In February, TechCrunch published a post on how changes to the way AdSense determines a valid click led to lower CTRs (click-through rates) for publishers. This was not really a surprise; as I wrote back then, this was primarily a bid to ensure click quality on behalf of advertisers. And not only AdSense–there were rumblings on publisher boards earlier this year about Yahoo Publisher Network, a rival contextual ad network, showing the same dropping CTR problem.

But CTR is only part of the revenue equation. RPC (revenue per click) determines how much the average click is worth to a publisher. Interestingly, the data we’ve assembled shows that RPCs are rising among the most popular contextual ad networks. Looking at data drawn from a publisher base comprising over 4 billion monthly page views shows a steady climb—about 60% over a seven-month period—in RPC among publishers using the most popular contextual advertising networks in use today.

Why? There are two possible explanations. First, the contextual ad networks are giving a greater share of advertiser revenue to publishers, to counterbalance fears that tightening CTRs will lead to losses of revenue and prompt searches for alternate ad networks. Second, we might be seeing the effect of rising competition among online advertisers, as advertising spending continues to move online. Contextual advertising gives advertisers the option to pay only when a user expresses interest in an ad (by clicking), so it’s a natural pick for advertisers with performance goals in mind.

We have no idea if the rise in RPC makes up for—or exceeds—any losses through lower CTRs, and, regardless, the situation will be different for any particular publisher and their specific content and traffic patterns. Again, these are aggregate trends from a pool of publishers, and each publisher might see data that deviates from this trend. Each ad network calculates RPC in a different way for each publisher. But the trend for this sample of publishers is clear: when visitors click, expect more, not less.

The explosive growth of online video in the last couple of years has generated plenty of inventory, from major studios to high school kids with a camera phone. The eyeballs have followed. The missing piece of the puzzle has been the business model. The two questions have been: what will it take for advertisers to bite? And will viewers tolerate advertising on something they’ve enjoyed until now without it?

With respect to the first question, finding advertisers, it seems, has depended on the nature of streaming video. Studio-quality, broadcast television shows from networks like ABC, CBS and NBC have been sponsored by big brand advertisers such as Intel and preliminary studies (NBC, MediaPost) suggest they’re getting their money’s worth through this new distribution channel for existing, vetted, “safe” content. Although the traffic pales in comparison to that of YouTube’s, ABC reports 37 million episodes watched in May. Keep in mind these are US-based viewers only (viewing is only enabled if you have a US IP address), and the depth of engagement with a half-hour or full-hour feature show is substantial.

The problem continues to be user-generated video, genuinely new, long-tail content, where neither the advertiser nor the video hosting platform tend to have a whole lot of control over the nature of the material. Advertisers are understandably skittish. As I mentioned in a previous post, there are solutions becoming available that will help UGC platforms identify and weed out content that doesnt’ meet the site’s—and advertisers’—standards (UGC platforms are in the business of moderating content instead of producing it like their forebears).

The reality is that UGC—no matter how well moderated—carries with it a certain risk to advertisers, although so can live television events, too. If UG video continues to grow, then advertisers might be willing to live with a queasy stomach and direct more spend to where viewers have flocked to.

Another significant factor affecting viability and adoption of video ads is their format. Battles have raged over what’s acceptable to viewers, among preroll/midroll/postroll, overlay, adjacent/companion ads and non-overlay invitation ads (VideoEgg has an excellent solution called AdFrames).

The IAB recently released its standard video formats and display guidelines, but there hasn’t been any clear indication on what viewers are willing to accept broadly until a recent Ipsos study, suggesting most viewers will tolerate advertising for broadcast-quality television, movies, music videos and news clips, even the widely-loathed pre- and mid-rolls, but most draw the line for amateur/homemade clips (it’s unclear if that will change once YouTube and other popular platforms begin to allow amateur content producers to generate income from their material).

Here are companies that are providing online advertising for video:

• YuMe
• Tremor Media
• VideoEgg
• Jivox
• Adap.TV
• BrightRoll
• Move Networks
• Adotube
• ScanScout
• Ooyala
• Kiptronic
• Broadband Enterprises
• and, of course, Google AdSense

Costs: Valleywag has some estimates based on format and network.

