We all know that the way the search engine giant makes money is through advertising - over $23 billion in 2009 - but what may surprise you is that its advertising-based revenue comes almost exclusively from sites that are owned by Google.]]>Sponsor

Ever increasingly, Google is relying on itself to make money through its own real estate - places where it can position the ads that advertisers purchase. This is a concern for publishers that rely on Google for revenue through Adsense because there has to be a point at which this is no longer a profitable exercise for the company.

If it reaches that point, Google will essentially be subsidizing publishers. And it may not have a choice but to keep doing so. Because without fresh content creation, what is there for users to search for on the Internet that is of value? The main tenet of the search business is to provide quality results, and while that may be the case now, if publisher's Adsense revenues were affected, one can wonder what kind of effect that would have on content.

So although Google may have made some mistakes with applications like Buzz, along with the half-hearted emergence and now slow death of features like Gears, expect them to continue to increasing space for content to grow, even if that means one of several strategies:

Become an ISP

An experimental program has been announced whereby Google will provide gigabit service via fiber directly to homes in select markets. Interested municipalities and community organizations are encouraged to submit a proposal for this right. At the World Mobile Congress, CEO Eric Schmidt talked about the goal of this program being purely experimental, which means showing infrastructure operators such as cable companies that this is possible, rather than Google becoming a full fledged ISP. But once the fiber has been rolled out, it doesn't roll back in, does it? How long does the "experiment" last?

Trounce the Competition in the Browser Wars

Google's Chrome browser is getting a lucky break over the next few weeks. That's because Windows users in Europe who use Internet Explorer will be getting an update to their machines notifying them about browser choices that they have. This is in response to the European Union's ruling that Microsoft's practice of bundling Internet Explorer with Windows restricts competition. While the update offers many browser choices, the result will be a boost to market share for Chrome. It has steadily grown in popularity and already has roughly 5% of the market since emerging in 2008.

Offer Computing Architecture to Device Manufacturers Completely Free

We've seen this already with Android, and it appears that the no-cost operating system has basically saved Motorola from a fall to obscurity with its release of the Droid. Expect to see more of these developments as 2010 unfolds with Chrome OS attempting to break into not only the netbook market, but also tablets and smartbooks, which fill the gap between a high end mobile phone and a netbook.

So when you hear these new announcements of applications and services that Google rolls out, think of content. Think of how they can better deliver information to users. They want it to be as easy and as seamless as possible. While sometimes these initiatives don't always work out, they aren't going to stop trying.

For the time being, these ads are only available in the U.S. and in English, though Google plans to launch them in other regions and languages as well.

Google has obviously struggled to turn YouTube into a profitable business unit. Taking YouTube ads out of the YouTube silo could help Google to win over more advertisers and give current advertisers more reasons to buy ads on YouTube.

But cracks are appearing in AdSense. AdSense is 30% of Google's revenue, so this matters. Any weakness in AdSense is important for Google's investors as well as advertisers, publishers, users, and entrepreneurs.

AdSense was a runaway success because it met the needs of online publishers, advertisers, and users all at once:

• Publishers could get revenue simply by pasting a widget on their website.
• Advertisers could extend their performance-based search-driven advertising, which they already knew and liked, across the Web.
• Users began to see ads that actually made sense in the context of what they were reading, and many of the ads came from smaller advertisers whose products and services would not have otherwise reached them.

But each of these constituents is starting to see problems with AdSense. Let's start with publishers.

Publishers

BtoB Magazine published an article on June 5th titled "Declining revenue has publishers rethinking Google AdSense." It quotes many B2B publishers who echo the conclusion that revenue from AdSense is no longer meaningful to them, that it does not "move the needle." This is less a reflection of AdSense's decline than the fact that traditional publishers have gotten smarter about how to sell advertising online. They have had to. Print is in decline, and the Internet is their only hope. Getting some "spare change" from AdSense may have been okay in the past, but they need a lot more now. Plenty of good alternatives exist on other advertising networks, and publishers are getting a lot smarter, too, about selling directly to their consumers.

Who cares about traditional B2B publishers that are migrating online, you say? What about those big native-online publishers? Well, Facebook just hired the guy who masterminded AdSense, but don't expect too see AdSense ads there. Rupert Murdoch wouldn't like to be thrown scraps of revenue for MySpace with a partner that makes all the rules. And one couldn't imagine Twitter pasting AdSense ads on its network. What large online publisher could get a meaningful amount of its revenue from AdSense?

