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Monday, July 2, 2007

Yahoo! shakes up advertising

Putting aside the arguments over what it means for Jerry Yang to take over Yahoo! now that Terry Semel has resigned, it still seems that the company is doing a better job of "sticking to its knitting" lately.

It is well known that Google is the leader in search advertising and that Yahoo! is still playing catch-up in that space despite the recent release of Panama, their new search advertising engine. On the other hand, for many years Yahoo! has derived a tremendous revenue stream from display ads whereas it took Google's purchase of DoubleClick to get Google into that game in any sizable way.

Now comes news that Yahoo has developed a significant improvement to their display ad technology. Display ads, otherwise known as banner ads, comprise a significant portion of Internet ad buys but have been losing luster as many Internet users automatically ignore them. As a result, there has been a continuous raising of the bar in terms of the creativity, animation and interactivity required in order to get users to actually read and click on a display ad.

Yahoo's new approach, known as SmartAds, appears to apply some aspects of search advertising and contextual advertising (as in Google's AdSense) to the display ad medium. SmartAds will use behavioral, demographic and geographic targeting capabilities to create ads based on the user. This is intended to make it easier for advertisers to customize ads for multiple users by allowing an advertiser or agency to submit art and provide a list of offers or products to Yahoo!, which will create an ad from the best combination of components based on the targeted user. Yahoo! hopes direct response marketers would also be attracted to the new offering because of the potential to combine branding and direct response elements in the ads. Ads will be sold on both CPC and CPM pricing models.

SmartAds are expected to make heavy use of "customer insights" extracted from data Yahoo! keeps on visitors, including their shopping, searching and Web surfing behaviors, as well as registration information and location data. How does Yahoo know it's you or what it is that you like? Yahoo (like many other sites) drops tiny files on your computer's hard drive called cookies. These cookies are useful for storing settings for Yahoo content that you might return to and use again. These settings can initialize the behavior of a stock chart, for example. Cookies may also store an identifier so the site knows it's you and displays your MyYahoo page with the correct settings, shows you the weather for the city where you live, etc. Once your identifier is in the Yahoo! database, it isn't too hard for Yahoo to develop a profile of you as an individual based on your activity on Yahoo's network of web sites, your Yahoo! email profile and so on.

Search advertising has depended on parsing the search terms and search results to determine the type of advertising to present to a user. Contextual advertising typically parses the content of the web-page hosting the ad in order to determine the type of ad to display. As Yahoo rolls out SmartAds to the travel segment first, it is clear they are using both concepts to extract the information needed to create a compelling display ad. Travel sites require users to be very specific in terms of what they are searching for (plane tickets, cruises, hotels, source and destination cities, etc.) Yahoo can use this kind of information in combination with known aspects of the travel sites (context) and Yahoo's own database of user behavior (remember those cookies) to very specifically target customers with the appropriate kinds of ads. The expectation, however, is that Yahoo! will use this information to target groups of users with similar characteristics as opposed to individual users. This ability to slice and dice customer segments allows agencies to more effectively reach smaller subcategories where previously the ROI of an tailored ad campaign would not have been worthwhile.

Here's what's being said about SmartAds (thanks to Promotion World for the quotes):

The following is from Todd Teresi, Yahoo!'s senior vice president of display marketplaces: "Yahoo!'s SmartAds gives marketers what they want from online advertising: the ability to deliver customized marketing messages to consumers, and still engage very large audiences with their brand, ... By enabling marketers to reach consumers on a more tailored basis and helping creative agencies support those customized campaigns, we can provide an even more engaging, relevant online experience to the more than 500 million users of Yahoo! branded products and services."

"Yahoo!'s SmartAds is the breakthrough marriage of brand and direct marketing that advertisers have been waiting for," said David Kenny, Chairman, Digitas and Publicis Groupe Digital. "By combining its huge audience, dynamic ad creation capabilities and deep knowledge of user interests, Yahoo! has developed a true innovation that will benefit agencies and its clients, especially companies with a large number of offers to present to many audience segments."

Given that Yahoo! still maintains an advantage over Google in terms of breadth of content, this new advertising product is an opportunity for Yahoo! to leverage its strengths rather than compete with Google in an area such as search advertising where Google is the run-away leader. Panama allows Yahoo! to stay in the game; SmartAds allows Yahoo! to differentiate itself and take the lead in a different marketing sector. Yahoo! considers the process unique enough to have applied for a patent. Interestingly, though Terry Semel has since resigned, SmartAds was developed on his watch so he probably deserves some credit for at least approving the R&D expense required to develop the product. It would be interesting to know who championed SmartAds within Yahoo! from inception of the idea to its fruition today. Once again, I feel that buying Yahoo! on weakness (and it has certainly been weak lately) may turn out to be a smart move in the long run. In addition, with all the talk about who should buy the company now that Semel has resigned, SmartAds should only make Yahoo! a better takeover candidate.

At this time, I own no shares of Yahoo!

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