AOL’s ad strategy comes at a time when Jeffrey Bewkes,CEO of Time-Warner, acknowledges there is no future in the dial up Internet. There is increasing pressure as media companies and Web portals aplenty are starting and the future is buying or promoting networks as the next step toward”one-stop” shopping for ad buyers.

Acquisition Spree

In an attempt to reinvent itself, AOL has spent about $1 billion acquiring ad-centric companies over the last several years. (See sidebar). AOL’s first big step into the ad market was its 2004 purchase of Advertising.com for $435 million. Advertising.com made a name for itself selling ad space on websites at a time when few were doing it and is the largest third-party display advertising network.

In 2007, AOL bought contextual advertising company Quigo. It alsosnapped up Tacoda, a behavioral targeting company. It bought Third ScreenMedia, a mobile advertising network and maker of mobile software. It also acquired Germany’s Adtech AG, an international online ad-serving firm and added Lightningcast to its roster of companies. Lightningcast delivers advertising for on-demand, live and downloaded video content on the Internet.

The buying spree continued this year. In February AOL acquired Buy.at, an independent affiliate network based in the United Kingdom, with more than 9,000 international affiliates and merchants such as Butlins, Carphone Warehouse, Capital One, Egg, John Lewis, M&S, Powergen, TMobile and Virgin Media.

In March AOL made a step into the Web 2.0 world by acquiring Bebo.com, the fourth largest social networking site, for $850 million. With more than 40 million members, Bebo’s user base is a far cry from the space’s leader MySpace with 109 million.

The Platform Play

AOL’s Platform A division brings together all of AOL’s ad-related silos under a single umbrella. Formed in September 2007, the division has already experienced a series of executive shakeups. Since November, several Platform A executives have exited including Kathleen Kayse, vice president of marketing; Lance Miyamoto, head of human resources; and Dave Morgan, chief ad strategist.

Curtis Viebranz, CEO of Tacoda, who was brought in as president of Platform A, was removed in March. Lynda Clarizio, a nine year AOL veteran that was previous president of Advertising.com, took over the reigns of Platform A.

Clarizio, for her part, has reportedly jumped in with both feet. She is known to have reveled in the start up culture of Advertising.com. PlatformA insiders say she is looking to infuse the many AOL ad groups with that same startup work ethic. And up until recently, the acquired companies had so many department heads with similar roles that many insiders claim various parts of Platform A were essentially competing with themselves for the same clients.

Clarizio has publicly said she will structure teams so that there is only one sales team, technology team, product and operations team, marketing team and publisher services team. She has also combined the overlapping search marketing efforts by Advertising.com and contextual targeting shop Quigo.

In recent interviews with the media Clarizio focused on the short term goals of the group, rather than the executive turnover and claims of integration difficulties.

“As our technology has continued to advance, we’ve gotten better and better,” Clarizio told the Associated Press.”We can handle a lot of demand from advertisers.”She also told the Washington Post that “this is probably the most dynamic industry in the world right now, the online advertising space. To compete effectively in this space, you have to be constantly pushing, innovating new products.”

Some analysts are giving AOL the benefit of the doubt as it works though integrating all its acquisitions.David Hallerman, an analyst at New York-based eMarketer, says, “It takes a while. This is not just buying technologies. It’s buying human constructs, and it takes a while to work out.”

While Platform A is still in its early stages, its reach is already significant when accounting for all the once-disparate units. According to comScore MediaMetrix, Platform A counted 167 million unique visitors in February 2008 and claims 90 percent of the U.S. online audience. However, AOL as a whole, however, ranks fourth as a Web portal, behind Google, MSN and Yahoo.

AOL’s ad revenue is still growing but not at the same clip as previous years. Its ad revenue for 2007grew 12 percent, off the 37 percent growth AOL experienced in 2006 and the 38 percent growth in2005, according to eMarketer.

“AOL appears to be feeling pressure from aggressive sales targets set against the backdrop of a slowing economy,” says Greg Sterling, analyst at Sterling Market Intelligence.

Advertising.com recently lost its biggest advertiser, University of Phoenix, whose ads accounted for $215 million in 2007 and $157 million in 2006- that’s about 17 percent of AOL’s ad revenue growth last year.

There has also been repeated speculation that Time-Warner may sell off AOL and that the recent acquisitions and formation of Platform A is meant to make the company look more attractive to potential buyers or as a spin off company.

And with Microsoft’s bid to buy Yahoo rejected by Yahoo shareholders, AOL is once again mentioned as a potential merger partner with both of those companies as each seeks to thwart Google’s continued dominance online.

Last September there was talk that Platform A itself could be spun out and become public with an IPO. There was also wide spread speculation in the blogosphere that with the dial up business and its Web portal stagnating AOL might change its name to Advertising.com in an effort to clarify its focus to outsiders.

A Big Plan

A key element in AOL’s ad network strategy is the purchase of Bebo.com. Some industry observers say that in a best case scenario, Bebo can leverage the behavioral targeting capabilities from several of the PlatformA companies to better target certain demographics,and will be able to scale to reach a larger audience with AOL’s Instant Messenger.

While revenue from ads on social networks is likely to reach $1.6 billion this year – up from $920 million in2007 – the lion’s share of that money was from MySpace and Facebook.

“It’s hard to know what AOL is getting,” says Ryan Jacob of the Jacob Internet Fund, a firm that invests in Internet companies.

At the time the Bebo.com/AOL deal was announced inApril 2007 there was some debate in the press that AOL was overpaying for the network, given that Bebo’s traffic over the preceding three months had been relatively flat.The Silicon Alley Insider reported that many AOL senior managers were against the deal and that AOL president Randy Falco and COO Ron Grant alone pushed hard for the acquisition. AOL did not speak with Revenue regarding those issues.

In 2006, AOL’s first attempt at dipping into the social network pool (the launch of AIM Pages) was labeled by industry watchers as a misstep. The project was reportedly slow, weighed down by ineffective JavaScript and patched together from up to seven AOL systems. AOL replaced it with a simpler AIM Profiles platform within six months, aping a Facebook look. Since AOL merged AIM Profiles with its extensive Member Directory it gets about 170,000 page views a day, says comScore, however Facebook gets about 1.2 million. “As soon as it bombed, no one wanted anything to do with it,” an anonymous AOL product manager told TechCrunch.

AOL has also faced challenges on the search front. In2007 AOL went from a results page with links for copy, images, song files and other elements to a cleaner page that looked more like Google’s. Reportedly, the reasoning behind the change was that the diversity of search results was slowing down the pages from loading and that had an impact on revenue per search.

But revenue on search in the new format actually dropped to $156 million from $232 million in a previous quarter.

At the time, the top brass at Time-Warner claimed the search improvements would be good for traffic growth. But traffic in the following four months dropped with unique visitors down 0.2 percent from March to May 2008, to 30.6 million in November 2007 from (what), according to comScore.

“It’s troubling that they didn’t know what the impact of the search change would be,” Richard Greenfield, analyst at Pali Research, says. “This raises serious concerns about their ability to run the business and turn it around.”

The Transformation

From a content and functionality point of view, AOL maintains a variety of strong offerings. Its Truveo video search engine sports 100 million videos to search and is on track to total 1 billion by 2009. Its TMZ.com gossip site is on fire with 10 million visitors per month and a spin off TV show. AOL Music’s free music has an array of videos, news and concert tour information and is second only to Yahoo’s music portal.

AOL TV is the only site that hosts shows from all four of the major broadcast TV networks.

One AOL insider, who asked not to be named, says part of the problem is that AOL is unlikely to gain the same type of dominance it once enjoyed and being held to that old standard is unrealistic.

Before the dot com bubble burst in 2001, AOL’s userbase at its height was estimated to be more than 27 million people (it’s now about 10 million) all paying about $19 per month to stay connected. Its biggest coup was the much ballyhooed merger with Time-Warner in 2000. However, things quickly soured and by 2002, the combined company wrote off $99 billion. And, by 2003 the media giant had removed the”AOL” from its name and AOL head Steve Case from his chairman’s seat.

In 2006 AOL seemed to be making a comeback. It became free (it’s all ad-supported) and saw 46 percent ad-revenue growth in a single quarter, 49 percent the following quarter. Its stock seemed to spring back, too, rising as much as 40 percent in a six month period. At it’s height in 1999 AOL’s stock hit about $147. It currently hovers around $15 per share. AOL revenue in 2007 was $5.2 billion and its websites still draw 112 million visitors per month. Plus, it continues to have one of the most recognizable brand names on the Internet.

“If you just look at what AOL has accomplished in the last three years, it is amazing,” the source says. “I just don’t know how anyone can see that as failure. Most companies would kill to have achieved this level of success in online advertising.

Eastern Promises

Japan’s had it hard. After nearly a decade of stock market doldrums and an economy on the brink of disaster – just as the rest of Asia struggled too – Japan bounced back. Growth happened. Its economy is still a tad slow, but there are many industries looking way up. Online marketing is one of them.

Of Japan’s 130 million people, about 88 million are online. That’s about 68 percent of the population, according to Internet World Stats (Asia), compared with 210 million of the U.S.’s 300 million and 137 million of China’s 1.4 billion residents. Japan’s may seem like small numbers, but the momentum of online marketing and the ever-growing popularity of affiliate marketing in Japan make it a region everyone’s talking about.

Blogging, for example, in Japan is a popular way of getting products in front of the masses. Technorati Japan says that more than 85 percent of Japan’s bloggers write about companies and their products – and that over half of these bloggers have been contacted by companies to extol their wares. Japan’s Ministry of Internal Affairs and Communications says that bloggers totaled about 8 million in that country, making for an in-blog ad market of about $60 million last year.

Expansion on the Way

In the 1990s, the Japanese did not use credit cards much for online purchases, as bank transfers and postal transfers made e-commerce slow and a waiting game. But by 1999, a tech-hungry culture emerged and online spending came with it. Pay-per-performance business models were not far behind.

A leader in this space is online retailer Rakuten and its affiliates – managed through LinkShare Japan, a U.S.-led affiliate company acquired by Rakuten in 2005. Rakuten is the leader in online shopping destinations in Japan, so their penetration made them a default major player. In fact, Rakuten plans to be in about 27 more markets by 2012, according to Atsushi Kunishige, a vice president at Rakuten. He says they will use LinkShare, for example, as a way to "expand our business into the international market. We want to open a full-fledged Internet mall [abroad]."

Rakuten’s 20,000-plus online stores and merchants did about $66 million in operating profit in the second quarter of 2007. With the company traded publicly on the Japanese stock market, that’s a market capitalization of more than $5 billion.