Back in around 2006, all you needed to do to get VC funding was build a website that got user traction. "What about revenue?" they'd ask. "AdSense," you'd say. "Okay, then, here's the term sheet." Anybody try that with a VC lately?

Ah, so it's all about the long tail, right? Yes, a lone blogger has few other options. Everything else takes too much effort. They are not making a living from it, so they are satisfied with "spare change." Many of the alternatives to AdSense seem rather scammy, along the lines of, "Make a lot of money working from home." Google is well respected as a brand, and everyone knows what they'll be getting from AdSense. Don't they?

Actually, most people don't know one very important part of the deal: the percentage of the revenue that the publisher gets. You can parse the data from Google's financial filings in aggregate. But knowing its percentage in aggregate does not matter to a publisher. Google may be giving a great deal to a large publisher with clout. What do you, the little guy, get? You may know how much Google is paying you for the clicks that you generate, but do you know how much the advertisers are paying for those clicks? If you get $100, did advertisers have to pay Google $200? Did you get 50%? Was it only 10%? Maybe Google sold the clicks you generated for $1,000, and you got 10% of it? How would that feel?

To Google and its investors (more about them later) this ability to simply turn a lever and get a bigger percentage of revenue is marvelous. Who would not want that kind of pricing power? But to your average publisher, it seems to violate one of the most basic rules of business: knowing the terms of the deal, knowing who gets what.

The long tail is also where the problem of click fraud is most serious. To protect it, Google will (quite rightly) sue publishers who scam the system. But now publishers are suing back, and winning. This is ugly stuff.

In another murky corner of the Internet are "made for AdSense" sites that scrape other publishers to generate ad clicks. This is also considered click fraud.

So, the long tail looks rather like fishing in a murky bottom, full of nasty catches, and hardly a bright future for a great company like Google.

Advertisers

Hang on. Get real, you say. None of this matters because Google sells more advertising than any other company, and that's all that matters, right? Publishers, big and small, will take whatever Google gives them because Google has advertisers locked up.

Yes, that is true in search. Neither Yahoo nor Microsoft, nor any of the myriad of search startups, has made a dent in search advertising. AdWords reigns supreme.

Not so fast, though. First, some perspective. Traditional brand-based advertising is still bigger than search advertising, which is why Google bought DoubleClick. But the current excitement and creativity is centered on social media advertising, and Google is not a player in that game (yet). So, search is only one part of the ad market.

More importantly, AdSense clicks are converted differently than clicks on Google's search page. Getting people to talk about this on the record is hard. Off the record, many advertisers/marketers and ad agencies will tell you that those conversions are not the same.

Conversions matter. Clicks are only the first step in the process of earning revenue. Conversions, either directly into revenue or into something deeper in the conversion funnel, such as a free trial, are what advertisers care about.

Logically, an AdSense click wouldn't convert as well as a click on Google's search page. That ingredient of direct intention on the part of the user is missing. Some advertisers may not be savvy about tracking conversions and will therefore pay the same for both types of clicks. But Google can hardly rely on dumb advertisers for its growth strategy.

Advertisers will pay less for AdSense clicks, then. This could cause AdSense revenue to decline (more on that later). Or instead, Google might "dial back" the percentage it pays out to publishers, which would almost certainly spur the system's decline in a vicious cycle. Smart publisher and smart advertisers would desert AdSense, leaving Google to profit by mediating between dumb publishers and dumb advertisers. Not a good long-term strategy.

And then there is the "brand safety" issue. The keyword approach to contextual relevance can create those ugly mismatches that you occasionally see. You know, like when you see an ad for kitchen knives while reading an article about a vicious stabbing? Readers are only faintly upset or annoyed by it when they notice it, but advertisers consider it a major issue. This is the kind of thing that keeps brand-builders up at night.

Weaker conversions and brand safety issues in search-based advertising will only fuel the excitement and creativity in social media advertising. Is AdSense simply a bottom-fishing volume game?

Why is it hard to get advertisers and their agencies to talk about this on the record? Martin Sorrel, founder and CEO of WPP (the world's largest advertising agency) speaks of Google as a "frenemy." Actually, now he has renamed it a "froe." WPP buys $850 million worth of ads per year from Google, which would normally give WPP a lot of clout with media firms. Yet Google also disintermediates ad agencies. One just buys AdWords ads directly from Google.

