This post is broken up into two parts:

• What are contextual ads? (with examples of good and bad matching)
• Contextual ad networks

What are contextual ads?

Contextual ads are online ads that include code that enables the ad network to spider the page’s content, determine its topic from a preponderance of the keywords and meta data, and serve up ads relevant to the page’s topic. Or, more simply, contextual ads are ads that match the page’s topic.

So, if a page is about treating a cold naturally, the contextual ads are likely to include links to alternative cold remedies and the like. There are varying degrees of sophistication, but most match ads well enough to content so that click-through rates are far superior to demographic- or geo-targeted advertising solutions.

How does it work? When a publisher places a contextual ad tag on a page and publishes it, the code instructs a bot that indexes the page and determines the topic of its content. That information is passed to the ad server, which selects an ad to display in that spot that provides the best contextual match, against any other requirements (size, site restriction, frequency/budget caps, etc).

Here’s an example from HubPages:

The contextual ad matches wrinkle cream ads to the article on natural face creams, because, presumably, people interested in reading an article on natural face creams are more likely than the average Internet user to respond to that sort of ad.

Contextual ads are not always text-based; banner ads, as long as they’re properly tagged in order to categorize the creative, can be matched contextually. Google AdSense is one contextual ad network that does provide contextual matching for display (image) ads.

Contextual matching does not always work perfectly. As demonstrated in these cringe-worthy examples posted on Mashable, sometimes a simple term match doesn’t do the trick:

It’s easy to imagine other, more innocuous but equally ineffective matches (ads for Mrs. Field’s showing up on a page on how to clear your browser cookies). Two contextual advertising firms (Proximic and Peer39) have come up with methods that purportedly minimizes the likelihood of these kinds of semantic/lexical mismatches.

Contextual Advertising Networks

The contextual ad network space is dominated by Google’s AdSense,  the publisher’s earning solution side of its advertiser solution, Google AdWords (which also places ads on Google’s SERPs).

Here is a list of contextual advertising networks:

• Google AdSense
• Yahoo Publisher Network (YPN)
• Microsoft PubCenter (AdCenter Publisher)
• Chitika
• Kontera
• Quigo
• Vibrant Media
• LookSmart
• Peer39
• Proximic
• Ask.com Sponsored Listings (ASL)
• Ad-in-Motion
• LucidMedia (upcoming)

I guest-blogged at Adotas and posted an article (the bespectacled dog is me, I swear! thanks, Edward!) on the good and the bad with the state of online advertising. An excerpt:

Data and projections from the IAB, Morgan Stanley’s Mary Meeker, Jupiter Media, and eMarketer, among others, suggest that online advertising, having enjoyed reliably robust growth rates over the past 6 years, will see them shrink to zilch–optimistically–in 2009.

But behind the negligible overall growth figure lies two contrasting figures: continued growth in contextual/search advertising, and a slump in display. Looking at the previous online ad market slump, as well as the nature of today’s more complex market, provides indications on why this mixed picture stands, and when and how we can expect growth to resume.

Looking at the implosion of the online ad market in 2001, and its subsequent lengthy recovery is only partially instructive. The reality is that a number of factors make the state of today’s online advertising market different enough this time around to give credence to optimism. Search and contextual advertising exist now.

In contrast to the heady days at the turn of the millennium, the online ad market is much more complex today. Traffic patterns, strongly influenced by search, have changed, as has targeting sophistication. Contextual and search advertising is now a more than $10 billion business in the U.S. alone. Contextual- and behavioral-targeting technologies didn’t exist during Web 1.0; they are making more out of advertising dollars today.

Read the entire article at Adotas »

A VC writes an interesting analysis of a comScore whitepaper on the performance of display/rich-media ads relative to search/contextual ads. The analysis and perspective are primarily from the advertiser’s perspective, but I’ll add my $0.02 on what it means for publishers at the end of this post.

The study coming against the backdrop of falling (click-through) performance of display ads: static image ads fell to an aggregate CTR of only 0.2% in 2006 (0.1% in 2008), while dynamic rich-media variants have fared only marginally better, at 1%. Besides, 2/3 of those exposed to display ads never click on ads, while 16% accounted for 80% of clicks (I wrote on another study of natural-born clickers early this year). The study then wonders if the impact of display ads should take into account more than simple clicks.

Naturally, it does, by using CPM as its pricing model, but there has been an assumption among advertisers and marketers that clicks are what they’re paying for. The study points to some data that underscore the benefit of display ads in a mixed-media online campaign:

• display ads have much higher reach among Internet users: 81% seeing only a display ad in comScore’s study vs 8% seeing only a search/contextual ad
• display ad exposure lifted site traffic (+46%) and brand searches (+38%) over the first four weeks of exposure to an ad
• display ads improved sales, with a 27% lift to online sales and 17% improvement to offline

It’s been commonly understood that while CPC-priced search/contextual ads target conversion and action, CPM-priced display advertising targets awareness and branding. These figures reiterate the tangible (if delayed) benefit in investing in brand/campaign exposure to customers in earlier stages of the buying cycle.

A second part of the study examines the benefit to advertisers to using both search/contextual and display advertising as part of their online ad campaigns. Clearly, a synergistic relationship was noted in the combined-media campaign vs a campaign relying on either search/contextual or display alone. Search/contextual + display outperformed search or display only in terms of:

• visitors making a purchase at the advertiser’s site, providing a +173% lift compared to +42% using display alone and +121% using search/contextual alone
• spend per visitor, with a +124% lift, vs +27% for display only, and +76% for search/contextual by itself

This data is interesting in that in measures a clear, measurable transaction, and the benefit to using both forms of online advertising to improve conversion.

