The Quest For the Perfect Online Ad

On the Internet today, everybody knows you're a
dog. In fact, legions of Internet companies also know your breed, your
gender, your age, the neighborhood you live in, that you like pickup
trucks, and that you spent, say, three hours and 43 seconds on a
website for pet lovers on a rainy day in January. All that data streams
through myriad computer networks, where it's sorted, catalogued,
analyzed, and then used to deliver ads aimed squarely at you,
potentially anywhere you travel on the Web.

Online advertising, to put it mildly, ain't what it used to be.

For starters, it isn't all about king Google and search. True, Google (Charts)
grabbed a fourth of the $15.7 billion shelled out for online ads last
year. But consider this little-known fact: Internet users spend a mere
5 percent of their time actually searching. The rest of the time,
they're trolling the vast expanse of Internet space, leaving marketers
ever more opportunity to fill it with display ads.

But
unlike the first Internet boom - where dumb, old banner ads were
slapped up with zero regard to effectiveness - this time around, the
programmers and analysts are taking center stage, helping to create new
forms of display ads that not only do a better job of getting your
attention but also can be tracked with laserlike precision. The new
breed of supersmart, supertargeted display ads, says Usama Fayyad, Yahoo's (Charts) head of research and data, is "just so much more powerful than search."

This
is Web advertising 2.0, where machines play as big a role as the
copywriters and designers. In the midtown Manhattan offices of Ogilvy
North America, co-CEO Carla Hendra and her team run online campaigns
for blue-chip clients such as Allstate (Charts), American Express (Charts), IBM (Charts),
and TD Ameritrade. The agency's Interactive division is one of its
fastest-growing operations, says Hendra, and most new hires come with a
deep understanding of analytics.

"Marketers now
all have to understand the power of algorithms," she says. Today
everything about a fully realized Web campaign - how the creative
messages look, what color the ads are, what sites they're placed on and
where on each site, what time of day they run and how frequently - is
determined at least in part by software applications known as "creative
optimizers."

Ogilvy's in-house optimizer runs
5,000 to 10,000 calculations each time it evaluates the performance of
an ad campaign. The optimizer collects data on scores or even thousands
of ads and analyzes which ones are working, and why, on the fly. As
data pours in, the optimizer starts pulling underperforming ads.

Red
isn't working on a particular banner? The background will be blue the
next time you see it - and the software will even swap the ad copy. No
one's happier about that than advertisers: Optimized ads perform 15 to
30 percent better than their standard-issue counterparts. "We've
reached a point of instantaneous feedback," Hendra says. That's forced
the business to become brutally Darwinian.

And every big media company is paying attention. The fact that Google doesn't (yet) dominate the market for display ads is