The relationship between advertisers and Google is delicate, one that would not be helped by advertisers speaking to journalists on the record about weaknesses in one part of Google's services. Advertisers with clout prefer to negotiate behind closed doors.

Users

The most important person in the AdSense eco-system is the user. As long as the user is clicking and buying, all is well. Publishers and advertisers will both be happy. Users may be buying less now, but that is a simple cyclical issue: we are in a consumer recession. When the economy recovers, AdSense will recover.

Well, maybe. There are three reasons to doubt this:

1. Ad blindness. Advertisers are in an arms race for attention, leading them to produce ever more creative ads, in turn leading users to tune out those bland, familiar old AdSense ads all the more.
2. Social media alternatives. People trust other people more than they trust ads. That is why Ad-land is channeling its creativity into inserting its brands into their conversations.
3. Declining relevance. Users who do not get what they want from clicks will stop clicking. If they don't see AdSense ads on high-quality websites, and if the ads they do see are not relevant to what they are thinking about at the time, they won't click.

Google's Investors

Let's jump to Google's Q1 2009 results. The headline was that Google's revenue grew 6% (compared to the same quarter a year prior) to $5.51 billion. We can break that down as follows:

• Revenue from Google websites grew by 9% to $3.70 billion,
• Revenue from Google's partner sites, also known as network revenue or AdSense revenue, fell 3% to $1.64 billion.

According to the numbers, not all is well with AdSense. Still, a 3% decline does not sound like much; it would raise questions only with a fast-track company such as Google. Maybe this is simply the effect of the recession.

But maybe it is an early sign of a fundamental weakness in AdSense. With AdSense making up about 30% of Google's revenue, such a sign is big enough to matter. This should be a serious concern for investors. If I owned Google stock, I would be looking very hard at network revenues in Q2. Network effects can lead to explosive, hockey-stick-like growth on the way up... and falling-off-a-cliff declines on the way down. When all three constituents (publishers, advertisers, and users) were getting great value from AdSense, revenue exploded. If all three suddenly lost interest, that virtuous cycle of growth could turn into a vicious cycle of decline.

Judging from its actions, Google management fully understands the issue. Follow the money. Look at what Google is acquiring. Its two biggest acquisitions have been:

1. DoubleClick, which it purchased for $3.1 billion, allowing Google to diversify from search-based advertising, so that it could have more clout with advertisers;
2. YouTube, which it purchased for $1.65 billion, allowing it to lock up the fastest-growing inventory, video.

Look at the websites and services Google invests in. It plays to control inventory so that it doesn't have to depend on publishers, and so that it has better control over relevancy matching. Some of this has gotten a few publishers riled enough for them to go on record, particularly when their services lie directly in Google's path.

So, don't feel sorry for Google. It's taking care of the AdSense problem. We'll have to see, though, whether investors buy that story. Investor reaction to Google's Q2 report will be interesting.

Opportunities For Entrepreneurs, New Venture Intermediaries

If AdSense is in decline, that leaves open a big market for entrepreneurs. Publishing is not a winner-take-all market. Google will not control all online inventory. Advertisers and their agencies like choice. And users click on whatever is relevant.

We see two plays in this environment:

1. Match relevance. Match relevance means parsing content to deliver more relevant ads. This is easy to say and hard to do. A lot of smart semantic tech ventures are focusing on this problem. This is smarter use of search technology than Quixotic tilting at Google's search bar dominance.
2. Connecting CPM to CPA. This is another hard problem to solve but promises a huge payoff for the winner. Publishers like selling CPM (cost per mille): it is easy for them, and the burden of performing lies with the advertiser. Advertisers, on the other hand, like CPA (cost per action or acquisition): it is easy for them, and the burden of performing lies with the publisher. Both parties look at the CPC (cost per click), because that is trackable from both sides of the transaction. But CPC is just a proxy for what each really wants: CPM and CPA, respectively. Any venture that brings publishers and advertisers together with a deal that satisfies the needs of both will do very well. There is a huge opportunity here. High-quality websites that really engage with their audience will certainly do well by CPA metrics, but the solution will have to be really easy to implement.

What Do You See?

Please give us your feedback. And if possible, tell us your vantage point: publisher, advertiser or new venture intermediary.

As a part of the announcement FeedBurner offers information for publishers about how to migrate from FeedBurner to a new Google account, as in the future all feed related services will require a Google account. It's the end of an era, really.