YieldBuild held its first open house yesterday, and by all accounts it was a great success. About 70 people attended throughout the evening to enjoy our mixer, meeting other professionals in the online advertising and publishing space. It’s one dubious measure of the success of the evening that the food was gone (except the vegetables and hummus platter) by around 7 pm! And we had a lot.

Three leaders in the space talked about their companies and how they are monetizing (Joel Toledano, CEO of Krillion, came a bit later in the evening):

• Zach Coelius, CEO, Triggit
• Steve Polsky, President and COO, Flixster
• Will Price, CEO, Widgetbox

Thank you to all attendees, and we hope to see you at our next event! Watch this blog for details.

Attendees listen to Zach talk about Triggit.

Paul interviews Will about Widgetbox.

Steve Polsky shares on “the movie thing”, Flixster.

Attendees listen.

Our open house is tomorrow, Wednesday July 23rd, from 5:30-9:30 at our offices in SoMa, SF.

We have a few spots available, so please RSVP if you’re interested (send to events at yieldbuild dot com)

It will be a casual mixer with attendees from the world of online publishing and advertising, and we’ll have a few special guests who will share their thoughts on monetizing traffic:

• Will Price, CEO, Widgetbox
• Steve Polsky, President & COO, Flixster
• Zach Coelius, CEO, Triggit
• Joel Toledano, CEO, Krillion

I just attended OMMA Behavioral here in San Francisco, where we were treated to a number of presentations and panels revolving around the opportunities and possible pitfalls of using behavioral targeting to make advertising work better for advertisers, publishers, and end-users (it should be able to do all three).

A recurrent theme seems to be where the line is drawn at how well behavioral targeting works–there’s a point at which advertising that’s too closely matched to a user’s online behavior that might seem a bit…stalkerish. Media Post’s David Berkowitz writes a hilarious post on Facebook ads targeting him by presuming to know he’s Jewish. He points to another 22-year-old user who complains that she’s sick of seeing ads saying, Tired of being fat at 22?

This type of targeting probably isn’t behavioral at all - it’s probably a combination of geographic and demographic data that the advertiser hopes correlates with the product and message they’re offering. (I’ve used Facebook’s SocialAds and know that targeting is limited to age, geography, interests, etc., and not on how many times they looked at photo galleries, for example) In fact, as mentioned by David Kopp, Senior Director of Ad Product Strategy at Yahoo, the problem is that there isn’t enough behavioral targeting.

Users might resent being presented with advertising that presumes to know their interests and values based simply on where they live and how old they are. Not every suburban Dallas married man is a Republican, for instance, nor is every teenage girl enamored of Miley Cyrus. More effective analysis of user behavior might allow what Edmunds’s Stephen Berkov called “acupuncture marketing” - extremely precise targeting, even at the individual level. It would be marketing beyond segmentation and bucketing, with a minimum of error.

Social networking sites have become a goldmine of user information that would not normally be volunteered to sites without lengthy registration forms (which are rarely filled out accurately). Users freely volunteer information about their interests, purchase intents, travel plans, etc because it’s shared only within their own social network and a level of trust is maintained. Add to this the fact that people who have been online for a long time (or, in the case of Millennials, pretty much their entire life) understand they surrender a bit of their privacy, and the user option to opt-out, and you have a system that allows better targeting of ads.

David Kopp at Yahoo offered an example: he hears all the time that people see Botox ads on Yahoo, and wonder what they’ve done in the Yahoo network to encourage Botox ads. Kopp said they do no behavioral targeting whatsoever for Botox. In fact, if they had, there would likely be fewer mismatches and fewer people wondering what they did “wrong.”

Although its advertising base is not nearly as impressive as Google’s (AdWords/AdSense) and Yahoo’s (Search Marketing/Publisher Network), Microsoft has been private beta-testing its contextual ad network for publishers over the last few months, and continues to invite new publishers to its program. No word yet on when they plan to take the program public, but any entry by Microsoft at the very least means it plans on throwing a lot of money at publishers to bootstrap a network.