LinkShare Japan has about 68 percent of the top-selling merchants in Japan and is the leader in customer satisfaction, according to a survey by Japan’s Affiliate Marketing Association. Atsuko Umemura, director, corporate planning, of LinkShare Japan, says that their focus on per-sales kinds of merchants has helped make them a leader. "Affiliate marketing has proven to have the best ROI for us," she says.

Late Bloomers

While the U.S. affiliate industry can trace its beginnings to the mid-1990s, the first affiliate providers in Japan didn’t start up until 1999. The U.S. market has had a few years to evolve and grow, whereas the Japanese affiliate space is still considered a "juvenile." There are more than 80 affiliate networks in Japan that cover both Web and mobile platforms. Some of the more high-profile affiliate networks include Adways, Access Trade, LinkShare Japan, Fan Communications (A8), TrafficGate, ValueCommerce and Zanox Japan.

Anthony Torres, president of affiliate marketing program management company MetaFlo Marketing, which is based in Japan, points out that the key difference between the U.S. market and the Japanese market is that the "Japanese affiliate networks can service only Japanese sites. U.S. networks such as Commission Junction operate worldwide due to English being the most popular language for Web content. So, no matter how large the Japanese affiliate industry gets, it will never be as big as the English-speaking networks," Torres says.

He also notes that Japan is still behind the curve in tracking technology and commission sophistication. For example, U.S. advertisers have more choices in how they reward affiliates. Generally, U.S. affiliate networks allow merchants to pay affiliates based on subscription status of digital content and, of course, future sales even if buyer clicks go directly to a merchant store. The U.S. networks also have more payout choices. A small CPA, plus a larger percentage of future sales generated by the lead is a method that hasn’t made it to Japanese network platforms.

Torres notes that the cost of acquisition of a typical online customer is high in Japan. "When you add in customer service and all of the accumulated costs in the sale cycle, you are left with a lower margin per sale," he says. Merchants in Japan are just not used to paying high commissions or lifetime commissions on a customer, he adds. "As the industry matures here and the ability to attract online buyers becomes more challenging, we may see online merchants less reluctant to try more aggressive commission terms." Unique to the Japanese market seems to be the cross-investment of media sites and affiliate networks. In order to increase media coverage, many networks invest in or make their own in-house media sites.

Considered the real pioneer in Japanese affiliate marketing is ValueCommerce (Yahoo Japan took a sizable stake in the company in 2005), started by a New Zealander named Tim Williams. ValueCommerce has more than 50,000 websites and blogs in its network, with about 2,000 advertisers. The company has about $43 million in annual revenue and trades on the Tokyo Stock Exchange. Goldman Sachs veteran Brian Nelson is now CEO, having come on in 2000 as COO. Nelson says that "we focused on our strengths, continued to hire great people, and launched new products and services that kept new customers, especially large brand name customers, coming in to work with us."

Consolidation is Coming

Nelson says that a large product database for shopping and their Web 2.0 applications have kept them in the No. 1 spot. It also doesn’t hurt that there is some consolidation going on in the Japan online marketing space now. "I have been telling people in the market for a long time that consolidation is coming " and it is in full swing now," Nelson says. LinkShare’s Umemura says, "It is a very saturated market right now. There is not enough room for everyone to survive."

Online marketing observers in Japan note that there are just too many networks trying to service the same advertisers. With about 1.3 million affiliates registered with the major networks and the majority of transactions driven by a group of search affiliates and "incentive media sites," there are not enough "quality" affiliates to take on all the offers out there. This means the networks are starting to look at new channels for ads.

One of those new channels is mobile, a platform that has performed very well for Japan. Because the Japanese adopted 3G standards fairly early, more than three-quarters of all cell phones in Japan have smooth Internet access. This means delivery of interactive content and ads to about 86 million cell phones (compared with 31 million in the U.S.). There are more than 48 mobile affiliate networks in Japan, with names such as Moba8, Pocket Affiliate and Smart-C. In 2005, the Japanese spent more than $3.8 billion on purchases over cell phones – 57 percent over the previous year. In addition, the CPA-based mobile affiliate provider model does much better in Japan than in the U.S., where CPC or CPM models prevail. It’s been said the culture in Japan plays a role in this since there are so many more commuters in Japan – leaving more travel time for the Japanese to experiment with their cell phones.

And with greater mobile traffic comes the opportunity to serve more Internet phone search advertising. Local search engines like Goo, Nifty and BigGlobe get a share of those eyeballs, but the leaders are Yahoo Japan (with about 63 percent of searches), Google Japan at 23 percent and about 14 percent left to split between MSN and the regional engines. Yahoo Japan is also the biggest local player in Internet auctions, Web email, mobile content and broadband.

Search Challenges

Japanese online marketing agency and search specialist Sozon sees challenges in the search marketing arena. One area in SEO that is unique to Japan culturally speaking, says Andy Radovic, VP of strategy and planning at Sozon, "is its variety in language used. Essentially, there are four methods of writing – kanji, the character system borrowed from China; hiragana, a more simplified form of kanji; katakana, the Japanese expression for foreign words; and romaji, which is the alphabet," he says. "Depending on what you intend to communicate, you may use just one or a combination of these. This greatly impacts the keyword planning stage of your SEO program. Another major difference is Japan’s reliance on Yahoo as the search engine of choice."

Radovic notes that Japanese-run companies are the leaders in services and customized solutions. "There are very few successful, market-leading international companies in the online space," he says. The international companies that operate in Japan tend to do so with a local partner. The exceptions, he says, are technology- dependent products, where some U.S. companies are in the lead, such as in search (Google) and bid management and Web analytics tools (like Omniture). "Some of the Japanese homegrown companies in the mobile, travel and insurance space are getting more sophisticated in their online marketing programs and are tracking to off-line sales," he says.

Scott Neville, COO of Sozon, says that, creatively speaking, ad messages need to really know their audience. "International ad concepts simply will not work most of the time," he says. "Text is definitely king here. More information is better and creative is often very busy with multiple propositions." He says you will need to provide as much detail as possible in your campaigns – that Japanese users will definitely read your privacy policy. He says that text email is the standard and somewhat limiting in terms of email marketing campaigns that may rely on HTML. Flash and graphic-centric sites tend not to work that well at either an advertising or a site-campaign level. He says that Flash campaigns "are not really supported by major portals for media buying and tend to be not that well received." Also, comparison campaigns are not generally used in Japan and "culturally not respectable to run."

While online ad agencies in the U.S. are slowly starting to synergize their off-line traditional ways and the brave new web of interactive display advertising, the Japanese banner ad companies are not doing too well. Two online ad agency leaders, Cyber Communications and D.A. Consortium, actually had negative growth in recent years.

The Network View

Aside from the few U.S. companies acquired or now run by Japanese companies, there are few pure U.S. players in this market and there are not likely to be more anytime soon. Observers note that U.S. networks just don’t have the Japanese-language support. While LinkShare and ValueCommerce have a bilingual platform interface, they are the only two out of dozens. One of the U.S. networks to gain a measurable foothold in Japan is DTI. They host affiliate programs for Japanese adult sites, but since most networks in Japan won’t handle porn ads, DTI has found its niche in this area. Some experts point out that one opportunity for U.S. companies would be to acquire small- to medium-sized networks and re-brand. LinkShare’s Umemura says that in Japan, U.S. companies could have come in at an earlier stage, but that "starting now from scratch would be pretty difficult whether you are a U.S. or European company. There are some smaller U.S. networks that do quite well here."

In terms of what hasn’t been popular in Japan’s affiliate programs are third-party management vendors. Currently, only a handful of the affiliate networks have management services, mainly because they are pushing their own media. However, experts say, tool and service vendors could eventually find a market in Japan. Keywords tools such as Wordtracker, recruiting tools such as Syntryx Executive Solutions and competitive keyword research tools such as the makers of KeyCompete could enter the market fairly easily.

Perhaps the best indicator that the online marketing landscape in Japan is maturing is the formation in May of 2006 of the Japan Affiliate Service Kyokai, an association that started to draw up guidelines, educate the public and monitor ethical behavior in online marketing. The six major networks in Japan founded the association when they felt that "shady affiliates" were starting to encroach on the growth of the business.

A learning curve, however, still applies. Sozon’s Radovic says that "everyone is struggling with how to market in a Web 2.0 environment. The Japanese blog and peer consumer trust are major drivers of consumer purchase. So this is an ongoing challenge." And solutions to the challenge will certainly add up to a better marketing landscape.

Ad-Supported Nation

There’s no doubt that popular websites such as video clip destination Metacafe continue to be strong players because visitors know that when they come back again and again, they can be treated to fresh content to inform them and tickle their funny bone. They can play the short clips over and over again and send the links to friends without having to pay for visiting the site. Every page of Metacafe has a small, unobtrusive ad that helps support the site financially.

This is nothing new. In a world where Google’s Ad- Sense text ads can be added to any kind of website, the idea of monetizing any and every site on the Internet is a foregone conclusion. What media companies have come to realize is that in the fragile Web environment, your popular digital destination today can be a retread tomorrow if the revenue streams become too thin. Metacafe has to compete with the 800-pound gorilla YouTube, as well as Revver, LiveLeak.com, Dailymotion and a variety of other free video sites.

When AdSense can only do so much in terms of monetization, the notion of seeing, hearing or downloading an advertisement to view free content is gaining incredible momentum. Once afraid of ad backlash before they had even thought of trading ads for content, media companies, artists and even software developers are jumping on the ad-supported bandwagon. So many different kinds of online media and marketing efforts are dipping an ad-supported toe in the water, that it begs the question: Will everything eventually be ad-supported?

The Ad Landscape

In 2007, marketers spent more than they ever had on TV, radio, print, outdoor, movie theater and Internet ads – $175 billion, according to ZenithOptimedia. That number is up 5 percent from 2005. If you add direct mail and other direct-response-type ads into the mix, that’s $269 billion. Also in 2007, companies spent $13 billion on Internet classified, search and display ads, and that is expected to double to $26 billion by 2011.

“In mass media history and as media fragments, the ad model will continue to be popular for eons,” says Jack Smith, senior vice president of strategy at 24/7 Real Media. “Consumers really like free content – they will pay for HBO, but mostly they like free stuff. Bigger media is always ready to play. There’s plenty of supply right now, and demand will have to catch up.” 24/7 Real Media recently integrated its search marketing efforts with Baidu.com, China’s most popular search engine. It specializes in targeted Web advertising globally, with a strong mobile capability.