Still, for everything from analytics, to nice clean easily transferable URLs and accounts, to email subscriptions and adding links into the body of feeds - FeedBurner has been great.

Now it appears to be subsumed by AdSense. Maybe that will mean it will get more attention and updates than it has since the acquisition. Maybe that will mean there are more ads in feeds. Either way, just as so much of the art and communication world now lives in the shadow of advertising and PR, it's sad to see feed publishing now wholly under the umbrella of Google's massive advertising business.

Photo: "Spreading the FeedBurner love," CC by Flickr user 37hz

It makes good sense for Google to get start offering this new feature now, as mobile Internet usage on smartphones and other mobile devices is starting to take off. Other companies like AdMob and JumpTap have already carved out some lucrative niches for themselves, so Google is clearly trying to protect some of its home turf here.

A group of Stanford University researchers specializing in artificial intelligence, Saxena and Siddharth Batra, and Assistant Professor Andrew Ng, created this new technology they're calling ZunaVision. The embedding technology is driven by an algorithm that first analyzes the video while paying close attention to the section of the scene where the image or video will be embedded. It then subtly alters the color, texture, and lighting of the embedded object to better fit it in with the surroundings. As other objects pass in front of the embed, it disappears from view and as the camera pans and zooms, the algorithm shape-shifts the object accordingly. The appropriate shadows are also added for a more realistic feel. The end result is an embed that looks as if it was there all along, instead of being some obvious insert or overlay that is clearly not a part of the scene.

This type of technology is nothing new to the big Hollywood studios - they've been using similar methods for years in order to do special effects. Until now, however, there hasn't been a way for people to perform these kinds of advanced video edits without investing serious money into professional video editing software. But with ZunaVision , anyone and everyone can accomplish this same task in minutes, with only a click of the mouse.

Revolutionizing Video Ads?

Videographers are already thinking of creative and imaginative ways to use this technology to liven up their videos and amateur films, but the real financial potential of ZunaVision lies in advertising. With ZunaVision, anyone with a video camera could potentially earn money by agreeing to place corporate logos or ads within their videos before uploading them to the internet. That could be a hugely successful venture if the technology was adopted by Google, for example, to become the "AdSense for Video" and integrated with their video-sharing site YouTube.

At the moment, YouTube is experimenting with different methods of monetization, including overlay ads on embeds, post-roll ads, and allowing publishers to bid for sponsored placement of their videos on the site. These methodologies are still too new to provide any conclusive data as to their success just yet. ZunaVision seems to be just as promising, if not more so, than any of these current experiments.

The ZunaVision site features several example of these in-video embeds, which you can see here - there are well over a hundred examples of both user-gen videos and clips from TV and film that demonstrate the technology's potential.

You can sign up and try ZunaVision for yourself by clicking here.

This is a radical opening of the previously white-listed YouTube monetization strategies. Have you made a video of your band performing its new single, or your company's new product demonstration or your nonprofit group's expose of corporate misbehavior? If you'd like to have that video highlighted on the site, now you can - for a price. What price? What can you bid?

The service appears to be having technical difficulties at launch, I was unable to bid for improved placement of a video interview with my dog or of myself threatening to eat a live baby chicken, content that in my naive days I expected to soar to the top of the charts on its own merit.

YouTube started displaying advertisements inside selected partner videos a year and a half ago and moved to include selected videos in AdSense campaigns just over a year ago. We don't know how well those campaigns have monetized but both of them felt less creepy than today's announcement.

We'll be curious to see how many of YouTube's publishers are interested in purchasing views on the site and what that will do to the content community there.

At the very least, the class of slime balls that take money to inflate YouTube popularity numbers for their clients will now face a pricing challenge at the hands of the auction market.

It's important to point out that a large part of AdEngage's business comes from adult sites (2112 out of 3577 currently active sites are classified as adult). This is probably the main reason why Technorati decided to let AdEngage continue to operate under its own name for now.

Self-Serve Advertising

Technorati will first launch the new advertising network as a private alpha, focusing mostly on text ads. Next month, the site will launch publicly and Technorati will add 125x125 image ads as well.

Bloggers are always looking for new ways to monetize their traffic and having another option from a large and respected company like Technorati should draw in quite a few publishers. Most small blogs currently rely on Google AdSense for their income, but a lot of bloggers have also been complaining about the low income they receive from running these ads. Judging from what we have seen so far, Technorati's offering might be a compelling alternative to Google's AdSense, especially for smaller sites.

