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The webification of advertising

What's behind this web advertising landgrab? This is the webification of advertising, taking advantage of the connected fabric of the Web, and it depends for its success on other fundamental characteristics of the Web, such as network effects.
Written by Phil Wainewright, Contributor

Yes it's a bubble. If, like me, you thought Google's $3.1 billion acquisition of Doubleclick was over-the-top, then what else can we make of Microsoft splurging $6 billion on aQuantive? (Techmeme discussion here). Sometimes being smart is a handicap, because it means you can always figure out some kind of justification to rationalize irrational behavior. That's what sustains bubbles into the stratosphere, and Google and Microsoft each employ some of the smartest people on the planet, so there's no shortage of brainpower available to post-justify these crazy deals.

1895 train wreck at Montparnasse, Paris, France
For those of us observing this trainwreck-in-the-making from a safe distance (picture courtesy of wikipedia commons), the interesting question is, what's behind it all? Every boom-and-bust throughout history has been founded on some kind of substantive shift. The canal boom and the railway boom in eighteenth- and nineteenth-century England; the automobile, aircraft and radio boom of the 1920s; the dot-com boom and bust — all of them have been sparked because a generation glimpsed the potential of the new technologies around them, and became prematurely exuberant.

What we're glimpsing today is an extension of the same dawning recognition that was felt around the time of the dot-com frenzy. We all realized at the turn of the century that the ability to market books, groceries, petfood and every other merchandise known to humanity via the Internet was going to irrevocably change the way the economy worked. But we didn't fully grasp all the subtleties. Today, we're starting to understand that the Internet is going to fundamentally alter the way businesses promote their wares to prospective customers. So the entire online ad business is getting snapped up at (literally) any price. Even though the buyers have no clue what it is they're trying to buy. All they know is that if they don't buy it, someone else will.

What they're really trying to buy into is the webification of advertising. The same way that the internal combustion engine took the horseless carriage and turned it into something no one had ever anticipated, the Web is turning advertising into something we could never previously have imagined. Before the Web came along, advertising was a totally disconnected activity. Advertisers never had any certainty that their ads would be seen by any of their prospective customers, and even if they were, it was virtually impossible to assess how effectively they grabbed their attention.

Then came Google AdWords. At a stroke, it became possible to make sure your ads were only shown to likely prospects. What's more, you could track how they responded. The Web did that. It provided a context in which you could selectively advertise, and a mechanism for tracking response.

Now there's a dawning realization that that's how all advertising ought to work. Why can't we use mobile phones and geo-location and profiling to surround every citizen of the civilized world with context that we can use to selectively tailor our messages, and track their responses?

This is the webification of advertising, taking advantage of the connected fabric of the Web, and it depends for its success on other fundamental characteristics of the Web, such as network effects. The ability to tailor messages and to track and interpret responses depends on having large databanks of past behavior by similar prospects in similar contexts. Scale is a huge determinant of success, and therefore the would-be players are eagerly buying up scale.

So what are they missing? Why will they rue the over-inflated purchases they've all made in the past few weeks? The point they've missed is that walled gardens don't scale. Context belongs collectively to customers and sellers, not to the intermediaries that connect them. There's value in interpreting the information, but to realize that value they have to share the information rather than walling it in. There was an insightful article on Read/WriteWeb the other day, discussing the potential to build an open ad network on the Web.

This is not only Google's vulnerability, it's the prick that is set to burst all the over-inflated deals of the past few weeks. The bubble is fueled by the conviction that large amounts of money have been left on the table. But that money is going to be shared out between publishers, advertisers and advertising networks in different proportions than today's mega dealmakers assume.

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