Silicon Valley prepares to take the revolution offline

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Are the drab text advertisements that appear on internet search engines a harbinger of what lies ahead for the entire $600bn global advertising industry?

Californian technology companies have never been shy about making big claims for their inventions. Back in the dotcom heyday, the internet was supposed to overturn any number of traditional industries, from stockbroking to the sale of pet food.

Times have changed but the air in Silicon Valley still seems to inflate some very big dreams.

The advertising industry “is facing a seismic shift,” says Tim Armstrong, head of advertising at Google. “It’s going from a human-scaled environment to a technology-scaled environment.”

On a trip to the Valley this month, Steve Ballmer, chief executive of Microsoft, added: “The way advertising gets bought and sold will be fundamentally different in the future than it is today.” He conjured up the vision of a vast new electronic marketplace where buyers and sellers would meet, changing the way business is done: “Think of it like an Ebay for advertising.”

These predictions are founded on the success of the online networks that feed adverts into the results pages returned by search engines. Microsoft itself has just entered the fray with the launch of an advertising system, while Yahoo is overhauling its own network. Both have a common enemy in their sights: Google, whose advertising network has become one of the most spectacular money-making machines the industry has known and is expected to generate $10bn in sales next year.

According to the internet companies, the technology behind these networks, though honed for use on search engines, will soon be felt much more widely.

Advertisers on search engines compete in real-time auctions to have their messages displayed, creating a liquid market that attracts both sellers and buyers. Their advertisements are shown to consumers who type in specific terms, a process that closely matches the message to the audience. The interactive nature of the medium lets consumers respond directly to the adverts they see – and lets advertisers pay only for consumers who respond. Also, the internet companies supply advertisers with a variety of tools so that they can analyse the effectiveness of their campaigns as they happen.

What if those virtues could be carried into other advertising markets? “When people look back at search, it will be seen as one of the pivotal things that shifted how people think about advertising,” says Mr Armstrong.

Two things are set to extend the reach of these search engine advertising networks, turning them into direct competitors of the mainstream industry. One is their use in other forms of internet “content”, as consumers spend more time online and television networks and other traditional media companies experiment with new forms of digital distribution.

Yahoo’s new advertising platform has been built to place advertisements alongside these new kinds of online content, says Tim Cadogan, vice-president of search at the internet company. That could include the video services that a number of telecommunications companies plan to set up on the internet using a new technology known as IPTV, he adds.

The other is the extension of the internet advertising networks to the offline world. Google has experimented with buying advertisements in print publications on behalf of its customers. This year, it bought a company that places advertisements on radio stations – a highly fragmented, difficult-to-reach market that in some ways resembles the search engine world.

The ability of a single network to reach across a number of different media categories will bring “probably the biggest sea-change” of all, says Mr Armstrong: the separate “silos” of print, television and other forms of advertising will converge when advertisers can place messages in all of them at once.

As they extend their reach, however, these networks may not have as dramatic an impact as they have had in the search engine business. For a start, the technology companies are seeking to apply their new techniques to advertising markets that are already well developed. “To try to introduce this to an established market and expect everyone to roll over and die is naive,” says Rishad Tobaccowala, chief innovation officer in the media-buying arm of Publicis Group.

Some of the conditions that have made search engine advertising so powerful are less pronounced in other markets. Audiences are not as specialised in mainstream advertising markets, and as digital networks reach out into forms of media that are not interactive they will lose some of their power.

Yet there are signs that the advertising industry is starting to learn from the search world. Sensing the arrival of Google in their midst, some of the biggest US advertisers are looking at setting up a digital marketplace where television advertising can be bought and sold. Led by Wal-Mart, a group of advertisers under the auspices of the Association of National Advertisers this month set out to raise $50m for a pilot project to launch their own joint market for television time.

Letting buyers compete in real-time markets makes sense when the products for sale are commodities and a critical mass exists to create liquidity. That was the vision behind the many business-to-business – or “B2B” – marketplaces set up in the early days of the internet, though few prospered.

“There’s a difference from the old B2B days,” says Bill Day, head of internet advertising company WhenU. The early online markets “offered revolutionary purchasing opportunities but had very, very little traffic,” he says. In a world where advertisers are used to buying in online auctions, things should be different. Media buyers such as Publicis, however, respond that advertising space is not a commodity and advertisers still want control over where their messages appear.

There is also a growing acceptance that technology has a role to play in helping advertisers reach mass audiences in a world of increasingly fragmented digital media. Assembling a large body of like-minded consumers will involve tapping into a variety of small-scale markets.

In this world, “delivering the right ad to the right person at the right time will be machine-driven, without a doubt”, says Mr Tobaccowala. Google and others on the internet believe they have the technology to do this.

Whether the traditional advertising industry is ready for the greater level of efficiency and accountability this implies is another matter. There is a general perception, says Mr Armstrong, that the industry “is overweight and a bit mushy. We’re replacing fat with muscle”.

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