Smith says that as emerging countries keep seeing an increase in Web users, there will be ad-supported Web services opportunities, especially in places like China, where PCs are not pervasive in the home. Microsoft has made a bid to enter that game by introducing two ad-supported Web services – its popular Windows Live and Office Live. The applications and surrounding services are available from the Web, without having to download the applications themselves.

Microsoft’s plan has both free and paid versions of Windows Live and Office Live with ad-supported basic services. The company then tries to sell add-on services. The ads are served up through its recently developed AdCenter advertising system. Some experts speculate that a completely ad-supported Windows-based operating system that would live on the Web and not on your computer is not that far off from becoming a reality.

In the ad-supported software category, it’s been argued that the first wholesale successes were email-based programs – such as Hotmail and Gmail – that used ads to completely cover the cost of the free, Web-based programs where none of the information, email files or address books are housed on your computer. In the world of systems management, even, there are companies such as Spiceworks, which is a free, ad-supported network monitoring software for network management for small businesses.

“But small businesses should read the fine print,” says Jay Hallberg, co-founder and vice president of marketing at Spiceworks. “The free use of the application is usually a hook to get people to buy,” adding that these are usually “sales gimmicks” and not truly free applications.

Big companies are also experimenting with ads for content. AT&T is testing its “1-800-YellowPages” service in Bakersfield, Calif., Oklahoma City and Columbus, Ohio. It provides free directory assistance for callers who listen to short audio ads. The ads are targeted by the category of the number being asked for. Its technology provider Apptera will do the targeting and ad serving.

In the video category, viewers have already said they will definitely watch an ad to get to the good stuff. A recent survey by the Associated Press and AOL said that 71 percent prefer to watch an ad for free video. Only 23 percent said they would pay a fee for ad-free video. Currently though, demand for ad-supported video has not provided enough inventory. “As we get more and more people finding video through AOL, we’ll create more inventory through that process,” VP of AOL Video, Fred McIntyre, said to ClickZ News. YouTube is still testing small ad bricks that scroll or pop up over the lower portion of the video window.

Ad Overload?

Worrisome to some big media marketers is that the barrier to creating and posting ad-supported Web content is so low, the ensuing glut will bring down online ad rates and spoil profit margins, leading to the demise of struggling Web ventures. “Free media is a good thing,” offers Dave Morgan, chairman of target marketing firm TACODA Systems. “With off-line media, distribution is expensive – think papers and trucks and postal costs. ” It was a nice model for the media companies, but not for the consumers. Web and Internet distribution of ad-supported publishing means much more free content and more diversity of content for many more people. That is good, not bad.”

Music companies and ventures that offer digital music and ringtones have discovered the benefit of ad-supported freebies. MySpace, for example, as it starts to lose market share, is pushing its music-sharing deals and shifting to free, ad-supported downloads in conjunction with more than a few major recording labels.

Other major music companies that launched ad-supported streaming music recently include Sony BMG, Warner Music Group and EMI. All three use San Francisco’s imeem as their streaming service, which plans to share revenue with the labels. “The music industry needs big ideas because small incremental improvements won’t change anything. For example, nobody has tried some of the crazy revenue shares we are trying on imeem,” says Dalton Caldwell, founder and CEO of imeem.

File-sharing companies that traffic in a good deal of music are trying to monetize their networks by running ad-supported versions. Atlanta company Intent Mediaworks says that 60 percent of its users are willing to endure pop-up ads. Intent Mediaworks has technology that adds advertising to streaming music on file-sharing programs. Other companies such as Qtrax and Nettwerk also aid in the streaming of ad-supported music downloads.

Some critical opinions doubt the ad-supported model will pay for website operations, let alone see profits. “I have yet to see the model that makes me feel good they’ll get enough money out of advertising. The question is, can they get enough mass to lower the royalty?” says David Card, a senior analyst at JupiterResearch. Allan Klepfisz, CEO of Qtrax, says the challenge is to “demonstrate that ad-supported peer-to-peer is lucrative enough that everyone is going to be happy. The real issue for the industry is that right now there are all these people paying nothing for music.”

The artists themselves are getting in the game, not to be left out of the loop by their labels. RCRD LBL, a network of ad-supported online labels, deals in independent bands unaffiliated with the big record labels. Their downloaded MP3s and streaming music both carry ads. Like David Bowie before him, who was early in his use of interactivity and the Web in the ’90s, rock star Peter Gabriel recently launched We7, a free ad-supported music download service. Ads are sent to users based on demographic information they provide on the site that allows for better targeting by advertisers. The ads are heard at the beginning of songs and albums.

Ads on the Move

Mobile marketers are also showing a huge attraction to an ad-supported model. Avot Media launched its mV mobile video service that promises better video quality in conjunction with viewing an ad. Rhythm NewMedia cut a deal with Vodafone in Spain to send ad-supported video to its more than 4 million handset subscribers. Interspot has an SMS service that will provide free text messaging. The text messages come with ads that can be geo-targeted. Mobile coupons will also be offered as part of the service. Start-up Blyk will offer free calling in European countries by listening to ads first. Though Finland-based, the service will start in Britain and spread out to other European countries from there.

CBS television said it will launch a high-speed wireless network in midtown Manhattan that can be connected to by cell phones, laptops and other personal devices by going through the CBS ad-supported landing page. The program also allows voice over the Internet (VoIP) calls. The ad-supported page will include content such as breaking local news and national news. Broadband hotspot platform AnchorFree is just one of the wireless providers that are offering free broadband connections by viewing an ad.

Not to be excluded, the world of gaming upgrades to a mobile platform through Hovr, which is an ad-supported free mobile gaming community. Through the service, consumer websites, mobile portals and carriers can offer users hundreds of free mobile games. The games can be wrapped around a specific brand and still carry Hovr’s ads.

MySpace isn’t going to be left out of the mobile surge either. It has launched a free, ad-supported cell-phone-ready version as its parent, News Corp., rolls out mobile versions of FoxSports.com, gaming site IGN, AskMen and local TV affiliates – most in ad-supported environments.

Instead of being annoyed by the flood of advertising rising from the ad-supported mobile programs, people are proving to have an open mind. “If you ask mobile users if they want ads on phones, 78 percent will say, ‘Not really.’ But if the ad comes with something for free, the survey result flips the other way,” says Brian Suthoff, senior director of business development at Third Screen Media.

Also in gaming, video gaming network G4 is testing video ads in their games. The video ads are delivered by YuMe Networks, specializing in IP-based video ads. YuMe executives have said that the company expects to do more business as user-targeted video ads employed by sites such as BitTorrent sign more “deals with publishers that want to experiment with ad-supported downloads.”

Even in the off-line world, seeing an ad can lead to your daily coffee fix. A company in Japan markets an ad-supported coffee vending machine. If the buyer watches a 30-second ad, he gets a free cup of joe. The cup it comes in has an ad as well.

24/7 Real Media’s Smith believes “we will better understand the consumer with more ad-supported companies.” He says the “gold standard is seeing the measurement that comes in that environment. We will value it more.”

As the final piece of evidence that the ad-supported model may indeed be ubiquitous, Freeload Press has made a deal to send out ad-supported electronic textbooks to students at 38 universities. Perhaps the age of the highlighter pen is truly over.

The Desire to Acquire

The new geography features auction-based ad exchanges and conglomerated companies with divisions that buy, sell and distribute ads: something that would have been unthinkable a decade ago.

The emergence of these new entities with intertwined relationships has the potential to streamline the media marketplace and drive costs down and return on investment up. Consolidation will likely enable the biggest players to increase their market share while also growing the demand for independent agencies and networks that operate outside of their reach.

Fast and Furious

To recap: In a shorter span than is required to complete the NHL playoffs, Google gobbled up DoubleClick, Yahoo lassoed RightMedia, Microsoft acquired aQuantive, WPP Group won 24/7 Real Media and AOL absorbed Ad:Tech AG.

LinkShare, a subsidiary of Internet services company Rakuten, purchased lead generation company Traffic Strategies in June. Rival Commission Junction is owned by potential acquisition target ValueClick, and Performics is a property of Google’s DoubleClick.

The acquisition frenzy has made tracking industry relationships as challenging as keeping up with the latest Hollywood romances and legal tangles. For the first time the largest media companies own ad networks and/or agencies, one of the largest agencies owns a network, plus countless smaller players also work on both the buy and sell side. (To untangle the web, see page 49 of the July/August 2007 issue.)

Consolidation, shakeout, maturation of the market: Whatever you want to call it, investment banker John Doyle of Peachtree Media Advisors says there are precedents in TV and print industries for large media companies doing a “land grab” to acquire related businesses. “It’s like getting a bigger bucket to stand under a waterfall,” he says. Advertisers are expected to greatly increase their online spend during the next few years, so it is not surprising that the top media companies attempt to expand their reach by buying companies offering related services, he says. Doyle expects the consolidation to continue as it adds value for buyers, and more midsize companies will likely want to increase their heft by scooping up smaller competitors. However, after the biggest deals are done, the largest players are unlikely to buy smaller shops, as it “won’t move the needle” in increasing their market share, according to Doyle.

Questions of Perception

The distinction between interactive/ creative agencies, advertising networks and media companies began to dissolve through smaller acquisitions during the past few years, but now the potential for conflicts of interest are as clear as they are abundant. That agencies, ad networks and publishers are owned by a single organization has many in the industry uncomfortable. “Most of the rules of online advertising are broken …” says Russ Mann, CEO of search marketing company SEMDirector.

By comparison, how would investors feel if one entity ran the stock market and owned an analyst firm and a brokerage? Not too comfortable, most agree. Not surprisingly, in May, the Federal Trade Commission began an antitrust investigation of Google’s purchase of DoubleClick to identify aspects of the deal that could limit competition.

Publishers might be reticent to partner with companies owned by a competitor, according to Dana Ghavami, CEO of CheckM8, which sells software to manage rich media campaigns. For example, ad networks could prioritize placement based on the needs of their corporate family of publishers. “My worry – if I am a media company such as Viacom or Fox [which have used DoubleClick’s ad network] – is who is looking after my interest?” says Ghavami.

Interactive agencies with ties to networks and media companies have the most at risk as they are likely to undergo the most scrutiny to remove any doubts that they are putting clients first. Trusting agencies to buy “in-house” is akin to “asking students to grade their own tests,” according to John Ardis, vice president of corporate strategy at ad network ValueClick.

Advertisers looking to optimize the return on investment from their media buys will want assurances that purchasing decisions aren’t compromised by a need to unload excess inventory from a sister company, CheckM8’s Ghavami says. That’s not a comfortable discussion for those sitting on either side of the table. These “umbrella” companies will have to institute internal safeguards to prevent the possibility or even the appearance that their actions are being influenced by other divisions of the company.

