Tacoda Goes to the Video

Behavioral targeting of online ads is coming on strong. Advertisers will spend $1.2 billion on behavioral targeting this year, up from $925 million in 2005, and will increase that spending to $2.1 billion by 2008, according to a report from marketing research firm eMarketer.

That still doesn’t stack up to the dollars that will be spent on more traditional forms of online marketing such as search engine marketing and e-mail, but it does indicate a strong and growing interest in looking beyond those channels. That’s a natural outgrowth of trends in the online market, according to Forrester Research: the rising importance of data-driven advertising and the convergence of keyword search, contextual and display advertising.

Dave Morgan, CEO of Tacoda, says his company is poised to take advantage of that interest, both through its Audience Network of Web sites and through the Tacoda behavioral technology platform. He believes advertisers are beginning to turn their attention to behavioral ads for one specific reason: because keyword-driven sponsored ads have proven so successful and popular that they’re devolving into clutter.

“Current inventory is becoming constrained and expensive,” he says. “The pricing of the ads on the most valuable vertical sites and the clutter on the ad pages is driving agencies and advertisers to look for new inventory opportunities. And they’re realizing that behavioral ads can open up more inventory and make more pages valuable to them.”

Behavioral targeting can do this because it delivers ads based on users’ previous Web surfing, not on their current searches and not on the meaning of the page content they’re currently visiting. Behavioral ads often use browser cookies to keep track of where a visitor has been on the Web recently and use those past visits to understand what the visitor might be interested in buying or learning about now. For example, checking out the real estate listings at an online newspaper site today might get you some targeted ads from finance companies, realtors or insurance firms tomorrow, on the assumption that you’re considering moving house.

And those ads could be served up on Web content that is completely unrelated to the subject of real estate. In fact, eye-tracking research conducted late last year with Next Century Media and published by Tacoda in January found that behavioral ads worked better for Panasonic than contextual ones precisely because they were not correlated to the page content. The study found that behavioral ads generated an average of 17% more first looks, and even more significantly, 54% greater response on subsequent viewings.

Why should behavioral ads get more viewer attention? “It could be that there are just too many ads for the same product category attacking the user’s eye in contextual targeting,” Bill Harvey, Next Century CEO, said at the time of the publication. “Even though [visitors] are on that site researching a planned purchase, they might try to stay focused on the editorial content during that process.” But users who are in the market for a product and who see an ad for that category in some unexpected context might be surprised and interested enough to take a careful look at the ad.

Morgan says the results didn’t surprise him; he can tell that behavioral advertising works because of the growth his company has experienced. Since launching its advertising network less than a year ago with 800 partner Web sites and a reach of 60 million U.S. users, Tacoda has seen that network grow to 3,500 sites and reach expand to 140 million users. “This is such a ‘dot-com’ thing to say, but we’re now having to hire a staffer per week,” he says. “We need more people selling more ads because of growing advertiser interest. We’re the largest purely behavioral network in the world, and we’re just a hair smaller in U.S. reach than Advertising.com, the largest general online network. It took them about seven years to get to that point, but we’re right behind them in about seven months.”

As for who’s advertising, Morgan says he’s seeing an even split between brand marketers and direct-response marketers. Tacoda has structured its Web networks to include the marquee Web sites that will exert a pull on the branders: Weather.com, BusinessWeek, USA Today and The Food Network, for example. But the measurability and performance of behavioral ads makes them appealing to direct marketers too. “The power of the data means that we can deliver a return on investment on the back end that makes our network very attractive to marketers who are interested not only in positioning their brand but in direct sales,” Morgan says.

Tacoda sells its ads per thousand impressions, not on a cost-per-click or cost-per-acquisition basis. So it’s found its greatest traction among large direct marketers whom it terms “brand ROI advertisers”, companies that are interested in promoting their brands while they drive sales. These companies include telcos and PC manufacturers/ retailers.

“It’s also hard for us to work with very small companies because our focus is selling our services to the ad agencies,” Morgan says. “We don’t sell directly to the marketers.”

One potential stumbling block for behavioral ads has always been the chance that marketers’ ads will be delivered alongside content they consider inappropriate. While Tacoda enforces its own rules of conduct and enforcement for the publishers in its network, the company beefed up those strictures earlier this month by signing a deal with internet safety firm ContentWatch to monitor all its network Web sites weekly and flag unsuitable content for review and filtering.

“Tacoda is not a blind network, unlike most other ad networks,” Morgan says. “We expose our publisher list, and making sure that we retain trust in our clean, well-lit advertiser environment is a crucial task that we work at all the time.”

Another possible obstacle, for Tacoda and many other behavioral networks, is user resistance to browser cookies. For more than a year now, research has indicated that users are using software to block cookie deposits, erase them frequently, and prevent third-party ads. Morgan says that while frequent cookie erasure is an issue, it’s not the deal-killer it might be.

“Recency is what’s important here—whether you saw somebody a month ago is not nearly as valuable as knowing whether you saw them yesterday,” he says. “We know that users delete cookies every month or two, and some block them all the time. But that’s not really had much impact on our business. We think about it, but its impact on our business is manageable.” Working with highly trusted sites helps mitigate the deletion factor, and Tacoda plans to help those publishers educate users about the cookies they’re dropping to reduce the impact even further.

The basis of the cookie problem is that the ads they deliver are “terrible and irrelevant”, Morgan says. “We need to deliver fewer, more relevant ads. Because the current ads are so irrelevant, their pricing is low; because there are so many of them on the page, they tend not to work well; and because they’re so numerous, consumers tend not to like them.”

Partly to get beyond these problems of clutter and irrelevance, Tacoda recently announced two partnerships that will let it deliver behaviorally-targeted video ads to its network: one with Tremor Networks for an ad-insertion technology for video streams both on Tacoda’s network and on a 300-site network run by Tremor; and another deal with Klipmart Corporation for in-page video ad solutions on the Tacoda network.

Tacoda’s aim in branching out into video ads is to make ads more prominent, less numerous and ultimately more successful. “Not only is video better advertising, with sight, sound and motion, but it can support higher pricing,” Morgan says. “That means we can go to Web sites and convince them they can replace three normal display-ad units with one video unit and still make more money. That means a better experience for the consumer. Our targeting makes sure that the ads are more relevant; and the publisher gets more value.”

As with its display ads, Morgan thinks Tacoda’s video ad product will have appeal both for brand marketers and for those brand/ROI direct-response advertisers. The performance metrics that behavioral targeting produces will be compelling regardless of the price, he says.

“To show you how accurate and refined our segmentation has gotten, we’re running a campaign now that is delivering a $100-plus customer acquisition on one in every thousand impressions,” he says. “That’s not the tenth-of-a-percent clickthrough rate that people are used to; that’s a conversion rate, and for a $100 conversion. With that kind of capability, what we can do in video ads can be priced very effectively both for branders and for direct marketers.”

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