Interesting stuff, but what does this mean to publishers? Display and search/contextual advertising should not be considered a zero-sum proposition by publishers any more than it should by advertisers. Whether it’s because a combination targets different visitor format preferences, or that it targets a broader range of the buying cycle, image and text can work well in concert with each other. As the value gets demonstrated to advertisers and agencies, we should expect that spend in one format should grow alongside the other, not at its expense.

Online ad network Burst Media has released the results of a survey of over 4,000 Web visitors on their response to “ad clutter.” Here are the main takeaways:

• Ad-cluttered sites make visitors more likely to leave (30% immediately leave what they believe to be ad-cluttered sites) and less likely to pay attention to ads (75.5% of respondents)
• More than two ad units are tolerated by 47.4% of respondents; 27.3% will only tolerate one ad unit per page, and 25.3% will tolerate two ad units per page
• 52.4% of respondents said that an ad’s presence on a cluttered site reflects badly on the advertiser;
• There are some gender and age differences. Women are 17% more likely than men to abandon a site they feel is cluttered with ads, while 55+ visitors were 35% more likely than those in the 18-24 age set to do the same. Women were also 17% more likely than men to think ad clutter reflects badly on advertisers.

Results like these seem to underscore the benefit of blending ads, and making sure ads are congruent with your site design. And, as our own data shows, maximizing the number of ads does not necessarily maximize revenue for the page. Cluttering up a site with ads is a double whammy: it makes visitors both less likely to click on ads, and less likely to ever visit the site again.

I guest-blogged a post at tech news and commentary blog Profy today. Here’s an excerpt:

3. Myth: Referral/commission offers are a better long-term form of revenue generation than ads.

The reality is that there is no such thing as either/or when it comes to monetizing content. Unless you have exclusive representation by a network or agency, you should find the right blend of monetization options for every page or category of page.

•Referral/commission options can be an excellent primary (but not sole) monetization vehicle for pages with content targeted to the offer(s), and highly-targeted (usually search) traffic.

•Contextual advertising does well on the same sort of specific content, and complements referral/commission offers well. It gives visitors other options if they don’t want to be forced down the sales funnel, especially if they’re in information-gathering mode instead of buying mode.

•High-volume incidental or repeat traffic is best monetized through a CPM display ad network, since there might not be enough contextual relevance for referral/commission or contextual advertising to perform well.

Full post available at Profy.

What a difference a year makes. Google, whose stock famously rose from an IPO price of $85 in August, 2004 to over $700 by the end of October, 2007, seems to be losing its spark. It’s certainly lost its luster among investors, its stock price dropping almost 60% over the last year (see chart, right), despite posting comfortably double-digit top-line growth rates through Q3 and stable bottom-line growth as well.

Sure, the economy has been in recession, officially, for a year (at least in the U.S.), and the online ad market, which Google certainly dominates, has taken a battering among prognosticators. But Trip Chowdhry, an analyst at Global Equities Research, is expecting Google to not only slow revenue growth, but to go negative, in 2009 and 2010, for a more specific set of reasons:

• keyword volume is dropping, down 2-5% year-on-year
• bidding is mixed, but down overall
• the macroeconomic downturn is outweighing the traffic move from offline to online, specifically reducing advertisers’ spend
• Microsoft is mounting a move into cloud computing and even into Google’s publishers’ advertising services turf
• YouTube continues to monetize poorly

Perhaps in anticipation of the effect of sunk costs and factors beyond their control, Google issued a mailer with the alliterative title, Top Tactics for Tough Times, encouraging AdWords advertisers to spend more effectively, and to spend more. On the first page, it emphasizes a piece of data from an Epsilon study:

Marketing is more important than ever. 94% of CMOs believe that “a tough economic period is precisely the time when marketing plays a key role.”

Slightly more subtly, it offers (courtesy of Jupiter):

Search advertising is particularly valuable now. 83% of search advertisers plan to maintain or increase their marketing spend in the next 12 months. 

Google providing suggestions and “encouragement” to their publishers is not a bad thing; the timing is just a little suspect. And it comes against a backdrop of gloominess from the Googleplex. Google CEO Eric Schmidt hinted at belt-tightening, taking away resources from the company’s vaunted skunkworks program. More quietly, the company has been slowly shedding its large contracted labor force since August.

Continuing to buy (wisely) during a downturn is a maxim a good number of marketers are abiding by. Or at least Google hopes so. They might also hope for the same among equity investors.

eMarketer has revised its projections for 2008’s and 2009’s online ad spending, from its relatively rosy estimates from August, to a more modest set of numbers that reflect the worsening outlook for the display ad market. US online ad spend should reach $23.6 billion this year (down from the $24.7 billion estimate in August) and $25.7 billion in 2009 (down from $28.5 billion). What’s most striking about this change is not that numbers are being revised downward significantly, but that growth rates are still positive.

While eMarketer’s sanguine predictions might paint it as a cheerleader for the online advertising industry, its own history shows its projections of being fairly accurate.

Significantly, search/contextual advertising is expected to grow from about 44% of the online ad market to almost 50% by the end of 2010. This is due to the fact that, even as times are rough, search/contextual continues to grow by double-digits: 21.4% in 2008 and 14.7% in 2009. Contrast this with a now 3.9% anticipated growth rate for the year for display.