Advertisers may be unwilling to place their confidential and sacrosanct data about campaign performance in the hands of companies with divisions that are their direct competitors. For example, a liquor company might hesitate before signing on with a network that is part of the same company as an agency that represents a competing brand (see BT story on page 52 of the July/August 2007 issue).

Similarly, a media giant may not want its top advertisers’ performance data to be in the hands of a competing company. “Everyone has seen what Google is capable of when they have too much control – they start setting the rules,” says Ghavami. Giving the enemy the intelligence used to form your battle plan isn’t a strategy for success.

The Upside of Acquisitions

While organizations that span multiple aspects of advertising increase concerns about conflicts of interest, they should be able to increase efficiency and lower the cost of buying and selling. In theory, agencies would be able to buy from sister networks without the need for the sometimes lengthy approval process that slows insertion orders. Also, ad networks and their subsidiaries could combine campaign performance data with real-time analytics from their publisher properties with an ease and granularity not possible today.

“Microsoft [as one example] would be able to create bundled solutions that are more cost-effective and provide more value at the same price,” says Dema Zlotin, vice president of strategic services at SEMDirector. Advertisers would save time by working with one-stop shops and could better adjust campaigns by getting real-time site-by-site performance to complement their networkwide data.

Agencies, however, may have to rethink their fee structure if the purchase is made from elsewhere within the company. Charging a hefty commission when buying from its own network and properties won’t fly with some advertisers. Agencies that are part of other entities will have to work harder now to prove that their intellectual capital is worth paying the premium, according to ValueClick’s Ardis.

Greg Stuart, the former CEO of the Internet Advertising Bureau and co-author of the book, What Sticks, says online advertising was ripe for change. The buying and selling of interactive ads is costly and inefficient, according to Stuart, and consolidation and greater transparency will benefit advertisers. “Shame on the industry for letting it go for so long,” he says. “I am appalled at some of the things that go on,” says Stuart, stating that the failure rate (47 percent) of ad campaigns reflects poor performance by agencies.

While data sharing between organizations can simplify more “routine” buys, advertisers will continue to work with agencies for more complex purchases. The potential for conflict of interest could prove a boon to independent agencies. Some advertisers might be inclined to work with smaller but experienced shops whose allegiance can’t be questioned.

Though purchases through a single company might be more efficient, advertisers happy with an agency could go with networks from competitors, according to SEMDirector’s Mann. “Online is still best-of-breed world,” he says, adding that the various divisions of a one-stop shop might not be the best choice individually.

Rise of the Ad Exchanges

In this consolidated online environment, advertising exchanges that use auction bidding to sell ads and directly connect advertisers and publishers will see increased interest because of their transparency. Exchanges enable advertisers (either companies or networks working on their behalf) to bid for type of ad and the demographic that they would like to reach. Publishers set a minimum price for accepting the ads, and the exchange automatically matches buyer and seller.

Ad exchanges recently changing hands include Right Media, which was acquired by Yahoo, which previously owned 20 percent of the company, and an exchange being developed by DoubleClick that will become part of Google. Microsoft is said to be developing its own exchange, and independent exchanges include AdECN; Turn, Inc.; and ContextWeb.

Bill Urschel, the CEO of AdECN, says exchanges are differentiated from advertising networks because of the auction pricing, the transparency, and because the exchanges guarantee payment to the publishers. “[Exchanges] are taken from the stock exchange model,” says Urschel. AdECN’s exchange has signed up 28 ad networks since it launched in March of this year.

This transparency will attract publishers concerned about intertwined relationships since the services are (at least in theory) neutral to the source of the ad. While publishers and advertisers who compete with Google, Yahoo, etc., may not want to hire their agencies or networks, the exchanges can provide access to their sites.

Because of the negotiations involved in securing media buys, many large publishers such as The New York Times and The Washington Post often have 20 percent of their ad inventory unsold, according to CheckM8’s Ghavami. “Remnant inventory will be marketplace-driven,” he says.

Once they gain experience in using an exchange, some publishers and advertisers may bypass the ad networks and trade directly through the exchanges themselves. Ghavami estimates that 70 percent or more of major publishers’ inventories could be sold directly by exchanges. Ad exchanges will most directly compete with remnant networks such as Blue Lithium and Traffic Marketplace.

Exchanges may accelerate the shakeout of the weaker advertising networks, but they are unlikely to dominate the larger networks. Exchanges make sense for large publishers who have considerable unsold inventory, but publishers are likely to continue to get their highest CPMs through traditional sales channels.

Just as online stock trading didn’t cause brokerages to become extinct, the automated selling advertising is unlikely to replace networks. “There is a sliver of people who will be comfortable with the auction model, so auctions will have a place,” says ValueClick’s Ardis, whose company does not participate in an ad exchange, “but they won’t set the industry on its ear.”

The New Landscape

The current wave of industry consolidation will likely continue, enabling larger companies to become more powerful while at the same time providing opportunity for third-party auditing companies.

Google, Microsoft, Yahoo and Time Warner and their affiliated companies will have their hands in each step of the marketing chain, enabling them to increase the revenue generated from each client. The potential promise for advertisers is that these companies will be able to better target customers and increase by matching demographic and target data with real-time campaign analytics.

“The move away from AdSense to networks that are better at interpreting content” and matching it with advertisers makes sense, according to author Stuart. Advertisers would have greater control in distributing content to their target audience, such as being able to launch a campaign that is instantly delivered to a specific demographic (e.g., males between 18 and 35).

Though many of the sizable agencies and networks have been swallowed, the consolidation will likely continue. Networks such as ValueClick and smaller competitors could also be acquired. But analytics firms such as Visual Sciences (formerly WebSideStory) and Omniture are likely to be at the top of the media moguls’ shopping lists because of the additional insight they provide in maximizing revenue, according to Stuart.

Media companies are also likely to continue acquiring search and mobile properties (such as the recent acquisitions of Third Screen Media by AOL and ScreenTonic by Microsoft) during this continued consolidation, according to AdECN’s Urschel.

Advertisers and publishers may pressure multiservice companies to allow third-party auditing and oversight to ensure that ad buying, selling and placement are all completed without prejudice. Independent auditing firms could verify transactions between related organizations, or advertisers could request that purchases be made from outside networks and publishers. Industry groups will likely establish voluntarily privacy rules or codes of conduct to limit potential conflicts.

Exactly how companies will adapt with new services and systems to increase the efficiency of online advertising is uncertain today. But we can be sure that now that the rules have been changed, there is no going back.

John Gartner is a Portland, Ore.-based freelance writer who contributes to Wired News, Inc., MarketingShift and is the Editor of Matter-mag.com.

Video Ad Explosion

In early August, Foster’s Beer announced two changes. First, they’ll no longer try to be “Australian for Beer” and, second, they’re moving all their television ad spending online.

Although the decision only affects a $5 million ad budget, it’s a bellwether: Companies are flocking to online video ads as the way to reach customers.

Recent reports claim advertisers will spend $74 billion to buy airtime on TV in the U.S. for 2006. The online ad spend is set to reach $26 billion or 9% of the total US market.

“This [online video ads] could very well become the dominant form of online advertising … probably within the next 18 to 24 months,” says Bob Hanna, senior vice president of sales at Burst Media, which offers a network of publishers for advertisers.

A recent local online advertising report by market researcher Borrell Associates expects local video advertising to become a trackable category in 2007. And the biggest online ad opportunities currently revolve around real estate and automotive. Combined, these two categories comprise slightly more than one-third of all local online advertising, which is expected to grow 31.6 percent to a $7.7 billion category in 2007.

For its new online video ad push, Foster’s Beer is on Heavy.com, the online video site geared toward young males. Prior to Heavy content, which ranges from videos of scantily clad young women to spoofs on America’s Funniest Home Videos, you can find video ads for candy, beer and cars. But the edgier and more risque videos run without pre-roll ads.

Online Is Not TV

Heavy’s motto, “Because TV Sucks,” is instructive. For five years, it has been said that online content is constitutionally different from television: Advertisers will have to change their approach to creating video ads. A panel of online advertising, media and Web executives at the OMMA conference in New York in September agreed the most effective online video ads should be 15 seconds in length or less. The panel also promoted the idea of creating spots specifically for the Internet and digital media rather than repurposing existing television advertisements. That way the ads can be developed to enable consumers to click through to gain additional product information.

Advertisers may also have to be more open about where these ads end up as demand increases.

McKinsey Quarterly, an online business journal from consultant group McKinsey & Co., recently determined that in 2005, 80 percent of online video ad inventory was being used.

“The maximum supply of video ads is currently about $600 million a year – far less than future demand, which we expect to reach $1.4 billion to $3.2 billion in 2007,” the article “A Reality Check for Online Advertising” states.

Still, Randy Kilgore, chief revenue officer for Tremor Network, says, “The juggernaut called online video advertising is here to stay.”

And content providers are rising to the challenge. In August, Google, Viacom and YouTube made announcements about video advertising solutions. Two months later, Google purchased the less-than-two-year-old YouTube for a whopping $1.65 billion.

YouTube, which shows about 100 million videos daily, won’t disclose its advertising fees for visible ad spots. Google, at the end of June, also started testing an advertising model that features some video ads in a sponsored section. Google would also not disclose the fee for those video ads.

Not only are publishers opening up space, but technology solutions are also increasing; for example, Burst Media is now facilitating streaming video within banner ads, and Klipmart, a video ad solution heralded for interesting innovations in video ads for movies, was acquired by DoubleClick in June. DoubleClick is also the parent company of affiliate network Performics. EyeWonder and e-line Technologies are also in the space.

Despite television screens getting larger and flatter, viewers are enticed by the flexibility of on-demand viewing that the Internet enables.

One source for online video placement is on television network sites. Fox is streaming more than 40 episodes of prime-time shows online, with Toyota as the sole sponsor, and other networks are following suit.

That’s because most Internet users have watched online video; 25 percent watch regularly, at least once a week. Users regularly see online video ads and, according to the Online Publishers Association, 44 percent have taken some action after viewing an online video ad. Much of this reach comes during times when people wouldn’t normally be watching TV, given online video’s growing domination of the day-part audience.

And broadening the marketing window into daytime hours can be put to profound use. Thursday-night TV is no longer the last, best opportunity to influence consumers going into the weekend – that title is now held by the Internet on Friday mornings and afternoons.

Within these online shows, pre-roll, mid-roll and post-roll advertising is offered: just like on television. For instance, Heavy.com runs a static ad for Virgin Mobile for five seconds before one of their “Behind The Music That Sucks” shorts. There are also longer, more elaborate ads for Nike and Coors with production quality that is indistinguishable from television ads – and these ads are arguably as good as the content they precede.