Yahoo’s current problems might present an opportunity for Microsoft Live, since even Yahoo is able to garner premium rates on a wide range of branded and popular search terms, in the first few positions. On the advertiser side, Microsoft has been able to roll out demographic and time-of-day targeting, as well as optimization support, so it has probably geared itself up infrastructurally to boost its inventory-growth capabilities through its own home-grown publisher network.

It is possible that its purchase of aQuantive last year might give Microsoft access to advertisers interested in trying contextual advertising through their existing relationship with aQuantive. That might help solve the chicken-and-egg problem Microsoft faces in building a sizeable contextual ad network in the face of heavily-dominant Google and YPN.

We wrote about the proposed Google/Yahoo search deal a month ago. While most of the hand-wringing in the media and blogosphere was by investors worrying that Yahoo had rung its own death knell, advertisers and publishers were left scratching their heads, wondering what this meant for them.

A study by SearchIgnite takes a look at the search advertising market under a Google-Yahoo deal. The study demonstrates Yahoo already outperforms Google on branded and popular keywords for the first 3 search results, while Google registers higher CPCs for long-tail keywords and those ranking below the 3rd position. The current deal will help extract value for the latter for Yahoo, to the tune of an average lift of 22% in ad costs to advertisers, assuming Yahoo optimizes its ad delivery to maximize revenue.

Assuming rising Yahoo search rates will offload some spend from search to the publisher network, as advertisers try to strike a new pay/performance equilibrium, RPCs would probably increase for publishers in the Yahoo Publisher Network as well. However, advertisers are unlikely to be happy, and a recent intimation of the Google-Yahoo deal reducing competition in this space by Yahoo CEO Jerry Yang will do very little to assuage the DoJ and others (the European Commission, state attorneys general, etc) in charge of preventing anticompetitive corporate deals that this deal is something they can live with.

Advertising and marketing are often said to be the first things killed in a company’s budget when business begins to look bleak. Businesses seek to prop up profitability by squeezing spending on a line item that has typically provided a delayed, and often hazy, impact on revenue. Advertising agency heads are projecting dips in spending while the US weathers a recession (although other geographies are doing well and are enjoying healthy ad spend growth).

But not everyone is as bearish as Interpublic Group, and even a general retreat in spending could belie a different phenomenon altogether: a shakeup in the advertising mix, as a confluence of sophisticated online advertising delivery technology, growing online usage trends, and greater visibility into performance for advertisers, create a perfect storm for online advertising to leap ahead.

Andrew Chen wrote a great post showing where the silver lining to the currently darkening cloud lies. Specifically, he points to the continued move from offline to online, performance-based advertising and the rise of UGC and social networks that advertisers are beginning to become comfortable with.

Offline to Online Continues

Recent research group IDC figures underscore that online is not where content producers will feel the pain. Another survey by Outsell suggests a slowing-down of ad spending overall, but continued growth in online. Advertisers are simply following the traffic. Most of the recent buzz has been around social networks, although even search traffic continues to grow by double-digits year-on-year.

Technology eases advertiser fears, presents new opportunities

However, advertisers worried about unfettered online ad spending, without any sense of its impact on business and revenues, are showing continued interest in performance-based advertising models (CPS, CPL and CPC, in particular). This is balanced, though, by advances in advertising delivery technologies online, including high-quality and interactive video, and the growing dominance of social networks like Facebook and Bebo, that have put relatively sophisticated targeting and performance measuring capabilities in the hands of advertisers, and that police their sites for objectionable content. Marketers understand that they can’t abandon their brand during an economic downturn, and instead are looking to find ways to more deeply engage with users in a context they’re comfortable with.

2008 is already halfway behind us, but the US economy doesn’t show any immediate signs of improving. Fortunately, publishers who have thrown their weight behind online media are much less likely to feel it, since several trends will continue to work in their favor.

Here are the main contextual advertising networks. Contextual advertising scours each page for topic and then displays relevant ads. Installation usually involves embedding javascript snippets into places on your templates where you want ads served. (If you want the process of optimization, from ad network selection to formatting, placement, color and other visual characteristics, optimized automatically, be sure to check out YieldBuild.)

