Online Advertising: Big Changes Coming Soon

In the last few years the internet has seen tremendous changes to the media business in terms of content and presentation—think user-generated content, community, social networking, multimedia, AJAX; Web 2.0. Now it’s time for the ads to catch up. Lately I’m talking to and hearing about a number of companies aiming to reinvent online display advertising. Advertisers and agencies are eager for change as well. All the attention and investment focused on this goal is sure to drive rapid evolution.

Certainly display advertising is ripe for improvement. Traditionally the shotgun approach has prevailed, with a high degree of uncertainty that messages would ever reach receptive audience members. Economically, that uncertainty must be reflected in the form of steep discounts against the value to a seller of being matched to appropriate buyers. If you reduce the risks you reduce the discount but also improve performance. Everyone should win.

Four areas that offer big potential for change are the way online ads are sold, the way they're priced, how they're targeted and displayed, and finally the creative format itself.

In the past several months, Google and Microsoft have made highly publicized acquisitions in the display advertising market while Yahoo, holder of the world’s largest inventory of online display space, announced that taking online advertising to the next level is a top corporate priority. There are also niche players, some of whom are thinking in innovative new directions that don’t necessarily resemble traditional banners or IMUs; StarMedia Network, LocalThunder, Eyeblaster, and Personiva are a few names that have been in the news of late.

In addition, companies such as MySpace are beginning to leverage their deep knowledge of audience members to offer "hypertargeted" advertising opportunities.

Importantly, advertisers and agencies are ready to embrace new systems and approaches. They believe that current advertising solutions only scratch the surface of the potential of the online medium to deliver far better targeting, metrics, audience engagement, and ROI. However, these market players aren’t taking the lead in driving change. Instead, they’re looking to large online publishers or technology-based startups to set the agenda for the future of their industry.

Traditional media are also lagging in the leadership race, in part because both the technological and philosophical innovations required aren’t well aligned with their core strengths. Also, few individual publishers have the scale needed to drive industry-wide change in the face of the inevitable pushback from competitors. This means that a large number of companies with many billions of dollars in revenue are on the verge of having the source of that revenue wrested from their control and potentially given to other media outlets who better serve advertiser needs—not unlike the historic shift we’re seeing today of money moving from traditional to online advertising. Business risks continue to rise for traditional media companies that aren’t undertaking massive redeployment of resources toward technology-oriented platforms and services.

While only a few players are large enough to set the agenda, small companies will no doubt prove to be key influencers by way of solving pieces of the big problem, framing solutions differently, or simply being acquired by one of the big names. I’ve seen this happen in my own career: I used to work for a young internet company called GoTo.com that at one point aspired to be the next hot search engine. Instead we discovered the value in powering monetization for sites with more traffic, beginning with AOL and then Yahoo. We changed our name to Overture Services and eventually were acquired by Yahoo; equally important, Overture inspired Google to improve on the original model and develop AdWords.

The bottom line: keep an eye on online advertising. Revenue is huge and growing. Product evolution hasn’t kept pace with the environments where it’s displayed. And it’s one of those pieces of the economy that touches each of our lives almost every day. We all know the world will look different twenty years from now. It’s a sure bet that one of the areas where it will be most different is in the ways companies communicate with potential buyers about goods and services.