Viewers are sometimes unable to fast-forward through “pre-roll” ads. Mid-roll ads crop up in the middle of a video. This format of advertisement would not be practical in a video short but makes sense in a streamed TV show. And, because content is limited, some companies offer ads at the end of videos – post-roll.

New Opportunities

One benefit of streaming prime-time shows and live sporting events is ad opportunities go to marketers who would traditionally advertise with these shows as well as new advertisers who could not afford network television ads. But online video, except in cases like Fox’s shows or news shows like Evening News with Katie Couric (which is being streamed online), doesn’t look like television and should not be treated like television by advertisers.

The bread and butter of sites like AtomFilms, Heavy and Yahoo Video is short video. Most video online is less than five minutes long, and advertisers can’t run one-minute commercials they’ve shot for television.

Companies who have a difficult time understanding that are “trying to apply an old media solution to new media,” says Forrester senior analyst Brian Haven. “In the long run, that’s just not going to be a very successful way to approach online advertising.”

DoubleClick’s vice president of rich media, Ari Paparo, notes that for online video ads, less is more. “You aren’t going to be able to repurpose TV ads – a 30-second ad doesn’t work online. Fifteen seconds is the maximum for a single ad unit.” Paparo suggests a new model: a short preroll spot of three seconds and then the content, then a long post-roll spot. He also believes interactive video ads show real promise, where you can telescope when it’s over to find out more – like for a high-involvement product like a car.

But companies who have strong-roots advertising on television, direct marketing companies, may have other challenges. Edith Bellinghausen, vice president of new media of Razor & Tie, an entertainment company that includes a record label and direct marketing operations, is watching where online video advertising is going but says the company is not ready to rush in.

Razor & Tie will try online video marketing soon “because we have to, but we’ll never move away from TV altogether.” The placement of their spots depends on the product; their children’s music CDs might, for instance, be advertised on Nickelodeon. The documentary Biggie and Tupac was advertised on MTV and VH1, among other cable stations. But sometimes a television campaign is more cost-effective and focused when it’s run on local cable stations.

Potentially, online video advertising could work in a similar way, for focused campaigns for companies with lower marketing budgets.

Bellinghausen notes that YouTube already has videos posted by parents at shows for Razor & Tie’s Club KIDZ BOP. But when considering their children’s CD products, she points out another question facing advertisers who are looking to jump on the user-generated content bandwagon: Are advertisers protected from ad placement next to undesirable content?

“We’re intensely focused on them not ending up somewhere they don’t want to be,” insists Tacoda’s CEO Curt Viebranz. Tacoda sells ad networks based on behavioral segments and YouTube is now in their network. But Viebranz notes, “If you begin to drill down into YouTube’s site, we’re not there. We’re where you enter the site.” Because advertisers are sensitive to being placed near questionable content, Tacoda errs on the side of caution by placing ads near the home page, rather than in the murky underbelly of YouTube’s offerings.

The anarchic nature of user-generated video sites means that brands will have to deal with some uncertainty about placement. “Brands have to think a little more openly about what they’re associated with,” urges Haven. He also believes that online video advertising will cause a philosophical shift in marketers’ approaches: “What YouTube is really doing is issuing a challenge to marketers. You’re not going to just put an ad up on our site, you’re going to have to participate in our community and you’re going to have to be creative about how you do this.”

The shift will force marketers to think more like content providers and will ultimately result in more entertaining creative. The interactive, participatory aspect of the Internet was long held as the reason that television-like ads would not work online. But consumer-generated sites have enabled the ultimate level of participation: consumer-generated ads.

Get Users Involved

While the Coca-Cola/Mentos viral ad on Revver is a great example of a user-generated video that was eventually purchased by Mentos and accepted into their advertising arsenal, companies can go one step further thanks to CurrentTV. CurrentTV, the Al Gore-backed San Francisco-based company that allows users to submit content online for possible broadcast on television, also offers consumers the opportunity to create ads for L’Oreal, Sony Electronics and Toyota.

The first ad to be accepted for television was created by a 16- year-old and sanctioned by Sony. Viewers can rate the ads, which are posted on the site after being thoroughly screened. If the ad makes it to the network, the creator gets $1,000 and is given a licensing agreement. And if the ad makes it to cable or satellite television, the viewer makes $5,000 – for network television it goes up to $10,000.

CurrentTV’s president of sales and marketing, Anne Zehren, says it seems counterintuitive that major brands are the ones participating in this experiment. “At first, people thought the larger brands would have the most resistance because they’d have to give up control as brand guardians. But their marketing departments are now brand hosts; they’re craving innovation and the smart ones want to take a risk, as long as it’s not a free-for-all.” Zehren emphasizes CurrentTV’s commitment to making quality content, with greater control than one finds on other user-produced video sites.

Of course, users have been creating (unsolicited) video ads for companies and posting them on YouTube but most have yet to be formally embraced by the marketing departments of those companies. At the same time, it is certain that brands participating on YouTube’s brand channels will host their own contests to create video ads now that YouTube has announced the creation of brand channels as a way to monetize the site. Initially, sites like YouTube attracted movie advertisements – streaming trailers on such sites makes sense.

And short-content format is ideal for music videos: Warner Bros. has announced that they will promote Paris Hilton’s music debut on YouTube. But YouTube also seems to be a draw for small businesses, companies that would never have the budget for a television campaign.

Several months ago, Allison Margolin, an attractive, young, Beverly Hills-based criminal defense attorney, posted a video advertising her services on YouTube which voiced her disagreement with marijuana laws. The question is, how many people watched the ad before a Los Angeles Times article about her in August mentioned it?

Viral video is also a big deal. Lured by the prospect of reaching millions of consumers without also spending millions of dollars for television airtime or space in print media, companies have shifted more ad dollars to the Net. Video viral marketing has expanded from a negligible piece of the advertising pie to a $100 million to $150 million industry, researchers estimate.

“We’ve recently engaged top talent to help us build viral videos for brand awareness during the off-season, produce training videos to help our online partners to sell our product and to create product videos that sell the features and benefits of TaxBrain. All of these videos are intended primarily for online consumption,” Todd Taylor, manager of business development for TaxBrain, says.

Measuring Up

Right now one can only guess how many people are watching online, especially compared with the number of customers reached with television ads. There are two unresolved issues: online video advertising’s reach and the ability to track it.

“What’s missing right now is what is the return on investment and all the technology surrounding this. How are we sure it’s been placed contextually?” asks Forrester’s Haven.

But Tremor’s Kilgore, the former vice president for Dow Jones Online, disagrees and says, “Audience accountability is a significant advantage for marketers when they consider online video advertising.”

He claims that advertisers can count actual viewers of video when they are actively watching – not getting up for a snack. The other advantages are the ability to track completion rates and geographic data, frequency and targeting based on historical behavior and optimization of spots based on real-time effectiveness – where there’s no need to wait for the focus group. Also, with companion units, online video advertising can offer immediate user interaction. Advertisers can choose geotargeting, demo targeting, behavioral targeting, day-parting, etc.

Hotspotting

Five years ago, there was speculation that hotspotting would be the way to monetize online video advertisements. That is, brands would partner with content creators for product placement in online videos. Viewers could click on items on a counter or an actor’s sweater and be whisked off to a site to purchase it. Hotspotting is finally here, but not widely adopted yet. But if a viewer were watching some cartoons online, would he really click on the Coors ad to get a six-pack of beer delivered to his house? Hotspotting only works for particular products.

Hotspotting did make sense, however, to French clothing company Shai. Their online porn video ads have caused a minor sensation, but not necessarily more customers. Viewers can click on the clothes the actors are wearing as part of an interactive catalog. Before they take them off, that is.

With improved measurement capabilities, big brands jumping on the bandwagon and cheaper costs, video and video advertising are becoming a staple of doing business.

DIANE ANDERSON is a senior editor at Yoga Journal. She previously worked for the Industry Standard, Brandweek, HotWired and Wired News. She lives in San Francisco.

KATHI BLACK is a professor of philosophy (ethics) at The University of San Francisco. She was previously an online entertainment reporter and senior researcher at the Industry Standard.

The Mobile Marketing Monster

Tony Phillip will tell you the exact moment he knew that mobile marketing and advertising – predominantly via cell phones – had crossed over into the mainstream.

It was when American Idol, the extremely popular TV singing contest, allowed viewers to vote for their favorite singer via text message – and more than 50 million did in 2005 versus 21 million in 2004, according to the CTIA – The Wireless Association. Also in 2004, 46 percent of text messaging votes for a new pop star sent in was from wireless subscribers using text messaging for the first time, CTIA figures state.

Less than a year before, UpSNAP had a deal with ABC to allow text-message voting during the Academy Awards. It was basically a disaster, according to UpSNAP CEO Phillip, who notes, “If viewers didn’t have text messaging, they weren’t going to use it.”

What a difference a year makes. There is little doubt that mobile marketing – that including text-message ads displayed with a mobile search or via opt-in, coupons sent via cell phone, video and display ads interwoven with downloads or streaming from cell phones or other handheld device connected to the Internet – has arrived.

More major brands, agencies and start-up companies are putting their energy and dollars into exclusive campaigns and technologies aimed at mobile marketing, and for some it is already big, big business.

As people in the U.S. become more reliant on their cell phones, mobile services such as mobile search and Web surfing will become commonplace. Consider the following facts according to The Pew Internet & American Life Project:

52 percent of adults have their cell phones turned on 24/7.
30 percent of adults say they want to Web-surf from their cell phones.
47 percent say that mobile maps and driving directions are a must on the next phones they plan to purchase.

MOBILE IS GLOBAL

Mobile marketing adoption is shooting through the roof. Worldwide mobile ad spending is expected to top $870 million by the end of this year, according to Informa Telecoms & Media. Meanwhile, The Shosteck Group predicts mobile marketing will be worth $10 billion in the U.S. by 2010.

Furthermore, 43 percent of U.S. marketers are using or about to use mobile marketing in the next 12 months, according to Forrester Research. And nearly 90 percent of major brands plan to market to mobile phones by 2008, according to a survey by Airwide Solutions.

“It’s happening faster than anyone expected,” Laura Marriott, executive director of the Mobile Marketing Association (MMA), says. “2006 is certainly a year that more and more brands are getting involved but so much more can happen. Response rates from mobile are very high. There’s great engagement from the consumer.”

That sounds like a giant wellspring ready to gush, but the U.S. is not even in the lead here. Most of Europe is slightly ahead in the adoption of text messaging because of the availability of cheaper cell phones. In March, mobile phone users in Britain sent more text messages than they ever had before – 3.19 billion or about 103 million per day. That’s a region with only about 60 million people in it.

