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Web advertising that actually works

By David Kirkpatrick

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(FORTUNE.COM) -- Few things offend me more than the way American society is saturated with advertising. So how is it possible that I'm now starting to celebrate ads on the Internet?

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I'm not talking about the pop-up ads that make Web viewing like swatting flies, but instead the ones that are increasingly showing up on web search sites. On Google, the most popular of these sites, type in a search and one or two demurely unintrusive ads will perch above the results, with perhaps a couple more riding along the side. Since the ads are explicitly related to something I've just said I'm interested in, they can be very useful. If I type "bird watching" into Google, I find not only the usual motley array of sites but also ads for binoculars, birdhouses, and guidebooks. It's like giving the Yellow Pages a college education.

For all the flash and animation that marketers have put into building Internet ads, the geeks have figured out the real trick: Relevance is more important than style. We're turning to the Internet more and more in the ordinary course of our lives. Whether I'm researching a person or a company, finding the distance between Phoenix and Santa Fe for next week's vacation, seeking a movie review, buying a book, or learning about bird watching, I turn to Google first, then move out. The marketer that can reach me with a relevant message while I'm searching will win.

Companies -- mostly small businesses -- are beginning to get wise. Keyword-search advertising is growing even as Web ads in general declined 12 percent last year, according to CMR/TNS Media Intelligence, which tracks ad spending. Search-related ads are not yet closely followed, but Ted Meisel, CEO of Overture, which invented the concept, estimates that the industry sold more than $1.5 billion in search-term-related ads in 2002. His company, which places ads from its 80,000 advertisers on the sites of partners like MSN and Yahoo, had revenues last year of $668 million. Meisel sees an $8 billion industry by 2007 -- a reasonable figure, considering that U.S. Yellow Pages sales alone totaled over $14 billion last year. My fingers do much more walking on my keyboard.

And in perhaps the best sign that advertisers like this new way of reaching customers, they're paying more for it. Both Overture and Google sell ads in an auction style, offering up keywords to the highest bidder. By the end of 2002 the average amount an advertiser was willing to pay Overture when a searcher clicked on an ad rose to 35 cents from 23 cents a year earlier.

Closely held Google gives out no numbers, but paid search is likely its main source of revenue. Danny Sullivan, who edits, estimates that Google, with about 100,000 advertisers, is a "several-hundred-million-dollar" business. He may be guessing low. The newly revived search site Ask Jeeves, which carries ads from Google and pockets a portion of the fees, forecasts revenues of about $100 million this year. It operates around 13 million searches per day, compared with Google's 200 million. It's impossible to do a direct comparison, but Google clearly could be a $1 billion company soon.

Mainstream advertisers have been slow to take advantage of the new medium, just as it took big companies years to realize that they, too, could sell their stuff on eBay. "This has been driven by the grassroots," says G.M. O'Connell, CEO of marketing firm Modem Media. "The big corporations are just starting to wake up. I spend a lot of time telling clients, 'Hey, you've got to own this word.'" Instead of owning search terms, says O'Connell, they're used to sponsoring content -- the old, annoying way to advertise online.

Google, for one, refuses to sell demographically targeted ads or ones keyed to supposed "lifestyle" preferences. The company wants everything that appears on the page to be related to your search, so a car company can't buy an ad to appear with a search for "perfume." Sheryl Sandberg, a top Google advertising exec, loves it when people tell her they didn't know Google runs ads. "It means their advertising experience is not encroaching on their search experience," she says. "The goal is to make the ads as useful as the search results."

The company has also made it as easy to buy an ad as it is to view one. It took me about five minutes on Google to start advertising my artist wife's website, paying to appear near the names of artists she has been influenced by. After a $5 startup fee, I specified the most I'd be willing to pay for a click-through: 25 cents in my case. Google charges a sliding fee for each click, depending on how many other advertisers wanted that keyword. A day later I'd forked over 52 cents to get six people to click on my wife's site.

So let's see ... unobnoxious, useful ads that consumers like and are easy for businesses to manage? That's an easy sell.

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