Today, Google announced the launch of Google AdSense for Games, a flavor of AdSense built on Google's AdScape Media acquisition that allows advertisers and content producers to place ads within the content of online games.

But, that's a familiar position for Google.

The service, currently in beta, offers a variety of traditional AdSense ad units:

"As a beta user of AdSense for Games, you can display video ads, image ads, or text ads within your online games to earn revenue. You'll be able to show these ads in placements you define, such as interstitial frames before a game, after a level change, or when a game is over."

What's more, there are already a number of well-known companies participating, like Konami, mochimedia, and Zynga, which took on an additional $29 million in funding in July. Titles highlighted include Dance Dance Revolution, Yu-Gi-Oh, and Karaoke Revolution to name a few.

But just how well integrated are the ads? Google has provided the following demonstration of the service in action:

Content providers who are interested in participating in the program may apply if they have a minimum of 500,000 game plays with 80% of their traffic from the U.S. or the U.K.

Entering a market where Yahoo! and Microsoft already have a firm foothold is not out of character for Google. Nor is succeeding with that strategy. Clearly, it's a position from which they've managed to win, time and time again. It will be interesting to see if Google's series of come-from-behind victories remains consistent in the world of online gaming.

Revenue Split

As our sister blog Last 100 reports, the revenue generated by these videos will be split between MacFarlane, Google, the host of the site the video is playing on, and Media Rights, the production company behind these cartoons.

New Hope For AdSense Video?

AdSense has been giving publishers the option to run YouTube videos with advertising on their sites since last October, but it doesn't seem as if publishers really ever warmed up to the idea of having relatively random YouTube videos show up on their sites. Also, revenue from these videos tends to be low.

With this new series, some publishers might reconsider running these ads, especially if their audience is compatible with MacFarlane's brand of humor.

Today, Google announced that it is rebranding DoubClick's Performics Affiliate as the Google Affiliate Network.  Google acquired DoubleClick in March 2008 for $3.1 Billion. The Google Affiliate Network is not yet integrated into Google's AdSense and will continue to be hosted at ConnectCommerce.com for the time being. Companies currently featured on the network include Target, Kohls.com, Citibank, Circuit City, Zazzle, Bank of America, Verizon, and Barnes & Noble.

Google is clearly trying to expand its advertising portfolio both for publishers and advertisers. Chances are that Google will integrate the Affiliate network into AdSense in the long run. Given the synergies between the two, it does seem strange, though, that Google would not be doing this already. But then, Google does often seem to take a rather long time to integrate its acquisitions (just think GrandCentral of Jaiku).

Google is only slowly opening up the Affiliate Network to new publishers. Those interested in signing up are currently being forwarded to an application form.

Apparently, the plan is going to involve a lot of of work will use Google's Adsense advertising system and the Google Content Network to run the series.

"Google will syndicate the program using its AdSense advertising system to thousands of Web sites that are predetermined to be gathering spots for Mr. MacFarlane's target audience, typically young men. Instead of placing a static ad on a Web page, Google will place a "Cavalcade" video clip. "

There will be numerous strategies used for incorporating the advertisements into the clips including "preroll" ads, which will remind viewers of a commercial, banners at the bottom of the video clip, or a "brought to you by" note at the beginning.

The Animated Series

The series will be exclusive to the internet alone. The series will also include a new line-up of characters and will be 50 episodes that are two-minutes each. MacFarlane describes the episodes as, "animated versions of the one-frame cartoons you might see in The New Yorker, only edgier." MacFarlane will receive a percentage of the advertising revenues and will also work with advertisers to provide original animated commercials to run with "Cavalcade" for a hefty fee. There's no word yet on who's signed-up for the deal.

Why is This a Big Deal?

If Google succeeds, this could become the premier internet business model for Hollywood to look into. With a multimillion-dollar production price tag and a high-profile Hollywood celeb, Google could make history, while making Hollywood's dreams come true. This pay day could be huge for both sides of this fence if Google succeeds.

In that software story, Google stars as Luke Skywalker.

In a parallel universe called media, Google looks much more like Darth Vadar. Publishers have to publicly talk about Google as a partner while seeing their competitive advantage drained. Advertising agencies see their role as the intermediary fundamentally threatened. Even some advertisers start to fret about the lack of choice and accountability.