In Japan, NTT DoCoMo recently pulled in $2.5 billion in the first quarter of 2006 in non-voice revenue. About 35 billion text messages are sent each month in China, where about 426 million people have cell phones – that’s like giving one and a half phones to every person in the U.S.

Pay per text has also taken hold in the U.K., where users can request a text message of a phone number when calling directory assistance or have directory assistance send the number automatically. Phone numbers and special-offer text ads are sent when directory assistance is asked for a keyword such as “travel.”

“[Mobile marketing] can be a big cash cow for any company,” Holger Kamin, country manager USA for Germany-based Zanox, a multichannel commerce provider, says.

The ease with which so much of the world outside the U.S. has embraced handsets to communicate in ways other than phone calls means the choice for advertisers is simply how to reach out to them. Of cell phone functions available, the surprising choice for marketers so far has been the simple text message.

“We always go back to what the consumer knows,” says Marriott of the MMA, “and what is already available in handsets.” She says text messaging has made a pretty natural rise to the top, but also wants to make sure “we don’t get ahead of ourselves in technology.”

While Americans may own 200 million cell phones, marketers wonder if all these people are using even the simple functions on their phones. While 75 percent of U.S. teens (age 15 to 17) own a cell phone, according to eMarketer, only 36 percent ever send or receive a text message. These conflicting statistics are what may be holding back the really big advertisers from designing campaigns for mobile en masse.

It was only two years ago the CTIA – The Wireless Association introduced cell phone short codes, which are 5-digit numbers that text-messagers use to send their message instead of a standard 10- digit phone number. The short codes were designed to help marketers reach out to brand customers via mobile phones. Anheuser-Busch, Dove soap and Daimler-Chrysler are just a few of the major brands that ran successful short code campaigns to get customer feedback via cell phones.

CAMPAIGNS TO GO

That will not stop the innumerable mobile ad companies from vying for your attention.

MobileLime CEO Bob Wesley, for example, thinks of it as developing a one-to-one relationship. “This is all viral now,” he says. So far MobileLime has used radio ads to get opt-ins and serve coupons to cell phones. It is not only paving the way for m-commerce (paying for an item through your cell phone), but gathers rich data for the advertisers, such as if recipients opened the coupon, when they did, what they used it for and for how much, Wesley says.

Currently, some companies such as Bango enable payment via mobile phones through a deal with PayPal, but the selling merchant must sign up for Bango’s service to allow the capability. Other companies such as JumpTap aim at launching a mobile search index to challenge Google. Carriers join the search index and online auction platform and serve it to their customers.

Of course, in the online world, coupons are big business and they are not being left behind in the mobile arena. Mobile coupons are making great inroads to the electronic platform because of the “sheer inefficiency of paper coupons,” says Peter Sealey, CEO of consulting firm The Sausalito Group. He says with redemption rates for paper coupons at only 3 percent, advertisers realize they save more cash going electronic. The marketer pays only when someone prints a coupon, eliminating distribution costs. “Marketers after the 2000 dot-com crash said, ‘Thank God that’s over,'” Sealy says. “We can go back to TV and radio.” Now, mainstream marketers are embracing the full bloom of mobile marketing again, he adds.

Sealey predicts that within five years, the paper coupon will be as good as dead. Search giant Google recently said it would start to offer local coupons in conjunction with using Google Maps. Online coupons in general have already taken hold with as much as 50 percent of online coupons being redeemed, according to some estimates. Companies such as CoolSaving, Coupons, Inc. and Zixxo do well marketing coupons over the Internet. Sealey says as more marketers accept electronic devices as a viable vehicle, the better adoption rates will get.

Some mainstream advertisers and companies are already rolling out robust campaigns to cell phones. Strawberry music stores on the East Coast are text-messaging promotions and deals to mobile handset users who sign up to receive alerts and geographic-based special deals. While Strawberry has relatively few stores in its network, Starbucks with thousands of locations has run a scavenger-hunt-style loyalty promotion where cell phone users signed up to get questions via text messages, the solving of which could send five chosen players on a vacation to Costa Rica.

Recently named No. 2 carmaker Toyota spent $10 million on a mobile campaign targeting Hispanic cell phone owners to watch funny hidden camera clips on their phones featuring the 2007 Camry. And Google is undertaking significant testing for its own mobile ads on its mobile search results and to launch a version of AdWords for mobile. Google is testing the search ad in the U.S., the U.K. and Germany.

Popular eateries McDonald’s and Subway are also getting their feet wet by offering some promotions via mobile phones. Even Net vet AOL has had its Mobile Search Services up since December 2005 with search, a shopping comparison module and a Yellow Pages feature.

MOBILE ON TARGET

Firms with mobile technology know-how are not the only ones seeking to cash in on mobile marketing. AirG, for example, sets up social networks on its platform and has found great success in sending mobile promotions to its base of users. They worked five years to get 5 million users and in the last eight months that has bounded up to 10 million. AirG’s display ads and ad-sponsored games for handsets capture detailed demographics and consistently get a more than 28 percent response rate. Receiving the ads can be turned off and on at will and are all opt-in.

Along the way, AirG discovered they had a significant Hispanic demographic, so they customize certain promotions to target only those groups. Frederick Ghahramani, AirG co-founder, says he can find the Latino males in New York City who are single and send only them an appropriate promotion or coupon electronically.

“What’s been lacking isn’t the enthusiasm [for mobile marketing],” he says, “but the ability to target the active base of customers.” They share personal information with each other and find like-minded people. AirG brings relevant targeting to the table, he says, noting, “The industry has had the ambition but now is waking up.”

There is nearly universal agreement that the key element for the continued success of mobile marketing is targeting. Third Screen, the largest U.S. mobile ad network, got the jump on everyone when it started four years ago and has only recently said that targeting mobile ads has finally reached a kind of maturity. The company has stated that the next achievements in mobile marketing will be privacy standards for all carriers, predicting more detailed demographics from broad information and more and better mobile ads based on real-time location of the handset user.

With the popularity of buying and downloading ringtones and entering online auctions via cell, companies like Ad Mob want to make sure you can reach users based on their region, platform, device capabilities and even manufacturer. If you want ads to reach only Nokia users on MIDP 2.0 devices in Europe, AdMob, who also has polyphonic ringtone support, states they can do that. Of the many companies that now have a mobile marketing component, better targeting is their crown jewel, the company claims.

Some companies have come up with original ways to engage people via cell phones. Vibes Media has its Text-2- Screen that invites concert-goers to text to the Jumbotron screens at stadium-sized pop concerts. The text they send to the screen is displayed on the branded screens with messages such as “Get ready 2 rock!” and “Happy birthday, Sarah J.” Irvine, Calif., company go2 recently launched go2 SpeedPoll, which conducts surveys sent via cell phone that ask about attitudes toward certain brands – with results viewable in real time.

MOBILE PERFORMANCE

Affiliate marketing powerhouse LinkShare won’t be left behind. President of LinkShare Steve Denton says its parent company Rakuten of Japan is having considerable success with mobile commerce. He says that at LinkShare Japan, a significant percentage of affiliate purchases are coming from mobile commerce.

“Our customers live and work and play in a world without boundaries,” Denton says, “and we must find ways to exchange with our customers, and then we need a platform for that; then mobilize.”

Japanese m-commerce is exemplified by someone shopping in a mall who finds a cool jacket, takes a picture of the UPC code on the tag, sends that to a browser and makes the purchase via cell. In addition, that customer can mobile email the code and a picture of the jacket to as many friends as he or she thinks would also like to buy it.

Denton says he has no doubt that “affiliates could plug this into their business models very quickly. But the infrastructure is not there yet.” He adds that publishers have great house lists but are not using text or cell phone numbers from their customers. “Cell phone numbers will be more valuable than email addresses in five years,” he says, adding that LinkShare in the U.S. will have some key additions to mobile in the near future.

But even as the adoption numbers keep steadily rising, there are still some gray clouds out there. For example, for a country with so much Internet usage, only 16 percent of U.S. mobile phone subscribers use their Web-enabled phones for the Internet. Some ad networks only work with certain brands of cell phones and even companies that say their platforms work across all brands and telecom networks can’t guarantee that the service will work for consumers consistently.

While marketers are very eager to reap the financial benefits mobile promises, some critics have said that not enough is being done to erect coherent marketing strategies. In the rush to go mobile, some companies are grabbing whatever firms are offering and not building their own goals, figuring out how to follow the metrics, putting up privacy standards or discovering a solid plan to get people to opt in. “Some companies are so decentralized,” says Zanox’s Kamin, “that they don’t even know they have [offices] in Europe.”

Other critics say a patchwork of partnerships keeps true standards from emerging. In the realm of mobile search, a giant like Google can go out on its own with few partnerships because most go to Google anyway, but other search companies (Yahoo, MSN and others) must become allies with a carrier to get the best traffic. These kinds of deals can shut out some cell phone owners from getting the right information when they want it. There are also bandwidth inconsistencies as there are with general cell phone reception depending on location and interference. SEO firm Oneupweb has noted that the myriad of technical issues with mobile commerce and advertising will smooth out for the next generation of mobile surfers and searchers because the interfaces will gradually become less technical. It will be like operating your TiVo or your iPod.

“Unlike a year ago – the early days,” says Phillip of UpSNAP, “search [via mobile] didn’t make a lot of sense, but now they will do what is relevant to their mobile lifestyle – comparison shopping, for example, before you get into your car.”

Marketers are also just beginning to realize that the mobile lifestyle cuts across socioeconomic barriers. Most people in the U.S. – even some of the most poor – have a cell phone. With 200 million handsets out there and growing, the young and old and rich and poor and racially diverse pretty much covers everyone who can participate in mobile marketing.

Fair Game

In-game advertising offers geotargeting of a captive and highly lucrative audience.

National advertisers looking to reach mass audiences have had few choices online. The highly fragmented Web lacks properties that can match the millions of viewers who routinely view network TV.

However, online gaming (not to be confused with online gambling) sites are now accruing the millions of eyeballs that advertisers such as Ford, Procter & Gamble and Coca-Cola salivate over. Game publishers can offer interactivity and target marketing that is not possible through broadcast channels, and advertisers are now redirecting portions of their ad spends from broadcast to video games.

In-game advertising provides access to a rapidly growing audience of gamers of all ages that spend the equivalent of two workdays per week (often in three- to five-hour bursts) dealing, driving and detonating through consoles, PCs and Internet-only games. During December 2005, more than 27 million people visited game site MiniClip.com, which features casual games (trivia, cards), shooters and role-playing games, according to comScore Media Metrix.

