TechCrunch’s Erick Schonfeld reports on Microsoft’s dismal quarterly earnings report, with its Online Services division (including advertising) almost doubling its quarterly loss over Q4 2007 to $471 million. Microsoft says that advertising revenue grew at an anemic 7%, with search advertising higher, but these modest increases were not enough to offset ballooning expenses.

So where were there expenses? The development and early marketing of PubCenter, Microsoft’s answer to AdSense, has probably been running up red ink, but that’s to be expected. I’m thinking more about Microsoft’s bets on advertising on social networks. It inked a 3-year deal with Digg in July 2007, but the bigger bet was its advertising agreement (via a substantial investment) with Facebook. Facebook relies on MSFT as its exclusive advertising partner worldwide through 2011.

So why the loss? It’s possible, if not probable, that the deal guarantees Facebook revenue, and Microsoft is eating the loss. After all, Facebook is a social network, and social network users are unresponsive to online ads. Its own advertising platform turns out poor results; it’s not difficult to imagine that ads served by Microsoft wouldn’t perform any better.

Although Google seems to be the last place the newspaper industry should be looking for inspiration—it just recently shut down its print advertising service—the fact remains that the Internet advertising giant has nailed successfully an entirely new source of advertisers at the same time print is losing theirs. The continued growth of online advertising, even in the face of the recent slump, has drawn away traditional, big-media advertisers from newspapers, but there hasn’t been a concomitant cross-migration of “long-tail” AdWords-style advertisers to print. That is a problem for print, given the measurable performance of online advertising and continued, increasing time spent online; this is looking like a zero-sum game that the newspapers are losing.

But does it have to be? Jeff Jarvis, in a great article at Seeking Alpha, argues that newspapers are still well-equipped to survive the changing times; they simply need to adapt. In addition to looking at commerce (some have managed to be successful at this) and leveraging their unique information and readership into building new services (like real estate agency), there are a couple other intriguing ideas that print should consider, spearheaded by the Big G and other online advertising outfits:

• Form an ad network: Instead of relying on their own ad sales division, newspapers and newspaper networks should outsource ad sales to ad networks that can fill their inventory across all available newspaper inventory.  (Of course, the ad network typically shaves off a comfortable margin for itself, something the newspapers would probably not like to lose. They can form the ad network themselves, like the airline industry did with Orbitz.) This will allow them to sell inventory on metrics meaningful to advertisers—not just geo, but on demographic, vertical/topical bases as well. And it reduces advertiser friction and builds campaign scale.
• Create a new sales force: Maybe Google isn’t the place a small, local advertiser would think of turning to to start a campaign. Jarvis suggests a “citizens sales force,” the sales side of citizen journalism. He might have a point, since a lot of the print long-tail are not going to understand AdWords any better than those online long-tail advertisers that need services like ReachLocal, Yodle and OrangeSoda. He also suggests that local media can probably retool to sell inventory beyond their reach, if there were such a network in place that could serve them.

The Los Angeles Times announced recently that revenue from advertising on its online division covered the paychecks of its entire editorial division—online and offline. This is certainly heralding the value of online traffic, which newspapers have long thought cannibalized their print traffic with dubious financial return. The hidden story is that they’ve made a new advertising model work. Maybe it’s time they apply what they’ve learned online to revive their flagging print division.

SEO Book’s Aaron Wall (and fellow Oakland denizen) and I had an interview, which we posted on his blog yesterday. Here’s an excerpt:

Steve Ballmer mentioned how advertisers + search volume build off each other to create a higher yield. Do you see online advertising becoming a natural monopoly market?

I don’t, because although economies of scale have an important part to play in establishing the pecking order among firms, there are other ways in which an ad network can successfully compete.

Google certainly benefited from being an early, aggressive mover in the space, and it is clearly the dominant player, but there is still substantial opportunity that is being capitalized on by other networks. Smaller ad networks fighting Google with a more generalized approach can still offer lower pricing, because heavy bidding with Google and limited high-quality inventory means that Google can’t necessarily always provide the best value proposition to advertisers, so they offload to other networks. But there will always be other ad networks that either nail a specific vertical market well enough to be an attractive option for both niche advertisers and publishers, and smaller ad networks will also continue to innovate, creating engagement and pricing (payment) models that work better for some advertisers and publishers.

Google as a network can’t do all these things – the market is just too big and too complex. But there is a way for Google to be the dominating player in the market by owning the marketplace, by opening up its platform to other advertisers, as it has done. Google doesn’t derive any direct benefit by doing so, but one predominant ad delivery platform creates the liquidity in the market that makes Google’s economies of scale matter.

