Yahoo! ( YHOO) may yet have a card up its sleeve. With its stock languishing below $35 for nearly 18 months now, the Internet giant is in the best position to capitalize on a rapidly growing trend in advertising called behavioral targeting. Behaviorally targeted ads, which are "displayed to a selective audience whose interests or intentions are revealed by Web site tracking data," according to research firm eMarketer, accounted for $350 million in ad spending during 2006. But that number is expected to grow almost 11-fold to $3.8 billion by 2011. "Targeted advertising in display is the exploding market, compared with search-based advertising," Microsoft ( MSFT) chief advertising strategist Yusuf Mehdi told a conference of investors in May. But Yahoo! -- and not Microsoft -- has what it takes to dominate this field. Yahoo! runs the most visited network of Web sites in the world and is in a solid second place when it comes to search. That gives it plenty of expensive space in which to place ads on -- and lots of data about user behavior to better target those ads. It may also give the company a way out of a developing conundrum that contributed to the stock getting crushed after it reported
first-quarter earnings . Much of the new ad space on Yahoo!'s network is not premium and connected to its most-trafficked Web sites. It therefore fetches lower prices. To view Vishesh Kumar's video take of this column, click here
But targeting the ads on those nonpremium spaces could help boost prices. That effort will further be helped by Yahoo!'s
recent acquisition of ad marketplace Right Media . A group of car companies bidding to show a rich graphic ad to a user they know has been searching for the term "SUV" would happily pay more than the spot would otherwise command based simply on the number of people viewing it. "Marketers buying advertising have typically had to settle for broad categories like men between 18 and 34," says Richard Frankel, a senior director of product marketing who oversees Yahoo!'s behavioral targeting efforts. "But we can deliver people who are in the market for an MP3 player this week." Despite its promise, behavioral targeting isn't without obstacles. The most commonly touted issue is that of user privacy -- and the reason Google ( GOOG) cites for staying out of a burgeoning market. But in reality, this concern seems overblown. Most users simply don't care about the nitty-gritty of how ads are placed in their viewing field. The specific criteria used to show one ad over another may be a hot-button issue inside an Internet company, but few Internet users will care to dig that deep. Selling the value of behavioral targeting to advertisers, on the other hand, may prove to be a more formidable challenge. That's because advertisers are accustomed to setting rates based on how large a population they can reach. Slicing the user audience by behavior by inherently curbs the size of the audience.
"There is a fundamental tension when you move to a more narrow audience because what advertisers strive for is scale," says Frankel. "I'm not going to say we solve that problem, but we do go a long way towards helping marketers deal with that tension." For example, Yahoo! offers hundreds of different ways of targeting ads, which allows advertisers more precision in reaching their audiences than they have with broader categories. There also can be difficulties in conveying the value of behavioral targeting to advertisers, given the complicated amalgam of search and browsing behavior used to calculate which ads to show, Frankel says. Yahoo! has case studies about the superior return on investment advertisers have gotten with the technology, but can't share the numbers because the customers are sensitive about it, the company says. But the emerging nature of behavioral targeting also will play to Yahoo!'s biggest strength. For all its faults, the company has a better understanding of how to sell ads to the big, traditional advertisers than either Google or Microsoft. If anyone can persuade advertisers to put their budgets into a nascent type of Internet advertising, it will be Yahoo!. And investors, along with advertisers, could be well-served.