Unlike content or search sites where visitors routinely look at a few pages before moving on, game sites often retain a visitor for as long as it takes to watch a miniseries, enabling advertisers to repeatedly pitch their brands to consumers. According to Nielsen//NetRatings, people playing games on the Electronic Arts site spent more than four hours and ten minutes per session on average during February 2006. In 2005, the ratings service gave further legitimacy to video game advertising by beginning to measure its audience reach.

Delivering a Focused Audience

Ads delivered to video games (via PCs or connected consoles such as the Xbox) will have greater retention because unlike TV viewers, game players tend not to multitask, according to Nicholas Longano, president of new media at online gaming company Massive, Inc. Players who are being chased through the galaxy by aliens or are racing their fellow avatars to capture booty aren’t likely to be simultaneously talking on their cell phones or surfing the Web.

Unlike television ads that viewers with digital video recorders are increasingly skipping over, gaming ads are always seen, according to Longano. “Advertising in video games is TiVo-proof,” he says. Longano says the ads that are displayed on Massive’s network of 137 games are guaranteed to be onscreen for a minimum of 10 seconds. The company’s network features ads from “65 blue chip” advertisers, he says, and features games from Acclaim Entertainment, Ubisoft, and Vivendi Universal Games.

In May, Microsoft acquired Massive, and said that it would integrate Massive’s technology into its adCenter advertising platform.

Advertisers go where the people are, and the masses playing games online are an attractive audience to pitch. While the dominant demographic of gamers is the desirable 18- to 34-year-old male audience, the wide variety of games are attracting a diverse membership, according to Alexis Madrigal, a research analyst with DFC Intelligence.

Action games tend to attract younger male players while casual playing of puzzle, card and word games have made females over 30 the fastest-growing segment of the online gaming world. Casual game sites are also increasing the titles aimed at mature adults and children.

Game enthusiasts are also more likely to interact with what they see online than the average Web surfer, according to Alex Kakoyiannis, managing partner of consulting firm Navigame. “Gamers are a participatory group … the whole game experience is based on interaction and participation, [so they exhibit a] different behavior.”

Revenue from advertisements delivered online to video games is expected to rise from $192 million in 2005 to $248 million this year, according to Madrigal, who says ads in offline games were not included in his calculations. The majority of ad dollars are spent on casual games and PC-based titles played online, according to Madrigal, as the more sophisticated console games have yet to fully exploit connected game play.

Ads at Every Turn

Unlike commercial television that displays ads after several minutes of programming, game sites can almost continually interject ads before, during and after gaming. In-game ads are woven within the game to appear natural to the environment, showing up on virtual billboards, posters and video screens on the online world. Navigame’s Kakoyiannis says the ads have to be contextually relevant to the game and the audience. “You shouldn’t see a product targeted to women in a shooter,” he says.

For example, Tycoon City from Atari features an ad for Toys”R”Us in downtown Manhattan, where the company has a real-life presence. Similarly, Take-Two Interactive Software’s Major League Baseball 2K6 will feature rotating ads behind the backstop and on the facades, just as they appear in the real ballparks.

Jonathan Epstein, a member of the board of directors of Double Fusion, which develops technologies for online advertisers, says in-game ads are tracked to verify their delivery. Data is collected to show how many times and for how long within a game session an impression (for example an ad in the form of a virtual billboard) is served.

Epstein says it’s also important that the ad-serving system prevents competing products (such as Coke and Pepsi) from being advertised within close proximity or time frame within a game. The typical CPM for in-game ads is between $20 and $25 for one-dimensional ads, and from $40 to $50 for three-dimensional ads, according to Epstein.

In-game advertising does not disrupt game play and limits interactivity to before and after a game, says Epstein, who has collaborated with publishers including Midway Games and Crave Entertainment. For example, clickable video ads called “level-stitials” can run after a level of a game is completed, or static ads can be placed on exit screens or leaderboards at the conclusion of a game, he says.

The various formats and locations for displaying ads provide vast inventories. With an average of 20 to 30 ads displayed per game-hour, according to Epstein, games that average 90 million hours of game play per month could potentially display 2 billion ads per month. Most game companies have their own formats for ads, but there is an interest in developing sizes compatible with the standards set by the Interactive Advertising Bureau.

Product placement within games is becoming a popular method for game developers to offset some of the development cost. For example, makers of racing games will partner with an auto manufacturer to make their vehicles the default car. However, sometimes (as with the rhetorical question about the chicken and the egg), it is difficult for gamers to determine whether game development proceeds product placement, or whether the prominent display of well-known brands is the genesis of the game itself.

Another example of a product being placed within games includes Ubisoft’s upcoming title CSI: 3 Dimensions of Murder, which will feature credit card company Visa’s fraud-monitoring system to track down the bad guys.

“Advergaming” is the term given to games that are developed specifically to showcase a product, and where the advertiser subsidizes the development cost. Atom Entertainment created Hemi Highway to showcase the Dodge Charger, and the company recently launched the Shockwave.com Game Studios division to focus on advergame development.

Advergaming finances the creation of casual arcade-style games where the graphics and story are not as sophisticated as console games, but the often-humorous game play can nonetheless become addictive. “Building a custom game is a minimum of a $200,000 investment,” Lee Uniacke, vice president of sales for Atom Entertainment, says.

Atom Entertainment’s advergaming group links advertisers with game developers who create titles around a product. “It forces them to be creative within a structure, and this enables their true creativity to come out,” says Uniacke, of the game development process.

Uniacke says the amount of revenue the company is generating from advertising has tripled this year over last, thanks in part to the Shockwave In-Game Network (SIGN), which launched in November. SIGN games includes five titles such as Circuit Racer and H2Overdose that display in-game advertisements and require a minimum of a $30,000 spend from advertisers, according to Uniacke.

Online gaming sites generally require users to register to play, giving publishers the ability to target ads to specific demographics. Shockwave.com’s ad-serving system can control ad campaigns so that they only appear before 13- to 21-year-old males, and the company also can geotarget campaigns to specific regions, according to Uniacke.

Uniacke says advertisers can test-market campaigns online and get instant data on their effectiveness before rolling out a national campaign through broadcast. “Instead of spending four months on a campaign, you can get feedback within a day,” he says, adding that the cost is analogous to an $8 CPM.

Displaying ads around the games (on login screens and on the borders of online games) can also be lucrative for publishers. For example, casual game site Pogo.com served nearly 950 million ads during February 2006, according to Nielsen//NetRatings.

Gaming company WildTangent offers advertiser sponsorships of casual games such as Polar Bowler and Tornado Jockey, according to Bill Clifford, general manager of advertising platforms. Sponsors receive a 15- or 30-second pregame video advertisement, Clifford says.

To get developers interested in creating games that feature advertising, WildTangent shares the ad revenue with the game’s creators, says Clifford. Typically developers would get paid when a consumer chooses to pay to download a game, but receive no compensation when gamers play the free trial version online. WildTangent’s program can increase the developer’s compensation “by 10 times over what they were receiving,” he says.

Earlier this year WildTangent announced a program where gamers can earn virtual incentives by watching ads. The companies’ virtual “WildCoins” can be used to purchase additional game play time with the company’s pay-for games, or they can be redeemed within games for health points or weapons.

WildTangent is extending the virtual booty offering offline, as consumers who purchase real goods from partners including Coca-Cola will receive WildCoins coupons that can be used online, according to Clifford.

Ads Cut Game Costs

Many online casual games and massively multiplayer online (MMO) games are financed by subscription fees, but in-gaming advertising is likely to supplement or even replace this revenue stream.

Worldwide online game subscription revenue grew 43 percent to $1.84 billion in 2005 and could reach $6.8 billion by 2011; according to video-gaming market research firm DFC Intelligence. Once games reach more than a million registered users, publishers could lower the subscription fees or make the games free by attracting national advertisers.

Popular MMOs Shadowbane and Anarchy Online now offer free levels of the game that are ad-supported. DFC Intelligence’s Alexis Madrigal says games such as Runescape 4, which currently has 4 million subscribers who each pay $5 a month, could increase reach and revenue if advertising were integrated. “You could squeeze $5 worth of advertising out of each user easily,” says Madrigal.

However, fantasy role-playing games located in alien worlds or occurring during the days of yore aren’t natural locations for conventional ads. Madrigal also warns that publishers that display online ads through console or PC games risk alienating their audience. “If you are paying $50 for a game and then $15 a month for a subscription, the tolerance for ads is pretty low,” he says.

The increase in broadband adoption and console games that can be played online will grow the virtual communities of game enthusiasts who log in for hours at a time. As long as the ads are prevented from overwhelming game play, game companies will continue to capture advertising dollars from broadcast.

JOHN GARTNER is a freelance writer in Portland, Ore. He is a former editor at Wired News and CMP. His articles regularly appear on Wired.com, AlterNet.org and in MIT’s TechnologyReview.com.

Full Steam Ahead: Q & A with Chris Henger

Performics’ new VP of affiliate marketing claims the industry is still growing and is fueled by performance-based marketing.

Earlier this year Chris Henger, a veteran of affiliate network Performics since 2002, took the helm of the company’s affiliate marketing business unit. As vice president, affiliate marketing, Henger is charged with representing publisher interests to advertisers, a role he takes very seriously. In his former position as senior vice president of marketing and development with Performics, Henger dealt with affiliate issues from a different and broader perspective. Prior to joining Performics he was senior vice president/general manager at Emusic.com, which was acquired by Vivendi Universal. Revenue editor-in-chief Lisa Picarille spoke with Henger about his new role at Performics, some short-term goals for the Chicago-based affiliate network and where the online marketing space is headed.

Lisa Picarille: You recently took on some additional responsibilities; can you outline your new duties?
Chris Henger: Running our affiliate business unit for Performics is a responsibility that I took on with great enthusiasm. I am passionate about this industry and about Performics’ opportunity to take it to the next level. I represent the affiliate business within DoubleClick’s management team and manage a talented team of affiliate marketing professionals. In my role I am responsible for the growth and prosperity of our affiliate operations and that means making sure clients are satisfied and that publishers are productive and well-compensated. The possibilities for improved publisher productivity are endless and that is an area that receives a great deal of my attention and Performics’ resources.