Google AdSense

Google’s the big guy in this space. Payment is on a per-click basis (CPC). Acceptance into the program occurs within a few days of first applying, and accepts publishers in most countries of the world. Payout occurs once clearing $100, and can even be converted to local currency in 42 countries. More highlights:

• Can allow advertisers to target your site (run-of-site), and specific publisher-set ad channels on your site
• Can block competitors’ ads by setting up competitive ad filters
• Allows you to choose your ads’ size, format, color, and border style
• Allows the setup of up to 200 channels to allow deeper performance analytics
• Can automatically serve up display (image) and video ad in appropriately-sized ad units, in addition to standard text ads

http://www.google.com/adsense/

Yahoo Publisher Network

YPN is the second-largest contextual ad network, but is limited to US-based publishers only at this time. Similar to AdSense, publishers are paid by click (CPC). Payout occurs at $100.

• Allows publishers to specify their site’s category (from over 100) to allow better advertiser targeting
• Can filter out up to 50 competitors from appearing on publisher’s site
• Can tailor color and size for ad units
• Can set up up to 50 channels for performance tracking

http://publisher.yahoo.com/

Vibrant Media

Vibrant Media hyperlinks keywords in a page’s text with its signature green double-line, and upon mouseover, displays a relevant text, image or video ad.

• To be accepted, a site must achieve a minimum of 500,000 monthly pageviews, and adhere to other quality standards.
• VM ads are rolled out on pages with a minimum of 50 words, and must adhere to quality guidelines.

http://www.vibrantmedia.com/webpublishers/index.asp

Kontera

Similar to Vibrant Media, Kontera’s ContentLink provides pop-up advertising modules upon user mouseover on its blue double-lined links.

• recently added a WordPress plugin, and Blogger support
• payout happens once a publisher’s account exceeds $100
• can make basic format changes to make the ads match publishers’ site aesthetics

http://www.kontera.com/ads-for-site/publishers-overview/

LookSmart

LookSmart provides advertising to approximately

• counts approximately 3,500 Websites among its publisher base, with CNET, Wikia and InfoSpace among its most prominent.
• manages its own ads, along with third-party ad networks publishers might be using

http://www.looksmart.com/publisher-adcenter.html

Chitika

Chitika’s eMiniMalls deliver contextually-relevant Shopping.com offers. Publishers are paid on a per-click basis (CPC).

http://chitika.com/mm_overview.php

Despite the perception—and data from just a few years ago—that has suggested that only younger online users have taken to Web 2.0 and new online media, a study undertaken by the AARP and the Center for the Digital Future has shown that older Americans have embraced online communities, blogs, and social networking as much, and in some cases more, than their younger peers.

New media forms where older Americans have caught up with younger, and in many cases surpassed, younger cohorts [graphs]:

• Daily checking of news: 42% over 50 vs. 18% under 20
• Daily online community participation: 58% over 50 vs. 47% under 20′
• Maintaining social relationships: 46% over 50 and 46% under 50 (identical)
• Browsing in retail stores, then buying online: 68% over 50 vs. 72% under 50
• Daily online game playing: 18% over 50 vs. 22% under 50

A few other notable results:

• Considering the Internet a reliable source of information: Over-50s still (at 76%) still trail under-50s (85%), but that 76% has grown from just 50% over just five years
• Instant messaging and Internet video: still the domain of the young; only 9% of over-50s think IMing is important for maintaining relationships, while 48% of those under 20 do.

What does this mean for publishers and advertisers? The older demographic shouldn’t be written off just yet. They might be on TeeBeeDee instead of MySpace, and Eons more than Facebook, but their level of engagement in today’s social media presents plenty of opportunities for the savvy publisher and advertiser.

One insight shared by VC Paul Kedrosky is that older social media users are less capricious than their children and grandchildren: “Teens are tire kickers—they hang around, cost you money and then leave. The older demographic has a bunch of interesting characteristics, not the least of which is that they hang around.”