Read the full interview here»

In-text advertising involves serving up a small window with either an ad, related content, or related links (or a combination of these) when a Web page visitor mouses over a specially-hyperlinked word on a page. While normal hyperlinks might be blue with a single underline, for example, an in-text advertising link can be green with a double-underline.

Matching and the selection of in-text hyperlinked words is typically done by the in-text advertising network. The publisher simply embeds a snippet of code into the page, and the network serves up the hyperlinking and pop-up window code through Ajax.

Here are four current in-text ad networks:

• Kontera: Kontera’s ContentLinks product for publishers boasts high CTRs and allows publishers to earn incremental revenue on their existing inventory (we’ve been using it on HubPages for about 6 months, and have seen the revenue it earns clearly exceeds what it cannibalizes from other advertising on the page). It also allows a high degree of publisher control, allowing competitive and keyword filtering, control over the number of ads per page, the look of the pop-up window, etc.
• Snap: Snap’s SnapShots are a way for publishers to serve up related content (from Wikipedia, Flickr, and other trusted sources), but there are two ways a publisher can benefit additionally: through Snap Shares (getting impression shares for their site or favorite charities) or through the Gold Publishers program, restricted to larger English-language sites (250,000+ monthly  PVs) with predominantly U.S. traffic, and in certain verticals (Automotive, Business and Finance, Computing and Technology, Health, and Travel).
• Miva: Miva’s Inline Ads serve up pay-per-click (PPC) ads directly upon a user’s hover over the hyperlinked keywords. Similar to its competitors, it allows competitor blocking, and it also allows publishers to bypass its contextual matching keyword discovery functionality and directly select the keywords used to trigger ads.
• Vibrant Media: Vibrant offers two in-text advertising options: In-Text Ads and InterestADs. Both require at least 500,000 monthly vertical page views, in a long list of available categories (including health, business, computing and travel). In-Text Ads work similarly to its competitors, serving up advertising or advertising-supported content in a pop-up window; InterestADs integrate in-text hyperlinked keywords (with a box around them) with traditionally-placed standard IAB ad units

How do in-text ads perform? With the current state of the ad market, I wouldn’t dare hazard a guess on CPMs. However, Vibrant Media’s CEO Douglas Stevenson, in a December 2007 article stated 3% to 10% scroll over and click on in-text ads, depending on the category.

Real estate giant has decided to drop television advertising, and move its spend online. Why?

• TV’s ability to drive up brand recognition is no longer needed; the firm already enjoys 97-99% name recognition
• In 2008, lead generation via online increased 237%
• Cost per lead fell 62%

The fact that the real estate market has tanked has probably made the decision a bit easier. Performance-based marketing can leverage the brand equity it built during the boom years and let it ride out the downturn.

Interestingly, Century 21 was the first real estate franchise to advertise on television back in the 1970s.

Behavioral targeting has taken a lot of heat from consumers, privacy advocates, and even the government, for an industry-wide lack of transparency about how data is stored and shared. NebuAd and Phorm have been the most high-profile targets, but there’s been a growing sense that legislation might rein in the industry unless it demonstrates that it knows how to behave.

Four industry associations that have an interest in seeing online behavioral targeting stay clean, the American Association of Advertising Agencies (AAAA), the Association of National Advertisers (ANA), the Direct Marketing Association (DMA), and the Interactive Advertising Bureau (IAB) have banded together to preemptively head off accusations of laxity and negligence with new standards for privacy that behavioral targeting firms must abide by.

The timing is probably wise, given that the incoming Democratic President Obama and strong Democratic majorities in both houses of Congress are shaping up to be relatively regulation-friendly. The industry got a warning from the FTC a little over a year ago.

Gloom and doom tends to dominate online ad market projections these days. JP Morgan and Barclays Capital analysts posted dismal growth prospects at the beginning of the year. eMarketer, the industry cheerleader, continued to downgrade its projections for 2009 through the latter part of last year. Chatter in the blogosphere would only seem to delight if you were given to schadenfreude.

With such a grim outlook, it’s nice to hear optimistic projections contrary to ever-plunging growth figures. Here are two I saw the past couple of days:

Small business owners plan to maintain (60%) or increase (26%) ad spend in 2009; most optimistic about online

Though 97% of U.S. small-business owners have some degree of concern about today’s dismal economy, 26% plan to spend more on advertising – especially online and direct – and another 60% plan to spend about the same as in 2008, according to a report from Ad-ology Research.