Media and software are now one industry. So it is really not a parallel universe.

Google is a great company and the standards that they set will continue to grow the online advertising market. It is just that everybody else in the market will get slim pickings. Serfdom sucks.

Rallying around this 4-point manifesto will prevent an online media monoculture:

1. Use OpenX rather than Google Ad Manager. Yes, Ad Manager is currently more mature, but OpenX is backed by top tier VC and could become the Red Hat of online advertising. They will survive and thrive but need a bit of faith. Linux was immature for a long time as well. What is not to like about Ad Manager? It looks like just another great free tool from Google. It is the integration with Adsense that is a worry. One of the success stories on the Google Ad Manager site illustrates this: "The AdSense integration feature has been helpful with helping us optimize our remnant inventory. There have been numerous days where we made more money because Ad Manager was able to auto adjust and send AdSense more inventory." Take the link to Publisher tools and you get to an Adsense page with all the tools available for Publishers. Yes, all these free tools are designed to sell more AdSense. Letting Ad Manager and other Google tools automatically make these decisions on behalf of AdSense while you fly blind is not smart, particularly when you consider the next point.
2. Publishers should ask Google to reveal their AdSense revenue split. It is kinda funny that nobody knows what share of the AdSense revenue they're getting. I have seen blog comments where people confidently state that Google only takes X%, but the fact is, Google doesn't reveal it and the percentage can vary from zero to one hundred. Yes, if your site makes less than $100 per month you get zero; the transaction costs are a reasonable excuse and who knows if they make any money hoovering up this spare change. At the other extreme, if you have real clout and there is a strategic advantage at stake for Google, a publisher can get 100%. So the averages that analysts parse from public data are meaningless to publishers. It is the most basic of business questions - "what's the deal, what do you get, what do I get?"
3. Advertisers should push Google towards CPA (Cost Per Action) to get real accountability on clicks. One hears advertisers say, "who cares how they get their clicks, it is all performance based, I only pay when I get a click so I don't care." That is a naive view. The conversion is what matters. If clicks don't convert you lose twice - you pay Google and you pay the cost to attempt conversion - bad leads are worse than no leads. AdSense is not a branding tool, it is part of the direct marketing industry. Ask Google for a revenue share deal. If they don't give it to you, find somebody who will. Get clarity on revenue share percentage. If you are selling a $100 product, you need to know your cost of sale.
4. Back independent audience measurement rather than relying on Google Analytics industry benchmarking. The recent announcement about the availability of analytics benchmarking data was overshadowed by closure of the DoubleClick deal and the Ad Manager release, but is possibly even more significant. The announcement just looks like two simple new settings that allow Publishers to share their data. This FAQ explains it well. Google understands that controlling the data means control of the transaction. This is like financial markets such as FX where a company such as Reuters could dominate an industry by controlling the information flow. The biggest speed-bump on the road to more online advertising is reliable, verifiable, audited audience measurement data. Big advertisers won't open up their wallets to the long tail until they see this transparency. This should come via industry standard bodies such as IAB and MRC and not the largest ad network.

I am not anti-Google. Google Web Toolkit is a wonderful addition to the open source community and I love what they are doing with Apps to give Microsoft a run for the money with Office. In fact, after this post, I was accused of being a Google fanboy! Nor does this touch upon Google's dominance of search - that is the free market at work and if anybody can create a fundamentally better search engine, they can win.

Nor is this asking anybody to do what is not in their best interests. For publishers there is a small trade off involved in the OpenX vs Ad Manager decision, but the long term benefits should outweigh any short term hassle.

The fundamental issue is that AdSense is the weak link in the Google chain. It has fundamental issues for both publishers and advertisers and Google should not be able to use their dominance in other areas to shore up this weakness.

Launch participant Brightcove said in a release tonight that "Publishers and content providers can control which videos get which ads and when the ads play in each video." Am I the only one that hates those damned pop up text overlay ads that show up on other services' videos?

There is clearly a lot of room to experiment with video ads.

In some cases even interstitial videos inside a video can be done well, check out almost any of the work of video ad network Castfire, for example. Castfire has a very sophisticated technology for serving up ads in video. While at first blush this San Francisco startup might seem to be in trouble given tonight's news - in reality, AdSense for Video will be about monetizing bulk, remainder and less-than-high quality video more than anything else. That leaves plenty of room in the market for startups taking other approaches, like serving video ads inside of videos - as Google said it was going to do.

