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.

It’s no secret that social networks, like Facebook and MySpace, have had a relatively tough time selling their inventory. Much of the discussion has been around advertiser skittishness and poor targeting, but a new study by IDC suggests there is something different about social network users themselves: they are simply less likely, compared to overall Web users, to respond to online ads.

At first blush, it looks like it’s a simple matter of social networks enjoying a lot of repeat traffic, which dilutes CTRs and eCPMs. However, the study states that only 57% of users of social networks have clicked on any online ad over the previous year, compared to 79% of the Web at large. Furthermore, ad click-throughs led to far fewer purchases among social network users: 11%, compared to 23% among the Web at large. This indicates that it is not a matter of the social networks themselves or the advertisers that use them, since, presumably, social network users used non-social networks as well, and simply didn’t respond to ads on those sites as much, either.

That different types of online users respond to online ads differently is not new: I wrote last year of a “natural-born clicker” profile that clicks on ads far more than the general online populace.  I suppose it’s no surprise that if there’s a group that clicks more than average, there’s probably a group that clicks less often. Pity it’s a group that is so large and spends so much time online.

Why do social network users respond less? Here are a few guesses of mine:

• Because they spend so much time online on a particular network, ad blindness is more likely to set in. They are far more likely to know where ads are placed, and to filter them out.
• Since social network traffic is of a browsing nature rather than a searching/information gathering one, users are more likely to find ads irrelevant or uninteresting than those reading content sites
• Within the sheltered confines of their social network gathering place, ads, whether targeted or not, might feel intrusive of users’ sense of privacy

IDC concludes that social network advertising will continue to underperform until social networks take on a more content-oriented dimension like portals like MSN and Yahoo. It appears simply building a platform where users communicate and share with each other might not be enough.

YieldBuild optimizes online ad spots for publishers, maximizing revenue across networks, layouts and formats. But what if you’re an advertiser, and want to optimize the response rate to your banner ads?

There are a few companies that have created optimization services for advertisers that tweak design elements within the ad in order to improve click-through:

• SnapAds: Profiled by TechCrunch today, SnapAds takes creative from a network, agency or advertiser, and creates a large set of permutations with which to test. Backgrounds, calls to action and other aesthetic elements seem to be teased out of a multilayered source file provided to SnapAds, and are tracked for performance. The result is an ad (or small set of ads) that outperform the average. In one test, the SnapAds-identified ad format outperformed the original by almost 2000%.
• Tumri: Tumri’s AdPod parses out the core elements of a good banner ad: the product message, image, brand and call-to-action. Provided with a number of variants for each, AdPod can cycle through all the variations and determine those combinations that perform best.
• Personiva: Personiva’s AdaptiveAds, currently in beta, tout personalization down to the visitor level. Ads change depending on “environment, behavior and interest,” which I would take to mean context, although AdaptiveAds likely do something similar to Tumri and SnapAds: allow advertisers to test a wide variety of creatives with audience-targeted messages.

Why is this important? Banner ads are struggling to demonstrate their worth these days. And, while aesthetic concerns are important, they are not paramount, and leaving creative optimization to your creative team might not necessarily achieve optimal performance.

Before YieldBuild, I worked at QuinStreet, where the best practices team was constantly testing the effects of layout, format and other visual changes of ads, landing pages, and microsites. Sometimes subtle or seemingly inconsequential changes could have a significant impact on a piece of creative’s ability to engage a visitor. Thankfully, technology, such as YieldBuild for publishers, or Tumri, Personiva, and SnapAds, for advertisers, is making that work far more extensible and granular.

The premier tech blog, TechCrunch, just published an update on YieldBuild, covering the most important changes we’ve rolled out recently as we enter our public beta phase:

• we are accepting publishers of all sizes
• publishers can use our self-service wizard to provision YieldBuild code for themselves (you sign up via the application form, and we will send you a link to the wizard shortly)
• improvements to the algorithm have significantly shortened the training period (the time it takes for YieldBuild to yield significant lift to your revenue)
• we support more ad networks: in addition to Google AdSense, we now support Yahoo Publisher Network, BlueLithium, Advertising.com, ValueClick and TribalFusion, with more contextual and display network support coming soon

We thank Jason Kincaid at TechCrunch for the coverage and look forward to seeing more publishers enjoy great revenue improvements using YieldBuild, without the hassle or guesswork involved in trying to optimize your ads’ formats, layouts and ad networks manually.

2% growth from Q2 to Q3. Keep in mind that that’s a mix of contextual/search and display, and the former’s growth is more than certainly offsetting the latter’s drop. Assume flat growth for Q4, and we’re looking at a 2008 revenues total of $23.2 billion, a banner year and a 10% increase over 2007. But, if you’re inclined to pessimism, as is Henry Blodget, even that projection is too rosy.

Erick Schonfeld, covering online ad market trends over at TechCrunch, warns that the situation outside the U.S. is likely to be even more dire.