LP: That sort of makes you the face of Performics, at least for affiliates. That can be a tough position with some very vocal critics. Talk about how you plan to interact with the affiliate community.
CH: I am proud to take on the responsibility of Performics’ leadership for the affiliate community. I am active at industry events like Ad:Tech and Affiliate Summit and I am always looking for ways to have more direct contact with publishers. We recently established a Publisher Advisory Board and this group has already proven to be an honest and insightful sounding board for ideas. I also represent our publisher interests to our advertiser clients. It is important that they understand the implications of the decisions they make, and I spend a lot of time talking to advertisers about publishers. There are tough critics in our industry but they have good ideas and the key is to absorb the feedback and use it to make sound decisions.

LP: Do you have mechanisms in place for addressing negative comments and effecting change?
CH: Monitoring and addressing comments are a shared responsibility at Performics. The affiliate marketing director keeps careful track of the media, blogs and other forums, and the product manager is active in the community. Our publisher services team fields inquiries from publishers and they are the first line of support to quickly address comments and effect change on behalf of our publishers. I meet with these teams on a regular basis to anticipate changes we need to make. We also have an internal blog that we rely on to get the word out to the program managers if there is a particular issue or change in the marketplace that needs attention.

LP: What are some of the goals you have for Performics in the next 12 months?
CH: The next 12 months are going to be very exciting for Performics. We have an aggressive growth plan in place and a lot of innovation coming with our product road map. Personally it is my goal to ensure that our employees continue to feel good about what we are building and I want to deliver the message to our publishers that I care about their needs and about growing their businesses. Actions speak louder than words. We are a heads-down team that is always striving to do right by our employees, advertisers and publishers.

LP: Performics recently announced it is providing network-level data for advertisers in the ConnectCommerceSM interface. What other functionality is planned?
CH: Performics is committed to continuous improvement and we have an aggressive product development road map for the next 12 months. One significant feature in development has been in beta with a small group of about 25 publishers for several months. The product feature, now called OrangeLinks, was integrated into our ConnectCommerce platform in June. This feature enables publishers to sign up to receive all updated links via email or FTP and eventually via RSS. The links are pre-generated and ready to be added to the publisher’s site. We saw a phenomenal increase in sales from the beta group, and other publishers should be able to increase their commissions with OrangeLinks.
Another important feature that will be released this summer is the availability of publisher contact information within ConnectCommerce. Performics and DoubleClick have recently adopted a new product development methodology called SCRUM. With this methodology in place we are working on short “sprints” to accomplish bite-sized feature improvements or components of larger enhancements. We have dramatically reduced the development cycle and improved deliverability. You are going to see seven or eight small releases a year, instead of one or two large releases.

LP: Why does Performics work with so many catalog retailers?
CH: We do have a very strong catalog client base that goes back to Performics’ roots as the first full-service affiliate provider. When the company was founded in 1998, the vision was to fill a gap in the marketplace for affiliate marketing services. Traditional direct marketers didn’t have the in-house expertise to tap what was the wild world of online marketing in the late nineties. The full-service value proposition really resonated with catalogers in the late ’90s, and the unique agency approach we take to affiliate marketing still resonates today.
Performics is also headquartered in Chicago, the birthplace of direct marketing and the home of large traditional catalogers like Sears and Spiegel. As a matter of fact, Spiegel was one of Performics’ original clients and we continue to manage the affiliate program with the new management at Spiegel. The other aspect is that affiliate marketing is nirvana for a direct marketer; catalogers “get it.” They really understand the power of performance- based marketing. Because of our roots in direct marketing we are pushing the envelope for catalogers today and helping them understand the dynamics of multichannel marketing.

LP: I know that Performics doesn’t accept affiliates from religious-related organizations; why?
CH: Performics has a comprehensive, quality affiliate network and we ensure that quality through editorial review. Just like major search engines, we have human screening of all affiliate applications and we have to provide that group of screeners with a set of criteria. To date, we have not allowed applications for sites with religious content and the policy is meant to minimize subjectivity from our editorial review process. Performics’ policy is not to allow sites that are focused on a particular faith. We don’t want our staff to have to make a judgment on whether or not a site with content from one faith or another is appropriate for advertisers. Recently I have seen some church-specific sites that are doing some very interesting things with affiliate links and using the commissions as a fundraising effort. This is certainly an example of innovation and we are willing to reconsider the policy.

LP: Are there any other types of affiliates that you don’t accept, and why?
CH: Yes, we do screen each application and there are many, actually thousands of applications that we reject each month. The most common reason we have to reject an application is that the publisher’s website is not available for review. But upon review of the site we do have criteria about content that we evaluate. The policy is posted on our website and available to any affiliate:
Websites or publishers engaging in online activity that contains, promotes or has links to any one of the following will not be accepted into the network:

Pornographic, obscene or offensive content
Violence or hate-oriented speech
Extensive religious commentary or attempts to preach or solicit members for a particular church or faith
Gambling
Libel or defamation
Illegal substances
Unsolicited commercial email (spam) or trademark infringement
Any type of misleading, fraudulent or illegal activity

LP: Are there segments you believe are ripe for affiliate expansion?
CH: Blogs are certainly one segment that we expect to drive increasing volume. In recent years the affiliate channel has moved heavily toward commerce-driven sites. Coupons, discounts and shopping-related publishers garner a substantial chunk of sales volume and we have seen phenomenal growth from loyalty and reward sites. We’ll continue to see the bulk of the volume come from those categories. Publishers in those categories have grown increasingly sophisticated and many consumers have come to rely on shopping-related affiliates as an intermediary, as they are perceived to add value to the transaction chain. As for new expansion, we are likely going to see affiliate marketing go back to its roots and witness growth in the area of content. AdSense and programs like it are geared toward content- driven sites, and a lot of people talk about small publishers monetizing content as if it’s a new initiative. Monetizing content is what affiliate marketing is all about and that segment is ripe for expansion.

LP: You have a deep background in online music and music-related businesses. Are there any initiatives at Performics related to online music merchants or affiliates?
CH: I often rely on my experience in the early days of interactive marketing. Our business model back then is not far removed from effective affiliate marketing – build a loyal audience of consumers and at the same time attract advertisers that wish to engage those consumers with products and services. There was no question the promise of digital music was going to drastically change music distribution; the question was when. One of the core things that was lacking was a ubiquitous device, and obviously the iPod has solved that, and now the companies in the online music business are flourishing. A lesson I learned was it is critically important to stay focused around the core value proposition you provide your customer. This certainly applies to how we manage at Performics, as we stay focused on our two core businesses: affiliate marketing and search marketing.

LP: You attended the MSN Strategic Account Summit recently. What was the most important message you took away from that event?
CH: One of the underlying messages I took from the event was the importance of having aspirations and high standards. Creating an environment where people are held accountable for high performance often has a multiplier effect on the satisfaction they derive. At the end of the day, people want to feel they are contributors to the overall success of the business – that what they do day in and day out matters. I want to surround myself with the very best people, and share in our collective successes. I jotted down this quote, which rings especially true at Performics: “You strive to create excited, high-energy environments, but not exhausted ones.” In today’s fast-paced marketplace, it’s easy to get exhausted.
You need to have a definition of success so that when you get there it will be meaningful to reflect on the accomplishment. These types of moments are often understated because really, who has the time to laud achievement? The MSN Strategic Account Summit represented one of those instances. I left the event proud in the knowledge that Performics was out in front as the only SEM to share the stage with Steve Ballmer.

LP: Is Performics looking to leverage a more strategic relationship with MSN?
CH: Our long-standing relationship with MSN is certainly an asset that we value. We have been optimizing data feeds for MSN Shopping for years, and were the first to adopt the MSN adCenter API for Search. We work very closely with MSN, and strongly believe there are many opportunities for advertisers within that platform.

LP: Can you give us an idea of just what role search plays at Performics?
CH: Search plays a critical role at Performics and within DoubleClick. Performics was a pioneer in search engine marketing and among the first to realize the power of paid search. We are the leading SEM globally, and have a thriving natural search optimization practice. The affiliate and search channels are inextricably linked for Performics – affiliates use search to drive traffic, and we share many cross-channel clients. And more importantly for our advertisers, the Performics business model aligns our interests with our advertisers. A consumer who transacts with our advertiser through either channel benefits the Performics business model, whereas this is a differentiator between us and other affiliate providers.

LP: Is the reign of the “Big Three” (CJ, LinkShare and Performics) over?
CH: Absolutely not. Performics and our two industry peers are still growing by leaps and bounds. While there will always be changing dynamics in the marketplace, our target clients – retailers – are going to continue to look for affiliate marketing solutions. Multichannel marketers and other advertisers need a proven solution, a comprehensive network and reliable technology, which is core to the Performics offering.

LP: What is the biggest competitive threat to Performics’ business?
CH: We stay competitive by thoughtfully thinking and planning for the future. We recently completed an extensive three-year strategic planning process across Performics and DoubleClick. There is a very clear plan and set of priorities that the entire company shares on where we want to drive our business. Ultimately, business comes down to customer loyalty. If a company loses sight of the needs and wants of its customers, then it opens the door. We are fanatically focused on servicing the needs of our customers. Through strategic leadership, proactive service and sustained innovation we control our own destiny in creating loyalty with our customers.

LP: Talk about where ad networks and subnetworks fit in the performance marketing landscape and how they impact Performics.
CH: Ad networks sure are plentiful nowadays. They can provide value in increasing reach through one media buy, and most campaigns are on a performance-based pricing model which has similarities to affiliate marketing as well. In some cases we work with ad networks for select clients, and in other cases we produce leads for our customers directly through our affiliate network.

LP: How important is it for leaders in the online marketing space to be global companies?
CH: The Internet is a global medium and the barriers between nations, languages and communities are virtually invisible. DoubleClick is the world leader in online advertising solutions and that provides tremendous insight for our clients and employees. We are working to improve our interactions and payment processes for international affiliates because that segment is increasingly important.

LP: What are Performics’ global plans?
CH: We have an office in London that predates our integration with DoubleClick and we now have 21 offices around the world. We will certainly use that foundation as a platform for further expansion. Currently we license our affiliate marketing technology platform internationally but do not have plans to set up affiliate networks in other markets. Never say never, but we have a huge growth opportunity in the U.S. and that’s where we are concentrating today.

LP: Give me an idea of what you think the performance marketing space will look like in three years.
CH: It is going to look even better than it does today – more growth, new and different distribution and better data across the performance-based channels. In the next three years we as an industry will have answers to many of the questions we face today. I think there will be a recognized distinction between adware and spyware. We are going to have an industry-wide resolution of ad blocking. I think we’ll see more sophisticated compensation for publishers that are tied directly to delivering on advertiser goals. We are going to have a larger pool of talent to expand with because the industry will be further developed. Performance-based marketing is a key driver in the evolution of online advertising and in three years we’ll see an industry that is taking a larger piece of the overall media pie.