There has been a lot of coverage about the potential Yahoo! acquisition by Microsoft over the last week. This coverage has looked at issues such as deal mechanics, antitrust implications, and the impact on advertisers. One aspect of the possible blockbuster deal that has not been adequately examined is the impact on web publishers, in particular the medium and long tail publishers who are almost wholly reliant on ad networks to monetize their ad inventory.

Short term: the acquisition will be bad for publishers

In the short term, the potential acquisition will be bad for medium and long tail publishers.

Yahoo! Publisher Network, Yahoo!’s competitive offering to Google AdSense, is an also-ran in the marketplace. It has been in beta for two years now. Most publishers that we work with wait a month after sending an application to YPN, only to have it rejected. YPN won’t serve ads outside of the US despite Yahoo!’s presence in the brand/display market internationally. Unconfirmed sources inside Yahoo! indicate that they will be re-launching YPN in the summer of 2008, but it’s entirely possible this timeline will slip as the acquisition process plays out. At the same time, Microsoft Content Ads, Microsoft’s competitive offering to Google AdSense, is in a private beta running on less than a few hundred web sites. It is hard to imagine that the merger process will accelerate delivery of either solution.

From a strategic focus perspective, it’s clear that Yahoo! and Microsoft are focused on the advertiser side of the online ad market. One of Yahoo!’s biggest development projects, Apex, is intended to integrate search and display advertising into one system for advertisers and ad agencies. Microsoft’s largest acquisition to date is aQuantive, an ad agency and digital solutions provider which is largely focused on advertisers.

Yahoo! and Microsoft can afford to focus on advertisers at the expense of publishers because they have so much ad inventory on their owned and operated web sites, which Google does not. The majority of Yahoo!’s and Microsoft’s properties are designed to keep users on their web sites, whereas Google’s main product (search) is intended to send users away, with the notable exceptions of Gmail and YouTube. comScore and UBS estimate that Yahoo! and Microsoft have more than twice as many monthly page views as Google as of December 2007. As a result, a combined Yahoo! and Microsoft would likely focus on how best to monetize their own ad inventory, and those of strategic partners such as Facebook and eBay, rather than inventory from an open publisher network.

Long term: good potential upside for publishers, but don’t hold your breath

In the long term, there is upside potential for publishers. However, it’s just that -- potential -- and has remained that way for several years now.

As a combined force, Yahoo! and Microsoft might see a big enough opportunity in the market to pursue industry solutions outside of their owned and operated portfolio of web sites. Yahoo! has started down this path with the Right Media, Blue Lithium, and Maven Networks acquisitions. Other media companies such as Fox Interactive Media and niche players such as Martha Stewart Living Omnimedia have started down the path of selling ads for external publishers as a way to grow their businesses. As the trend towards user level targeting increases, as opposed to web site level targeting, Yahoo! and Microsoft will need to find ways to target advertising off of their owned and operated site network.

Yahoo! and Microsoft can combine research and development budgets in a number of different areas to free up money for investing elsewhere. Within a combined entity, spending on search, email, infrastructure, etc. can all be reduced to free up money to invest in solutions that benefit publishers. In addition, Microsoft has a significant cash advantage over Google with respect to available money for investment. In 2007, Microsoft’s quarterly net income was roughly equivalent to Google’s annual net income.

Conclusion

In the short term, the Microsoft-Yahoo! acquisition process is likely to be bad for publishers. The lack of focus and investment that Microsoft and Yahoo! will have on the medium and long tail market will result in a slower pace of innovation and poorer monetization opportunities for publishers. In the long term, there is potential upside for publishers but the acquisition process, integration, and renewed product development will take a long time to sort out. The time frame involved reminds me of the old economics adage: "In the long run, we are all dead." How long might we wait until Microsoft and Yahoo! deliver?

This is a guest post by Rajeev Goel, the Co-Founder and General Manager of PubMatic, a publisher service that automates and optimizes ad serving decisions. You can follow Rajeev at the PubMatic blog.

]]>Discuss]]> http://www.readwriteweb.com/archives/how_will_publishers_fare_under_microhoo.php http://www.readwriteweb.com/archives/how_will_publishers_fare_under_microhoo.php Trends Thu, 14 Feb 2008 10:34:33 -0800 Guest Author