Not many people realize that contextual advertising is a multi-billion dollar software-as-a-service category. Yet if you look closely at Google AdWords, Microsoft AdCenter and Yahoo!'s newly launched Panama engine, it's plain to see that all of them are Web-native, on-demand applications, accessed either via a browser interface or an API. This is quite sophisticated software, too — not your run-of-the-mill Web-based application — and with a significant degree of penetration among large enterprise customers.
People haven't previously identified contextual web advertising as a SaaS sector for two reasons. The first reason is that all the major contextual advertising vendors also operate their own content properties, most notably search, and that makes it harder to separate out the advertising element of what they do from the content and search elements. The second reason is that contextual web advertising isn't an application that has ever been offered by conventional software vendors; so the software industry ignores it.
That's why it's taken until 2007 for someone to come up with a contextual advertising package that's sold as conventional licensed software. Yesterday, Norwegian search technology vendor FAST Search & Transfer did just that with the launch of AdMomentum. Unsurprisingly, FAST is talking up exactly the same advantages that every other on-premises vendor says about its solution compared to on-demand or SaaS alternatives. BusinessWeek reports that the software will surely give website owners more control and customization over the content ads shown on their properties:
"Besides giving them more control of the ads on their sites, this could also help them create more attractive ad inventory on their sites: With their extensive knowledge of their readers, they could offer up even more relevant ads."
And, as ZDNet's own Tom Foremski adds, all the on-demand vendors are doing is hosting a few servers, so how difficult can that be?
"The advertising networks take a huge cut considering that they establish self-service advertising interfaces and run a bunch of servers and some software. Well, now the publishers can now do the same and cut out the middleman."
Of course these sorts of arguments will appeal to publishing 1.0 businesses that prefer a vertically-integrated publishing and advertising sales model. Even Google, the 800lb gorilla of on-demand contextual ad vendors, has been working hard to build advertising on its own content properties faster than its AdSense network because it, too, prefers the vertically integrated model. But I'm not sure that's a model that has legs in the Web 2.0 era. In my view, Google has to decide whether it wants to concentrate on search or on advertising. It can't excel at both simultaneously.
For the time being though, Google dominates search and its competitors have also allowed it to dominate contextual advertising. That's how it manages to cream off such a huge cut — more than a billion dollars from AdSense partners in the 2006 financial year just closed. I would argue that it's been successful not just because the competition have floundered but also because it's behaved like a true on-demand vendor, maximizing the 'long-tail' business via its online registration process and using self-registration as a prospect funnel that its internal telesales teams work relentlessly.
This year, though, all that is set to change as Google now faces real competition from Yahoo! and Microsoft's new contextual ad platforms. Meanwhile AdMomentum, even if take-up is low, still gives Google AdSense partners another bargaining chip when negotiating terms. Finally, there's the potential highlighted by Tom Foremski that some players might use AdMomentum as the platform for an AdSense-style third-party contextual ad service, servicing some 'long tail' or other where they have some geographic or vertical leverage:
"It could also be used by a third party to offer a ready made online contextual advertising network that could be used to service many smaller online publishers such as blog networks."
The pity of it is, I wish FAST would host the service themselves, and private-label it to other service providers instead of selling it as a conventional licensed package. I'm less keen on services founded on other people's software (unless it's open source) because they don't have a good success record (ASPs anyone?). But if FAST operated its own software as a service I suspect that would be a more effective competitor to the likes of Google, Yahoo! et al.
One final footnote: FAST recently got a PR boost with the rapid rise to prominence of the FASTforward blog, set up to promote its conference of the same name, which takes place later this week in San Diego. Produced and managed by Corante, the blog has been a great source of debate on enterprise 2,0, and several ZDNet and Enterprise Irregulars colleagues have participated. This post wouldn't be complete if I didn't also disclose that I too have agreed to become a contributor, and my first post should be appearing there shortly.