The “Ad-ology Small Business Marketing Outlook” survey found that though 25% of owners of small businesses with less than 100 employees are fearful about the current economic situation and 58% are concerned, they are also cautiously optimistic, writes Marketing Charts. Some 83% expect 2009 sales to be up or about the same as 2008.

In terms of 2009 spending on various media types, more than half of small business advertisers plan to spend the same or more on the following: Online advertising (69%), Yellow Pages (54%), newspapers (51%), and direct mail (51%).

At the other end of the size spectrum, Mike Peralta of AOL’s Platform-A was optimistic about the spending prospects among CPG clients, even though some verticals, like auto & retail, are most certainly down.

E-Commerce Times: Do you think the online advertising industry can survive this recession? It’s getting ugly out there.

Mike Peralta: Yes it is. Online advertising, though, is performing relatively well, although not all of the categories are up. Retail, for instance, is down; so are autos. But what is happening, and why I am bullish as we go into 2009, is that there are a number of categories and clients out there that have been underrepresented online.

For instance, consumer packaged goods companies have spent between 3 percent and 4 percent of their overall ad budgets online. That trails by a third general ad spending online. As the economy gets tougher, a lot of folks will look online as a way to run a more effective campaign.

ECT: So you see a boost in CPGs’ online spending in 2009?

Peralta: Absolutely.

The Online Publishers Association (OPA) released the results of a study today as a followup to another study (full PDF) published six months ago that found ads performed better (higher impact on brand favorability and purchase intent) on branded content sites than on portals (content aggregators) and other types of Websites. The study used data from Dynamic Logic’s MarketNorms database.

The recent study took a look at 47 different performance metrics  on original-content sites vs portals, social networks and other types of sites, and found that despite the recent economic downturn, advertising on the former continues to outperform the rest. Original content sites generally have a strong advantage at attracting traffic because of their unique product offerings, but, it seems, advertisers benefit from the association.

Here are a few data points, comparing original-content sites with other site types:

• aided brand awareness: original-content +38%, ad networks -19%, over the past six months
• brand favorability: original-content +27%, ad networks and portals showed double-digit percentage declines over the same time period. This was particularly the case for younger (18-34) and more affluent ($75k+) Web audiences.

Why? We can speculate that higher-quality sites demand more respect, however subconscious, among Web viewers, and brands associated with them are more likely to enjoy a halo effect, enjoying an implicit endorsement from the sites. This might provide some comfort to original-content publishers smarting from seeing value bleed to portals and aggregators through behavioral targeting.

Silicon Valley Insider’s Michael Learmonth, writing for Advertising Age, contends that top online content producers, destination sites that identify Web users with a vertical buying intent in particular, are losing advertising value to parasitic behavioral advertising networks. The content producers, such as Edmunds.com or NYTimes.com, do the heavy lifting of providing value that brings users to their sites. Behavioral advertising networks on these sites, usually running on remnant inventory, capture user data and seek to monetize them based on their established profiles on lower-quality sites that the same user might visit later.

For example, a visitor to WebMD.com might read an article about mesothelioma, establishing that visitor as a possible asbestos-victim litigant, the clicks on advertisements for which pay top-dollar among lawyers trawling the Intertubes for potential clients. However, instead of clicking on an ad on WebMD, the visitor might end up clicking on a mesothelioma ad on a low-CPM social network a few days later. The social network enjoys a great RPC (revenue per click) without having done any of the valuable content building that profiled the visitor in the first place.

The heart of this issue is the value of user data that high-quality content networks are effectively giving away for free to the behavioral advertising networks that they work with to monetize their remnant inventory.

Increasingly, large publishers are choosing to stop contracting with third-party ad networks because they find visitor data more valuable when it is exchanged directly with their advertisers (and because they have greater control over ad creatives and scheduling). But smaller publishers without the scale to build their own advertiser relationships or even demand premium pricing might have gotten the short end of the stick, despite delivering a unique value proposition in carving out a niche to advertisers.

What’s next? As publishers using behavioral ad networks begin to understand that the value of their content is often recouped beyond their sites, they might begin to demand some of that dispersed value back. Privacy issues abound with user data ownership and transferability, and tracing an advertising click to its “true source” is a sticky proposition. But difficulties like these will have to be surmounted in order for behavioral targeting ad networks to continue to get buy-in from valuable publishers. The alternative might be worse: much like larger publishers like ESPN have done, smaller but targeted publishers might drop behavioral targeting networks altogether.

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)