Not long after the beginning, when the first-ever ad appeared on the previously commercial free World Wide Web (for Absolut Vodka, on wired.com), the consensus among the Internet and advertising intellectuals and futurists was that thousands of Web sites would “narrow-cast” their content to specific niche audiences, and even small Web site publishers could earn a nice living selling ads to companies needing to reach extremely targeted audiences.
It’s been ten years, and other than pornographers, Matt Drudge and a handful of other exceptions, it’s easier to find someone with something good to say about Paris Hilton than it is to find a person who made a fortune selling ads on a small Web site.
Instead, the selling of Internet advertising in the United States is dominated by an oligopoly of massive companies who set the trends, rates, and expectations for the industry. If you’re an online advertising sales rep, look at your business card. If you don’t see a logo for MSN, AOL, Google, or Yahoo! you may want to rethink that decision to drop out of law school.
When selling ads, the rich get richer. See a copy of “In Style” magazine lately? At the Baer household, we’re using ours as a booster seat.
But now, like a modern day robinhood.com, a new online advertising system has emerged that gives the small guys a seat at the table. It’s called contextual advertising, and more than 250,000 Web site publishers – most of them small – have signed up to participate over the past 18 months.
It works like this. Advertisers purchase search terms on Google, Yahoo!, Kanoodle, Quigo, BidClix, Industry Brains (B2B focus) or other contextual advertising networks. This is generally done in an online, self-service capacity, with no sales rep involved.
Meanwhile, site publishers wishing to participate paste a line of code into their Web pages. Once the code is in place, ads automatically appear on the publisher’s Web site based on the content of the page. The ad networks’ software “reads” the content of the page and automatically sends ads for advertisers that have purchased matching search terms. A Web site about cell phones will automatically show ads about cell phones and accessories.
It’s perhaps most similar to magazine ads. If you’re reading Tennis World, chances are the ads will be for rackets, balls, apparel, lessons, resorts, and other tennis-related products and services.
How do publishers get paid? Most of these ads are sold on a per-click basis, so small publishers make money whenever a Web visitor clicks on an ad sent to the site by an ad network.
For example, if we buy an ad from Google for “college scholarships” and are willing to pay $3 if someone clicks on that ad to visit our client’s Web site, chances are good that our ad will appear on dollarship.com, a Web site run by Peoria’s Josh Barsch and his wife Christina. If someone clicks the ad appearing on Josh’s Web site, he’ll bank 60 cents or so, and Google will keep the rest for their trouble.
“When you’re a bootstrap operation, you can’t even advertise yourself sometimes, let alone hire someone to sell ads on your site” says Barsch. “But with contextual advertising, we don’t need to buy anything,” he continued. “The advertising comes to us.”
Barsch knows first-hand the advantages of the contextual advertising concept. Dollarship.com is a peer-to-peer scholarship network. Participants pay $1 and then mail in a one-page essay. Fifty cents of each dollar goes into a scholarship fund. Once $500 is raised, a scholarship is awarded and the process starts anew. While Barsch can keep the lights on with the few cents he collects from each applicant, the contextual advertising on his site (powered by Google) are netting him around $1000 a month. Not enough to quit his day job perhaps, but for many Web site owners, contextual ads’ ability to net a couple grand a month ranks up there with fire and the wheel as great inventions
The beauty of contextual advertising is that it’s exceptionally simple and usually free to participate. Just go to Google.com or the Web sites of other publishers and fill out a quick application. No porno or personal stuff, so don’t think you’re going to run Google ads on a Web site dedicated to photos of your last squirrel hunt. But if they like your site, you’re in the game.
While contextual advertising very much democratizes the online advertising industry, you still need to have decent Web site traffic to see much revenue. Consider that if advertisers are willing to pay an average of $3 for a click, 5% of all Web site visitors click an ad, and the publisher keeps 20% of the click revenue, you’d need 50,000 people to come to your Web site to make $1,500. Many sites won’t see 50,000 visitors ever, much less monthly, so the notion of small sites making money with contextual ads is somewhat relative.
The other contextual ad cautionary tale is that publishers don’t have much control over what ads are sent to their site, and computers being what they are, mistakes can be made. I don’t have the proof, and it may be an online urban legend, but a panelist at a recent industry conference proclaimed that a news site running a story about a killer who chopped up his victim and stashed the pieces in a suitcase featured an adjacent ad for Samsonite. Yikes.
The algorithms that power contextual ads are getting better all the time, however, and publishers are flocking to the concept. In fact, the next frontier is contextual ads in your email, which is the premise behind Google’s much-discussed GMail service (in beta testing as of this writing). With GMail, ads relating to the contents of the email are automatically inserted at the bottom.
It’s a little strange to consider an online world where ads for whoopee cushion manufacturers show up in our joke emails, and ads for house sitters appear in our out of office reply messages, but contextual advertising makes a staggering amount of money for the ad networks, and a satisfactory amount of money for the publishers, and a true win/win scenario like that will be around online for a very long time.
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Times are tough.
The problem is, this huge thirst for clicks is going to drive average cost per click through the ceiling. Google is already substantially most expensive on a per click basis than is Yahoo or MSN. Further, according to Efficient Frontier and their excellent Q2 search engine report (PDF) Google is getting $1.10 of each new dollar of PPC spend (Yahoo is minus 9 cents, and Microsoft is minus 1 cent). 
The price of a click on Google is going to go WAAAY up over the holidays. So much so that ROI on those clicks will inevitably diminish, especially with consumers in “I think I’ll go to the Hickory Farms store in the mall and have 11 free samples and call it lunch” mode. 
